Financial success for international professionals

Brexit (Part 1) - How serious was the impact on global stockmarkets?

· by Roy Walker · Read in about 3 min · (557 Words)
uk ftse100

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First - a question. The Leave/Remain referendum was held on Thursday 23rd June. The outcome to leave the EU (‘Brexit’) was known by morning of Friday 24th. Global markets reacted with immense volatility.

Question: By end of trading on Friday 24th, how did the FTSE100 (the index of the 100 leading UK companies on the UK stockmarket) close the week?

  • A) - about the same
  • B) - down by less than 3%
  • C) - down by between 3-5%
  • D) - down by between 5-8%
  • E) - down more than 8%

Think carefully.

Well, the answer is - none of the above. It’s a trick question.

The FTSE100 closed the week UP by almost 2%. Close on 24th was 6,138.70. Close the previous Friday was 6,021.10. That’s a positive change of 1.953%

Wait - that can’t be right! Well, it is.

Moreover, as I write, by the morning of Wednesday 29th, the index has recovered back above the level of the close of 2015 (the dotted line in the chart below).

We all know that ‘markets don’t like uncertainty’, but when the financial press and global media bombard us with shock-horror headlines, we need to escape our irrational, myopic, selves and look for the bigger picture. We need context.

So let’s zoom out a little and look at that big picture. First the FTSE100. Up a fair bit since February’s low, but still down significantly from last year’s April high. The trend seems downwards, and the impact of Brexit (so far) is, well, not so worrisome.

So how about other markets? The Dow Jones Global Index is a capitalisation weighted index covering 95 percent of global capitalisation across 48 countries (25 developed markets and 23 emerging markets). The chart follows.

Pretty much the same story. Last week was very slightly negative, but the trend is downwards since May 2015.

Let’s look at the Eurozone via the STOXX50 index, a market capitalisation weighted stock index covering 50 of the largest, liquid, blue-chip European companies operating within eurozone nations.

Ummm… The same. A downward trend, but hardly anything to do with Brexit.

Nordic countries?

USA?

Australia?

Hong Kong?

I don’t think we need to go on.


It seems to me that whatever the impact of Brexit on global stockmarkets, it was barely discernable across them all, other than creating a spike in volatility.

Brexit is barely a blip in the trend for most stockmarkets. And given how well established the majority of those trends are, it seems unreasonable to place too much significance on Brexit should they continue.


So why all the fuss and bother?

Four reasons:

  1. Financial journalists are paid to write/say something. An event like Brexit is a great opportunity to fill column inches and air-time.

  2. The impact on currency markets was far more profound - see “Brexit (Part 2)” coming soon…

  3. Brexit is a deeply emotional subject for many people, and has been a hot topic for months. It is natural that we want to observe (relish?) the immediate aftermath (but irrational to read too much into it).

  4. The political fall-out is the real story. The financial media is just providing the filler.



In Part 2 of this article, I discuss the impact of the fall in pound sterling after the referendum.