This article was written by Shoaib Abedi, the co-founder and director of ICM Capital.
A sense of shock surrounds the markets after the UK referendum result made it official that the UK is out of the EU. British Prime Minister David Cameron described the referendum regarding its European Union (EU) membership as “bigger than the general election”.
A series of market moves followed the dramatic results, with a freefalling decline of the British currency that was sent to its lowest level in 31 years.
Risk aversion became the main driver for the panic in the markets; safe havens celebrated the results with high profits with gold rallying to $1,358/oz, its highest level in almost two and a half years, while the US dollar index reached 96.70, its highest level since March this year.
Stock markets around the globe witnessed a sharp selloff, with bank shares taking a particular hit, wiping out more than $127 billion of the world’s richest 400 people according to the Bloomberg Billionaires Index.
With all this being said, we should keep in mind that the party hasn’t started yet, with many questions on the implementation of the Brexit yet to be laid out on the table. One thing that we can be sure of is the high volatility awaiting the markets in the next few weeks.
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This is not only a redefinition of the European Union, but it is also a redefinition of the UK’s trade relations with the rest of the world. New trends and moves may be seen in terms of monetary policy for different countries, mainly in the US, as we’ve seen there will be no more rate hikes in 2016. But not only this, we may see a return to easing and a possible rate cut starting to appear after the Brexit announcement.
The UK and the EU have a long walk ahead of them to reshape trade relationships with one another and with the rest of the world. London has set its mark as one of the global financial hubs of the world, and it will do everything in its power not to lose this status.
New trade agreements and a lot of work awaits the trade lawyers in the EU countries and the UK, with the expectation of a lot of bargaining and extra efforts needed to avoid future exits from the EU and for the UK to avoid a Scottish independence referendum which may lead to an isolated England.
What is interesting at this stage is that notification of Article 50, the formal act announcing how an EU member state leaves the union, has not yet been triggered by Mr. Cameron. Once triggered it cannot be reversed, which is perhaps why he is leaving it to his successor.
It can be difficult to make decisions when trading around geopolitical events, such as the Brexit referendum, which can have a global impact on financial markets. In times like these investors are advised to be patient and wait till the Brexit storm is over and the market contains its panic before deciding in which direction they should move.