The Brexit Vote: The Outcome and What Happens Next

What comes after the Brexit Vote?

The Brexit vote that took place on Thursday has left the world in a state of uncertainty. 

Investors have begun raising questions. 

Speculations have been made about whether or not the Federal Reserve should reverse its strong plan and start cutting interest rates.

However, to fully understand the situation, you need to know the Brexit Vote first. 

You should also understand the factors that weighed into the decision and how the decision impacts the global economy.

What is Brexit?

Investopedia defines Brexit as an abbreviation for “British Exit.”

The nickname refers to the British leaving the European Union after the referendum that took place on June 23. 

The referendum asked voters whether or not the United Kingdom should leave or stay within the European Union.

The European Union is a combination of both a political and economic union called a politico-economic union. 

It is made up of 28 members, most of which are located in Europe. 

Below is a diagram showing which countries/states make up the European Union:

Those who fought for this move framed the act as one that was necessary. 

They said that the culture, independence, and even the identity of the United Kingdom relied on its exit from the Union. 

You’ve probably heard this same argument in a debate surrounding immigration issues.

On the other side, those who fought for Britain to stay stated that the Union was better for the overall economy of the nation. 

They further argued that concerns about migration, and other issues surrounding the move to exit, were not important enough to equate the consequences to the economy if they left.

Why Did they Leave?

According to the financial times, Britain has not left the EU. 

Despite the fact that many believe otherwise, they state that the referendum that took place was not legally binding. 

They further report that the UK has made no moves to leave.

However, it is stated that the majority of Britons did vote to leave. 

The majority of politicians have even stated that the vote should be honored.

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Why Did the Vote Turnout How It Did?

The truth is that Britain has never been fond of the EU. 

If you have ever visited the United Kingdom, you may have noticed locals referring to the rest of Europe as a separate entity. 

Their displeasure with the Union was reflected in the referendum that took place on June 23, 2016, as demonstrated by the following chart:

Britain initially refused to become part of the European Economic Community in 1973, when it was founded.

However, two years after joining a referendum lead to a similar exit by 67% of the vote.

Afterward, an opposition of Europe followed. 

One example of this opposition is found in Britain’s refusal to use the Euro for their currency. 

Another is in their refusal to participate in the Schengen Area open borders agreement made by the Union.

Brexit and the U.S. Economy

A 6% probability that the Fed’s policy rate could potentially fall by .25% by July.

This was shown by interest rate futures.

Interest rates are a popular tool used by money managers and hedge funds to place bets on the policy moves the Fed will make in the future.

The futures showed a 17% probability that the September contracts would feel a rate cut. 

At the same time, the contract coming up in December also finds itself facing a 16% chance of reduction before it comes to pass.

This mirrors the anxiety that investors are feeling over the impact Brexit may have on the U.S. economy.  Many believe that Brexit will undermine the growth momentum of the U.S. economy.

This will cause the Fed to shift policy. 

The Fed raised interest rates in December for the first time in nine years.

Brexit and the Global Economy

James Athey stated that the biggest risk at the moment is the negative impact this will have on the global economy.

He further stated that if growth does not continue at its current speed, it will cause central banks to step in likely and stimulate economies.

James Athey is employed as a money manager for Aberdeen Asset Management. 

The company currently has around $420.9 billion under management.

Highly sensitive the outlook of the Fed’s policy, the yield on a two-year Treasury note fell from .653% on Friday and .779% on Thursday to .594%. 

This percent is barely over the .25-.5 percent Fed Policy rate range. 

Because of this, many investors are not expecting rates to be raised by the Fed any time soon.

Ward McCarthy stated that the rate normalization has currently fallen low on the priority list of the Fed. 

He further states that it will remain low on the list until things settle within the financial market and around the economic consequences caused by the Brexit vote. 

Ward McCarthy is a chief financial economist at Jefferies LLC.

Brexit and England

It is also being said that England might have to cut rates if their growth outlook begins to deteriorate. 

The current yield on the two-year government in the U.K. recently was at .153%. 

This is below the .5% rate of the BOE.

The following chart from the Bank of England shows that the OIS curve suggests rate cuts in the future:

What’s the Final Word?

Mark Cabana stated that expectations for any rate cuts from the Fed taking place near-term are “overdone.”

Mark Cabana is a U.S. rates strategist employed at the Bank of America Merrill Lynch located in New York.

Cabana further stated that growth uncertainties mean that the Fed needed to take another look at and reassess its current rate policy. 

He said that it made sense that the Fed would be “more cautious” faced with the current environment. 

Cabana’s bank was able to push back the Fed’s rate increase from September to December of this year.

Todd Colvin stated that the Fed had other options available to them other than cutting rates. 

Todd Colvin is senior vice president for Ambrosino Brothers. 

Ambrosino Brothers is a futures brokerage firm.

Colvin further stated that open swap lines and liquidity measures could found between both the Fed and other central banks could increase. 

Colvin isn't sure that a rate cut is the answer. 

He stated this was especially true because the Brexit effect would not, at least not right now, be directly under the Fed’s mandate.