Brexit Fears Spreading to Other Asset Classes
Is the British economy losing its safe-haven status in Europe? The drastic plunge in the British pound certainly suggests that investors are losing faith in the U.K.’s financial system after it voted to leave the European Union this summer.
And it is not only the pound taking a major hit; Britain’s other assets, including government bonds, had a very rough week. Pound selling, triggered by Prime Minister Theresa May’s timetable for Britain’s withdrawal from the European Union, has prompted investors to sell their British assets. These fears culminated last Friday when, in a matter of minutes, the British pound plunged over six percent, with many traders calling it a “flash crash.”
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The panic soon spread to the bond market, where 10-year gilt yields rose more than 0.2 percentage point last week, taking yields to a three-month high. Bond prices fall when yields rise. The jack-up in bond yields is happening at a time when the Bank of England is pursuing a monetary policy backed by bond purchases from the market.
British voters in a referendum this past summer voted for the country’s exit from the European Union on hopes that this exit will improve the nation’s economy and help the country regain sovereignty over issues such as immigration and flow of labor between the European borders.
Despite the favorable referendum, Britain has yet to negotiate the actual terms of this exit with its European partners.
Prime Minister May has set March-end as the deadline to withdraw from the European Union, saying that the U.K. would become “a fully independent, sovereign country” with “the freedom to make our own decisions on a whole host of different matters, from how we label our food to the way in which we choose to control immigration.”
Uncertainty about the future of the British economy after its exit from the economic block is also creating fears of a financial contagion gripping other markets. Traders cited the British pound slide as one reason for Friday’s stock market fall in the U.S., despite a release of encouraging economic data.
Earlier last week, an industry report cited by Bloomberg said that Brexit could cost banks and associated businesses in the U.K. almost $51.0 billion in lost revenue and 70,000 lost jobs.
