Even before the markets opened on Friday, June 24, it was clear that Wall Street was in for a rocky Friday.
After 51.9 percent of voters in the United Kingdom decided they’d rather leave the E.U. than stay, the effects felt around the world began to show quickly. Overnight, various U.S. stock futures were down more than 3 percent as uncertainty grew. As the reality of Brexit sunk in, stock markets crashed, oil prices tanked and the pound plummeted to a 31-year low.
The London FTSE 100 plunged about 8 percent, though it did manage to recover some to level out at a 5 percent loss. The German index fell 10 percent, its biggest one-day decline ever, and France’s index took a 7 percent hit. The Dow and S&P 500 futures were down — 3.4 percent and 3.6 percent, respectively. By the end of the day, S&P 500 had hit its largest decline in almost a year.
That was Friday.
Over the weekend, plenty of news stories flowed in showing Brexit's widespread impact.
Banks May Say Bye-Bye To The U.K.
It didn't take long for banks around the world to start thinking about making changes to their footprint in the U.K. Many banks are already talking about how to shift resources toward other more viable options including Paris, Dublin and Frankfurt. Prior to Brexit, HSBC indicated that it might move 1,000 jobs to Paris if it became a reality and JPMorgan reportedly said it could cut 4,000 U.K. jobs.
And that's just the tip of the iceberg, based on the reports circulating.
Even in the U.K. itself, large investment banks are busy trying to get licenses to operate outside the region. Major U.S. banks that have tens of thousands of employees in the U.K. are examining their options to Brexit, too. And then of course there's the U.K. banks that are heads down now sorting out how to manage their investment trades with E.U. organizations.
It’s clear that Brexit will usher in another trend, bankxit, as the U.K. banking landscape shifts over the coming months.
Brexit’s Ground Zero: London
The obvious question following the historic Brexit vote is how it will impact the U.K.’s financial epicenter, London.
The results of a poll from City UK, a lobby group that has members across London's banking, insurance and asset management ecosystem, showed (unsurprisingly) that a majority were in favor of staying in the E.U. In fact, its members showed 84 percent in favor, with just 5 percent saying they were OK with the exit.
The conclusion of that study was that even though smaller financial groups might have liked the notion of operating outside E.U. regulations, the bigger guys were down with the larger implications of Brexit and wanted none of it. Once banks start shifting resources outside of the U.K., the London banking center will shrink and become less relevant over time.
What could take a major hit is the foreign exchange trading market that London currently dominates. And as the world's principal location for the $2 trillion daily euro market, many bankers have already reportedly voiced concern about the Brexit-induced vulnerability. The European Central Bank has even been working to eliminate Clearing Houses from outside the E.U. from managing the euro and —depending on what happens with Scotland and Ireland’s own plans to exit the U.K. – London might not have much influence to force the Central Bank to allow it to continue its current role.
The Look Ahead
Now, three days after the Brexit shock heard round the world, there's still plenty of uncertainty. Lots of speculation, but there's plenty of unchartered waters to swim.
As far as the U.S. markets are concerned, reports suggest that the U.K.'s decision to leave the E.U. might only have a temporary sting. Markets will soon recover, and the U.S. economy is resilient enough to work through it.
Longer term, there’s the good news and the bad news. For one, Brexit will – and already has — strengthened the dollar. But uncertainties remain over how trading arrangements are negotiated and how long that takes. The U.K. is one of America’s strongest allies and it is in our interest to work through this with them. But should Brexit stick, there is a petition circulating that at least suggests that a vote might have to go before Parliament to revisit the decision or at least put it out to another vote. A lot will depend on the moves of others. Will Scotland and Ireland remain a part of the U.K. or vote to leave and join the EU? If the U.K. becomes England, it’s fair to say that there will be much more uncertainty about its future long term as a financial – and FinTech – center and how we prioritize our business and trade agreements, as a result.
While the U.K. vote has sent a shockwave of uncertainty across the global economy, it's too early to tell how deeply it will cut. We'll likely learn in the days and weeks to come.