Brexit impact

Brexit: When the Facts Change

Britain’s Brexit decision on Thursday, 23 June 2016, appeared to catch the financial markets by surprise even though the opinion polls had been warning of a very close vote.

On Friday, 24 June 2016, the British pound fell sharply, over 7%.  The S&P 500™ fell over 3%, while U.K. stocks, European exchanges, and Japanese stocks fell much more.  As Japanese and global equities declined, non-Japanese sellers of Japanese equities covered their FX hedges, and the Japanese yen briefly strengthened below 100 versus the dollar, before rebounding based in part on Bank of Japan intervention.  The VIX had its biggest one-day rise since the Chinese-induced sell-off in August 2015.  Bank stocks in the European Union took a beating, down 10% to 20%.  On the flight-to-quality side of the ledger, U.S. Treasuries rallied big and gold surged.  On Monday morning, 27 June 2016, the hangover was still severe, with the pound falling further, global equities moving down, and the “flight-to-quality” U.S. Treasuries rallying.  The dust is not settling several days after the event, so it is time to take stock.

These political and market developments raise many questions, to which there are precious few clear answers.   Despite the murky nature of what is to come, it is useful to have a starting place for the analysis, and this process is inherently scenario and probability-based.  That is, in the spirit of Bayesian inference, our task is to provide some useful expert information around which to build initial scenarios and to assign them rough probability estimates, even if we hold those probability estimates with low confidence.  As new information and facts emerge, our views, probability assessments, and confidence will shift appropriately.