Last week, in what came as a surprise to many, United Kingdom voters elected to leave the European Union. Global market reaction has been swift with the British pound sterling dropping and the dollar and yen strengthening, global equities falling and global bond yields moving lower. Although Friday’s negative market reaction has been significant, we think it will be short-lived.
We believe the greatest negative economic impact will be concentrated in the U.K. with a drop in business and consumer confidence and a decline in business spending. Europe’s growth could weaken by ½-1% this year but we still expect modest GDP growth, not a recession. It seems we are seeing a long-term weakening of the pound sterling and a short‐term weakening of the euro. Equity markets should re‐price quickly and then begin to stabilize, and bond yields will remain lower for longer.