To the surprise of almost the entire world, Great Britain has voted to leave the European Union.
The EU is a 28-member block that enabled people, products and services to flow freely between member states. Laws and policies were adopted, and in some circumstances, the block negotiated treaties, business transactions, etc as a whole instead of as individual countries. It was not the United States or Europe, but each country did lose some of its sovereignty.
The formation of the block can be traced back to the 1950's - not long after the end of WWII. It has evolved, and many new member states have been added since its inception. There were benefits to membership but also drawbacks.
Great Britain decided by a 51.9/48.1 vote that drawbacks were too great, and they were going to leave the block.
This is a big deal. In fact I'd say it's a huge deal. It's much bigger than the Fed tinkering with interest rates or other monetary policies that are temporarily put in place. In fact I'd even argue it's bigger than the presidential election in the US. Checks-n-balances in the US limit a president's power, and whoever is president may only hold the office for four years. But leaving the EU? I'm not going to call it permanent, but with regards to how long we can realistically look to the future and plan, this will be in place for several decades. I don't know where it ranks with the fall of the USSR or the Berlin wall, but it's up there in that realm.
Great Britain will be just fine on its own - even if Scotland votes for independence, which is very possible considering the country overwhelmingly voted to remain in the EU. It's has the 5th largest economy in the world; it's a military power; it's a diplomatic juggernaut; and it will remain Europe's bridge to the US. They will be fine, even if they do have a recession in the near term, and the divorce is a little messy.
The bigger risk, the bigger fear, is the entire EU unravels. There are many countries that "put up" with their membership and aren't exactly thrilled to be there.
Who's next? Will Italy leave? Will France leave? There are already people in numerous countries calling for a similar referendum.
If Britain's exit is isolated, things will get a little messy, but overall it will have virtually no effect on the rest of the world. But if the entire EU dissolves, a major structural change will take place - a change that hasn't happened since WWII.
I'm not an economist, and I don't have knowledge and understanding of geopolitics that you don't already have. I'm not going to pretend like I do. I can, however, look at how markets around the world reacted. The Asia/Pacific region suffered stiff losses, but they weren't extreme. Japan, which dropped almost 8% and was halted at least once during its trading session, posted what would be considered a very noticeable loss. Otherwise most other countries dropped 1-3%, and it's notable China only fell 1.3%.
Europe suffered much bigger losses. Greece got destroyed (down 13.4%). The country is on life-support. I'm sure there's speculation if the EU unravels, perhaps the eurozone (a monetary union of 19 of the 28 EU members) would follow. Spain and Italy, countries that have been speculated to be following in Greece's footsteps, dropped more than 12%. After that, Germany and France suffered 7-8% losses. Most of the rest of Europe dropped 3-6%. I find it interesting the biggest losers where the strongest countries (Germany, France) and the weakest countries (Greece, Spain, Italy). It's also worth noting the UK only dropped 3.2%. The US suffered its biggest loss of the year. It was bad, but it wasn't catastrophic. Considering S&P futures went limit down on Thursday night and were halted, to post a 3% loss isn't horrendous.
News can come out this weekend that other EU countries will have their own referendums. If so, the market could tank again Monday. But absent these types of headlines, I think it'll be back to business as usual in the US. This really shouldn't affect us too much. Despite comments from Obama prior to the vote, the US and UK will continue to have a great relationship on many fronts. In the long run I don't think the vote changes anything. But we don't trade in the long run (looking out several years). We're mostly looking out several weeks and months.
Let's get to the charts and see what they say. How much damage did Friday's drop do?
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