Right now, the results of the UK’s EU referendum are stunning global markets.
With about two-thirds of the vote in, the “Leave” camp has been called the winner by ITV and BBC.
In response to the vote, the British pound had collapsed to a 31-year low against the US dollar, falling below $1.35, while stock futures were collapsing with US futures off more than 3.5% while London’s FTSE 100 down almost 9%.
Ahead of the referendum, analysts across Wall Street circulated research on what they thought would happen in the event of either a ‘Remain’ or ‘Leave’ vote.
About an hour ago, Torsten Sløk at Deutsche Bank circulated a note that gave an overview of what the firm thought could happen, and in the broadest strokes here’s what DB put on the table in the event of a ‘Leave’ victory:
• We would expect 2017 UK GDP growth to be 0.9%, 1.2pp below the ‘remain’ scenario. The euro area will be negatively affected (-0.4pp at 1.1% in 2017E). Central banks will likely act to dampen tighter financial conditions. FX liquidity swap lines are in place. At the very least, expect the Bank of England to cut interest rates. The ECB will communicate its readiness to act, but the most effective policies are likely to face political constraints. We rank the ECB policy options in terms of likelihood.
• ‘Leave’ opens a period of lasting uncertainty. We think it will be three years before a new UK-EU deal is settled. Politics will determine the longterm cost. A ‘leap forward’ for European integration is unlikely.
• Sterling trade-weighted may fall 5-6% on the day. Euro trade-weighted should be little changed. Expect the Stoxx 600 to fall 15% (to 295) in the near term. The Bund yield should trade around -10 to -15bp. Periphery assets should be under pressure, especially bank equities. In an orderly sell-off, expect the iTraxx Europe (IG) CDS index to widen 25-100bp.
• The ramifications for the global economy are more limited. 0.2pp off our 2017 global GDP growth estimate to 3.4% still means acceleration next year. There are downside risks. Triggering a European banking crisis is one. A confluence of global shocks (e.g. a China hard landing) is another.
Right now, the only thing we can really react to is the drop in sterling, which seems to be far exceeding what Deutsche Bank thought was possible.
But given that betting markets and a good deal of the conventional wisdom around the vote expected ‘Remain’ to prevail, we expect there to be more curveballs in the coming hours.
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