MORGAN STANLEY: European stocks will fall 15-20% after Brexit vote

The United Kingdom has voted to leave the European Union.

Among the wide-ranging impacts, financial markets are going wild following the monumental vote and Morgan Stanley strategist Andrew Sheets thinks this will be a huge downside for markets.

“It looks likely that the UK has voted to leave the EU,” Sheets said in a note to clients following the vote.

“This result will come as a surprise to markets, based on Thursday’s pricing, and creates material political and economic uncertainty in Europe. Both are negative for risk premiums, and the question over the next several days is not whether prices fall, but by how much, and whether central banks respond.”

According to the Morgan Stanley strategy team, they expect European stocks to fall 15% to 20% from their close on Thursday and the British pound could collapse as well.

“Specifically, we think GBPUSD could trade down to 1.25-1.30, as valuations need to adjust sharply before the currency is ‘cheap’, in our view,” wrote Sheets.

Going forward, Sheets said the US assets — from stocks to corporate bonds — will be the “safe havens” for financial markets. Additionally, Sheets is watching the response from the European Central Bank.

“All eyes are now on the ECB, and how aggressively it decides to intervene in order to protect its member states and deflect downside risks to inflation that could result from increased economic uncertainty,” said the note.

This is just one analysis and certainly there are more to come, but it remains to be seen what happens next.

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