NEW YORK — The immediate response to the outcome of Thursday’s UK referendum on membership in the European Union was not positive, although the secession process won’t begin for several months. Trepp LLC reported early Friday morning that as the results of the vote became clear overnight, 10-year Treasury yields fell 25 basis points and European stocks were off by 5% to 10%.
“A period of uncertainty is inevitable for the UK with the focus on political stability in the light of Prime Minister David Cameron’s announcement that he will step down from office before the end of 2016,” Amsterdam-based trade credit insurer Atradius said in a report Friday morning. Among other effects, British GDP is expected to decline by 1% to 3% over the next two years. “The structure of trade agreements over the coming two years will determine the longer-term impact,” according to Atradius. The UK has been a member of what is now the EU since 1973.
At Irvine, California-based HomeUnion, Steve Hovland, director of research, notes that “equity markets across the globe entered a tailspin” following UK voters’ surprising decision to leave the EU. “The gains achieved earlier this week as polling pointed towards a small likelihood of the UK staying were given back, along with the loss of billions in equity. The pound declined 10% against the US dollar to the lowest level since 1985. The Dow, S&P 500 and NASDAQ futures also plunged hours ahead of trading.”
Although the overall impact of the so-called Brexit won’t become clear for several months—for one thing, it will be up to Cameron’s successor to formally trigger the secession process, and then not until October—“uncertainty will send investors rushing to safe havens, including US Treasuries,” Hovland says. Accordingly, “investors and homebuyers can expect low interest rates for longer and a pause on interest rate hikes from the Fed until at least September.”
(Check out all of ThinkAdvisor’s news and analysis on Brexit.)