The FTSE 100 index is down about 300 points, or 4.5%, at 10am. Sterling is 7% weaker against the dollar. And 10-year gilt yields have fallen from 1.3% to close to 1%, the biggest one-day drop since 2009. These are big moves but – versus expectations – you’d call it a par score. Share prices and the pound had rallied strongly in the days before on the expectation of a vote for remain. A victory for leave – a 10% chance, according to the bookmakers, as the polls closed – couldn’t fail to provoke a strong market reaction.
If this is as bad as it gets, it will not be an overnight disaster for most stock market investors. At 6,050, the FTSE 100 stands roughly midway between its highest point of the year (6,400) and its lowest (5,600). That is no consolation if your investments are concentrated in big banks (Barclays, Lloyds and RBS are down about 15%) or housebuilders (about 20%) but the FTSE 100’s international spread has softened the blow. The share prices of the likes of GlaxoSmithKline, a defensive stock that earns the bulk of its revenues in dollars, are broadly level – so far, at least.
Do not, however, read much into the kneejerk reaction. One chief executive of a big bank said last week that a vote for Brexit would be viewed by markets as a vote against free trade and for protectionism. The leave camp would dispute that interpretation but investors will make up their own minds – and do so slowly. Any talk of tariffs as the UK and EU negotiate the terms of divorce would be alarming.
For the City – and big banks, especially – that renegotiation is now the main event. Will the European Central Bank insist that big euro-denominated trades be cleared within the eurozone? If so, do the London-headquartered banks merely have to set a brass-plate operation in Frankfurt, Paris or elsewhere? If the EU really wants to be aggressive, it could insist that big EU pension funds redirect their corporate bond portfolios towards instruments that are governed by EU, rather than UK, law. That would be attack on one of London’s biggest competitive strengths – its legal system.
During the course of Friday, the business world will want to see a few more statements like Aviva’s – the vote to leave “will have no significant operational impact on the company”. But even the medium-term impact on corporate earnings is guesswork at this stage. Is easyJet (share price down 17%) about to be whacked by a slowdown in pan-European trade and travel? Possibly, but the severity – and timing – is impossible to estimate sensibly. But, overall, the initial market reaction to a colossal political event is surely: it could have been worse.
