…. On the broad front, the impact has been staggering.
First, David Cameron has already announced he will be stepping down as British Prime Minister and new elections will be called (probably for early fall).
Second, Brussels (the seat of the EU) will now go into damage control and the animosity between the continent and London will ramp up significantly.
Third, this may be the first of several “shoes to fall.” The Spanish parliamentary election this weekend will provide us the initial read on similar views elsewhere in the EU. My contacts now expect Ireland, Portugal, and even the Netherlands to experience similar exit pressures.
Fourth, this morning Spain has also already fired the first salvo. It is now demanding control over Gibraltar – the UK’s exclave at the southern tip of Spain – in the wake of the British departure from the EU.
Fifth, the Bank of England has promised “unlimited” liquidity support for the British pound sterling after it collapsed worse than at any time over the three decades. Nonetheless, the currency will be under pressure for some time and that will have a toll to exact from the British economy.
Sixth, hundreds of thousands of trade, investment, business, banking, and fiduciary arrangements ae now in limbo…as are hundreds of thousands of jobs. Seventh, the Euro will come under intense pressure as the contagion spreads throughout Europe. But it gets worse… London’s Significance will Fade
Oh yes, Daesh (the name for ISIS that the group itself hates) issued a statement applauding the “death of Europe.” This time around, on the other hand, it could not find a way to claim responsibility.
Other ducks will be falling shortly. Markets throughout the world are awash in tidal waves of red ink. The dollar and U.S. fixed instruments (bonds) are once again becoming a “safe haven” for international investors. Against this backdrop, rapid aftershocks are occurring in energy. Following hours of discussions with contacts in Europe and Asia, these are the immediate consequences:
Both WTI (West Texas Intermediate) and Brent, the two leading international benchmarks for oil trading, posted 5% losses in overnight markets. The losses have since leveled off. You see, the sudden drop in both pounds and the Euro is strengthening the dollar, which makes oil more expensive abroad, pushing demand and prices down. This is likely to rebalance, but there will be some choppy forex waves to overcome.
On the plus side, global demand is increasing and supply balance is taking shape. But the volatility spawned by the UK exit vote will provide some hefty headwinds for oil in the short-term.
The vote has also done major, perhaps fatal, damage to “The City” (London’s financial district) and its position as the world’s preferred location to raise energy project capital. For years more money has been raised for energy projects within a radius of two miles from Liverpool Station and St. Paul’s than anywhere on earth. This will now end. Banking and fiduciary action will move to New York (almost initially by default) and Dubai (the more moderate-term beneficiary). Frankfurt and even the Russian fledgling exchange in St. Petersburg will also increase in activity.
Meanwhile, a range of cross-border holdings based in London and involving oil, natural gas, and renewable controlling structures are now in jeopardy. And the pound sterling collapse will linger, having an adverse impact on Brent remaining as the dominant international benchmark. Since the vast majority of contracts are denominated in dollars, the exchange problems will be gravitating toward spreads favoring WTI.
Now, the effects won’t be limited to just Europe…