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Weekly Economic Commentary

Weekly Economic Commentary

Categories: General, General

Not since the turn of the millennium and the uncertainty around the “Y2K” impact have we seen an event that has dominated global financial markets the way the Brexit referendum has in recent weeks. Britain will end its 43-year membership of the European Union after a shock referendum result saw citizens vote to leave the influential union of nations. Under Article 50 of the EU Treaty, the UK would notify the European Council of its intention to leave the EU and a two-year negotiation period for withdrawal would begin. So it would be wrong to think that as the event passes, all uncertainty fades (unlike Y2K) as other EU currencies contemplate a similar move. British Prime Minister David Cameron has already resigned, along with many of his cabinet.

The “leave” vote was strongest in rural areas and post-industrial towns that are increasingly economically and culturally distant from prosperous, cosmopolitan London. Surprisingly, those are the kind of places in the US where Donald Trump’s appeal has been the strongest.

Now that the result is known, analysts will start to speculate on the aftermath, not only for Britain but for the rest of the world.

Market reaction was to move to the safe haven of US treasuries, gold, US dollar and yen, with equity markets around the worlds savaged on Friday (refer charts below).

For monetary policy, the Bank of England is likely to ease and the US Federal Reserve could delay its next rate hike to December and beyond. This may increase the chances of the RBA reducing rates sooner than expected as well.

Chart

Source: NAB, Bloomberg

Source: Rural Bank

 

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