by Andrew Vargas
by Andrew VargasHow The Brexit Vote Affects U.S. Financial Assets.
The U.S. economy is as fickle as a toddler with a gluten allergy trying samples of wedding cake. But, that doesn’t mean it’s in any danger of prolonged financial health risks if the UK votes to leave the European Union on June 23. If voters choose to leave there would be a two-year period before they officially left the union and gained their sovereignty. It’s like a separation period before the divorce is final. And it’s dependants (financial subsidiaries) will have to move on against their will.
Since the year 2000, American companies have received 9% of foreign affiliate income from the United Kingdom. These companies invest over half a trillion dollars in Britain. If the Brexit happens Standard & Poor’s will strip the UK of its AAA rating. And many American companies would shrink their operations in Britain. This could affect how the Nasdaq and Dow Jones would react that trading day.
When polling data showed 55% of UK citizens favour a Brexit the Dow Jones Industrial Average fell 120 points. This is not surprising news because Britain is the financial hub of gaining a foothold in other European markets. But if they leave, this uncertainty will have ramifications that make American companies question their business ties to the UK.
Close Banking ties
With Moody’s and the S&P willing to downgrade the UK’s stellar credit rating. It must be mentioned how interwoven U.S. and UK banks are, and the impact a Brexit vote would have on them. Because 90% of U.S. banks exposure to foreign expenditures is UK based. It would need U.S. bank regulators to assess the risk and how well banks can withstand losses due to the anxiety of Brexit becoming a reality.
These U.S. regulators also have to assess the large British banks that do a lot of business in the United States. Barclay’s, HSBC, Lloyd’s, and Royal Bank of Scotland. These banks would be hit the hardest and if they don’t have enough liquidity or capital to withstand the UK leaving the European Union. They might need to be helped out by their U.S. subsidiaries.
In 2008, U.S. bank regulators asked banks that were exposed to the fallout of Lehman Brothers to assess their risk. They found that banks were not capable of handling that meltdown because of poor data collection due to outdated technology. And we’ve seen what happened because of that. But the UK is a global leader in banking innovation so we are not looking at another great recession because the UK has proper banking infrastructure to handle the risks.
Passporting in financial services
One of the biggest industries the United States exports to Britain is the financial service sector. If Britain left the Union, they would lose their ‘passporting rights’ so that banks from the United States can no longer set up in the UK and freely do business elsewhere in the EU. Without these passporting rights the United States would lose a lot of business across Europe. Then banks from the U.S. might be forced to move their offices and staff to other countries like France or Germany.
And those passporting rights are key to U.S. companies reaching the broader European markets. If Britain leaves and loses those rights, it could cost U.S. financial firms billions of dollars in lost revenue. Senior executives from Goldman Sachs said they would consider moving their London offices if Brexit passes. J.P. Morgan and other financial firms could follow them. If they move to another EU member country, they would need new regulator approval. The cost of doing that is based on the firm’s cash and assets. And that alone will be astronomically expensive.
If the UK were to leave, then Britain would start new bilateral trade negotiations with the European Union. Before, they had to adhere to agreements set by the EU and the Common Commercial Policy.
Britain leaving the European Union would hurt the financial sector short term between the U.S. and Britain. But it would pay dividends in the long run by giving Britain the power to broker favourable deals with the United States.
Direct Impact on commodities
The UK leaving the European Union likely won’t lead to some international financial calamity, but it will make a lot of decision makers nervous. And how they react will affect other areas as well…like precious metals, and currency exchanges.
The price of gold will likely hit $1,300 an ounce before the end of 2016, and a vote to exit the EU will accelerate gold beyond that price point. Because the Federal Reserve won’t raise interest rates on the heels of the Brexit vote. That will raise the price of gold and see SPDR Gold Trust the largest gold-backed ETF to reach record highs.
If the Brexit vote passes, it will lead to the pound and euro hurting while the dollar will see a significant bump. Many experts predict that the pound will decline about 12% against the dollar. Forcing many investors to look at more stable currencies such as the Japanese yen, and Swiss franc.
The U.S. economy is also quite resilient, and any lingering effects if there is a vote to leave will be minor. These changes to the global financial landscape will be adaptable. Some companies are already in panic mode, but their fears might be unfounded. They say uncertainty is the enemy of investment, and the Brexit vote is a very scary uncertainty for US. Investors. Their fears might be overblown, but equally, they are fearful for a good reason.