Brexit: A seismic slap in the face of markets

Markets got Brexit dead wrong. Now comes the fallout

If you thought markets were uncertain and volatile before the U.K. referendum on membership in the European Union, think again.
 
The main driver: Markets got it dead wrong. The “Brexit” result, with Britain voting to leave, is in stark contrast to the optimism expressed in the run-up to the vote and even immediately after, as late-breaking polls suggested the U.K. would stay in the EU.
 
The moves as the vote results emerged were enormous. Sterling went from a high for the year to its lowest level since 1985, falling some 16 cents from its overnight peak against the dollar to $1.34. Ten-year U.S. Treasury yields dropped some 0.25 percentage point to 1.49%. European and U.S. stocks are in for a rough ride; the Nikkei is down some 7.8%.
 
The problem is that uncertainty has only increased. Moves in currencies, stocks and bonds up until now have been about a relatively well-defined risk: that of the outcome of the vote itself. They have tracked moves in the data that was available, such as polls and betting odds. But now they face many questions to which there are few answers.
 
The immediate problem is for the U.K. Already, political strains are clear with questions being raised about the ability of the government led by Prime Minister David Cameron, who led the “remain” campaign, to weather this storm, as well as about the status of Northern Ireland and Scotland, who now may press to change their relationships with the U.K. The process for leaving the EU will involve negotiations that will take a great deal of time and effort.
 
The vote has exposed deep political and economic divisions within the U.K. The economy, already chilled by uncertainty before the referendum, is likely to suffer further.
 
The bigger question is whether this is another Lehman moment. It probably isn’t, but if even so it could cause serious problems for Europe and the eurozone in particular, itself still attempting to reinvent itself after the sovereign debt crisis. The mere holding of the U.K. referendum had encouraged euroskeptic forces; the vote to leave has only emboldened them further.
 
Markets will clearly be on watch now for action from central banks; there may be some respite from the panic that has gripped investors overnight. But while the resolution of a risky event is often a cathartic moment for markets and investors, allowing them to move on, the U.K. vote offers no such relief.

- WSJ