Brexit: view from Wall Street
UNIAN has asked the people who deal with one-third of the world’s money – financial brokers of Wall Street – about the future of Britain following the UK vote to leave the European Union. Unlike many Ukrainian “Facebook experts,” the world’s wealthiest financiers still don’t know what to expect.
The UK has voted for withdrawal from the EU. 51.9% of the votes for “Leave” with an almost 70% turnout. It is interesting to note that England and Wales were the ones who pushed for withdrawal, while Scotland and Northern Ireland wanted to remain in the Bloc.
But it’s been done. Britain has made its choice. And the whole world was closely watching the process because the United Kingdom is one of the major players in the global political and economic arena.
And it was the economy which reacted even faster than political leaders – the sterling fell dramatically to its 30-year low overnight, even before the official announcement of the results, to a $1.35 mark. However, at the opening of the New York Stock Exchange, the pound stabilized at around $1.37.
The world’s financial center, Wall Street in New York, was watching the vote with bated breath. At 4:00 local time, half of the brokers started their work, and at the opening of trading, at 7:30, almost everyone was in their places.
So, what was the morning like for the UK on Wall Street? We were able to talk with several financiers, and one of them agreed to answer UNIAN’s questions broadly – and his answers clearly reflect the opinion of Manhattan financial community.
In the early hours of Friday, the author of this article managed to talk with Gaurav Hariani, former vice president – CIB Strategy R&D at J.P.Morgan.
UNIAN memo. Gaurav Hariani, 41, is a successful U.S. business manager. For five years (2009-2015), he has led one of the four main segments of JP Morgan banking group - Corporate and Investment Bank (CIB Strategy) He is now Vice President at iSENTIUM, dealing with business intelligence for players on the New York Stock Exchange.
J.P.Morgan Chase & Co is a banking group, founded in 2000 by the merger of several of the world’s major banks. It was recognized the world’s best investment bank in 2015. It is the sixth largest public company in the world according to Global Finance magazine. J.P. Morgan’s Headquarters is located in New York.
Gaurav, what is happening on Wall Street now?
Panic, Andriy. Look what is happening on the stock exchange, the British Pound - one of the reserve currencies, fell to its 30-year low. When one of the world’s major reserve currencies in the world falls 4.5% overnight... It’s the uncertainty that gets added into the mix and a lot of the US financial institutions that have large operations in London, like J.P. Morgan, Citigroup, will be hurt … They will start moving operations to the European cities. London’s position as the financial center of Europe is going to be hurt, which is why the largest banks will hurt the most today, because of this uncertainty. You see J.P. Morgan is down almost 7.8% today, Citibank is down 10%.
Why is it dangerous?
Because of the uncertainty, investors will demand a higher premium on British bonds on the currency. We do not know what happens next, what the new government will be like, what the EU will look like without the UK. I’m sure there will be certain people that will win. People will demand a higher risk premium for their investments, and this is going to push costs for British companies. The borrowing costs for the British Government will go up in the short-term [no one wants to risk]. All British imports can become more expensive. But the UK is no longer a manufacturing country, so a weaker pound will not benefit its economy as much. Also, political risks will go up.
What about big businesses?
Big businesses will suffer because they cannot plan [their activities]. Even considering that the exit of the UK from the EU can take two or three years, big business can’t build plans, because they don’t know what kind of an economic deal, a trade agreement with the European Union the UK will end up with.
In your opinion, is this a short-term panic?
Of course, the panic will be short-lived. Financial markets will obviously overreact but in the next week or two, I think the things are going to stabilize. But the uncertainty will prevail, so you will continue to see higher levels of vulnerability [of the financial sector], compared with what they were before.
In conclusion, it is worth noting that, to actually withdraw from the European Union, the UK also requires the approval by both the British and the European parliaments.
There is a procedure which involves the launch of the procedure of leaving the EU after the British Parliament adopts the decision, submits an appeal to the EU, as stipulated in the Article 50 of the Treaty of Lisbon, the article regulating the process of secession from the Union.
And it’s not as simple in the UK Parliament as it was in a referendum. According to the calculations by BBC, of 650 MPs of the Lower House 454 MPs oppose Brexit.
In fact, a lively reaction on Wall Street over the UK vote is anything but extraordinary – financial markets fluctuate daily, so a sharp drop of shares of the British companies and the depreciation of the pound were quite predictable.
By the afternoon, the shock and excitement on the New York Stock Exchange began to soothe. There has been an initial plunge and the financiers have taken a wait, again. Undoubtedly, the economy will witness some other unpleasant fluctuations. But it is also obvious that no new economic model of relations between the UK and EU should be expected anytime soon.
The consequences of Brexit are for the most part unclear at the moment. Wall Street says that, first of all, the referendum doesn’t equal a finalized decision and secondly, in order to even make any predictions on the subject, one should at least see the new UK Government. And only then will the financial world decide in which direction it should move.
So far, it was just a "slight shock."
P.S. On this occasion, UNIAN sends its heartfelt greetings to the Ukrainian experts who as early as Friday gave an extensive outlook regarding the economic future of the UK and the European Union following the results of the referendum. Wall Street is also impressed.