Brexit: What Happens Next: Higlights from Charles SCHWAB

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“After the Brexit Vote: What Lies Ahead for Markets?” Published on June 24, 2016 at www.schwab.com by Jeffrey Kleintop who wrote, “Britain voted to leave the European Union (EU) on June 23. We would term this development, commonly called a "Brexit," a market and economic shock. International developed and emerging market stocks were up in June and over the 90 days leading up to this referendum, suggesting markets were not pricing in a Brexit outcome. The initial shock of the unexpected result prompted a sharp decline in stock markets around the world, and we believe it may take some time for the shock to fully work through the economic, financial and political systems in the U.K. and Europe. With no visible catalyst to halt the slide, the decline in global stocks may continue as the risk of a recession increases… As we look ahead, some of the widening impacts of Brexit may include:

• Other countries calling for their own referendums on EU membership. This could put the European Central Bank in a difficult position to continue their quantitative-easing program of buying the bonds of countries that may choose to leave the eurozone. It's not hard to see France's Marine Le Pen taking the same path as Britain, should she win the election in less than a year from now. A "Frexit" could be even bigger than Brexit in its impact on markets, with a European Central Bank that may be unable to effectively intervene.

• A battle may begin among those who want to replace U.K. Prime Minister David Cameron, who has announced he will step down in a few months, with each candidate arguing he or she will be most aggressive in negotiations with the EU. In response, the EU leaders in Brussels will make it clear they intend to be tough on the U.K. to make them an example. As the rhetoric heats up, the markets may become increasingly pessimistic regarding a trade deal that could be mutually damaging. Negotiations could drag out for years.

• A rise in the U.S. dollar, as investors seek safe havens, would likely contribute to declines in commodity prices. This may renew cuts to earnings estimates and prompt an eventual devaluation of the Chinese yuan versus the U.S. dollar. These factors, combined with slower export growth to Europe (China's biggest customer), may renew concerns about an economic hard landing for China. In addition, a rise in the dollar could add pressure on emerging market stocks due to concerns about dollar-denominated debts and tighter financial conditions.

• A return to recession in Europe as fear of a breakup begins to slowly impact capital investment, hiring, and consumption.”

The Key points from this article were:

• “Voters have decided that the U.K. should exit the European Union.

• It may take some time for the shock to work through the economic, financial and political systems in the U.K. and Europe. As a result, global stocks may fall further.

• No two market shocks are the same, but in some of the other shocks since the financial crisis, markets have recovered in three to four months. Longer-term investors may want to maintain their diversified asset allocations intended to weather volatility on the way to longer-term goals.”

Read more at: www.schwab.com