Markets In Action

Market Lessons from the Brexit Vote

Voters in the United Kingdom sent shockwaves through the global economy when they elected on June 23 to exit the European Union (“Brexit,” in its familiar media shorthand). The unanticipated referendum outcome led to market indices dropping rapidly in trading around the world, and the British pound falling to a three-decade low.
Yet by the end of June, the initial storm had passed and the markets began to stabilize. So what can we learn from these events, so far?
There’s no question that the win for the “Leave” campaign—which many experts, economists, pundits and prognosticators did not foresee—is a significant event that has the potential to reshape the world economy in ways we don’t yet recognize. It remains to be seen how the outcome will affect business investment and consumer confidence in the long term.
The reality is that the “Leave” vote signals only a future direction for the U.K.—we’re unsure of how the Brexit will proceed, or the effects it will have.
Clearly, the initial shock of the Brexit vote sparked a negative reaction in the markets. In response, the Securities Industry and Financial Markets Association (SIFMA) monitored the situation and maintained regular contact with U.S. government regulators, European market participants, market infrastructure providers, exchanges and clearinghouses to assess the proper functioning of industry infrastructure and markets and communicate that information to the various market participants. In the face of a potential crisis, sound oversight was needed.
It’s true that as the Brexit process unfolds over the coming weeks, months and years, it is likely to bring with it uncertainty—and that uncertainty may likely bring additional periods of volatility and unpredictability in the markets.
Yet the rapidity with which the situation was stabilized after the initial shock of the Brexit result is a testament to the strength and resilience of the capital markets. Trading did not grind to a halt and operations proceeded as normal (even if the activity level was somewhat more frenetic). Traders and investors ultimately priced in the uncertainty, and what may have seemed like an earthquake on Friday looked like a manageable reality by Tuesday.
That should serve as a reminder to all of us that well-designed, well-functioning markets, operating in an environment with the right regulatory balance, remain one of our best tools for efficiently managing risk in the economy.
As markets recover and continue to stabilize, much of the value lost in the days following the Brexit vote have been recovered, at least in part. When met with a perceived crisis, the markets worked as designed.
Peter Matheson is Managing Director for International Policy & Advocacy with the Securities Industry and Financial Markets Association (SIFMA). 

Other Suggested Articles