For the last 2 days, it was not a comfortable weekend for all investors. UK’s choice on leaving the EU shocked all the global markets. Dow jones went down more than 500 points last Friday which is the largest downside movement after China eliminates the boundaries of currencies against dollar. Strong currencies like dollar and euro all went down with the slash of pond. So does the commodity market. Both emerging markets and developed markets are suffering from this terrible choice. However, the consequences of Brexit should be measured more forward and the logical outcomes seem not so disappointed to US economy.
London, which serves the financial center of Europe got hurt badly from Brexit. The base stone business in London is its service industry including financial service, legal service, marketing service and so on. The choice made here by UK just built a huge wall between UK and EU. Companies used to seek service in London now will switch to other supplier, like US. Based on this point, US service industry will have a promising demand from Brexit.
The barriers between UK and EU now posts threats to the trade between two economy entities. More than 50% of the export from UK is delivered to EU. Without this reliable partner, UK’s export will be stunned. And for clients in EU, trading with US will be a good alternative method. By trading with US companies with lower prices and even better products rather than continue making business with UK through same regulation process, it is believed that potential EU buyers will push US export higher in this way.
After leaving the EU, investor now fear of the related consequences upon economy. This worry of downside economy are forming the largest troop of capital outflows in UK. The money need to be placed in a safer place. Gold and Yen were the biggest winners in last Friday. But in the long term, US will a better place to reserve the capital out flow all over the world. Not only the dollar but also the investment projects will be good choice for international investors. Based on the FOMC meetings and Yellen’s speeches for last several months, the US economy is strong according to both decent housing and labor reports.
From all above that we discussed, Brexit posts a risk for UK’s economy then triggers a global selloff. This herd effect likely makes the action of the market overreacted. The market needs to calm down and takes more time to digest this effect.