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What You Need to Know About Brexit

Brexit has been in the headlines of global news ever since its referendum in the summer of 2016. Now this month, talk of Brexit is reaching a feverish pitch as the UK is slated to leave the EU by the end of March. There are three likely scenarios that could occur by the end of the month:

No-Deal Scenario (very low probability, high severity)

This scenario would be the worst outcome for the UK. If this were to occur, there are several areas of the economy and financial markets that would be immediately impacted. Initially, government bonds would be expected to rally as investors embrace a flight to safety. The British pound would meaningfully decline in the event of no deal. The devalued currency would be a very modest mitigate to a sharp correction in UK listed equities.

The economic implications under a no-deal scenario would likely bring significant economic pain across Europe, leaving the region without any beneficiaries. We could see the British GDP contract by around 4%. Ireland would likely suffer by almost as much as a result of its strong ties to Britain and shared boarder.

Leave with Theresa May’s Deal (modestly low probability)

The divorce deal negotiated by Prime Minister Theresa May and EU diplomats would result in a more orderly Brexit with Britain maintaining economic ties with the EU. While this deal would be far more positive for the economy than the disorderly no-deal exit, this could still portend a negative impact to the economy. Inflation would likely be higher by the end of 2023, possibly prompting interest rate hikes by the BoE. This is an unlikely outcome for this month as May’s last deal was defeated in Parliament by 230 votes, the largest defeat in Parliament’s history.

Delay (likely outcome, length of delay uncertain)

The most likely outcome of this month would be to delay Brexit altogether. PM Theresa May will not commit to a delay any longer than three months, but Parliament could seek a longer stay against her intentions. The larger question remains how a delay in the divorce would improve negotiations between the UK and EU. European Commission President Jean Claude Juncker has stated in the past that the EU would not renegotiate the deal. If there is a delay, there is no guarantee a new deal would be negotiated and accepted by both sides, thus the country could be in the same political mess at the end of June.

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