How Brexit could affect the financial markets

David Banks
Authored by David Banks
Posted Monday, October 22, 2018 - 10:21am

Brexit continues to dominate the news headlines here in Britain and is unlikely to stop doing so any time soon. Negotiations are ongoing and there’s no guarantee that a deal will even be reached before the deadline of March 2019. Overall, Exeter voted “remain” back in 2016 – but no matter how you voted, it’s easy to admit that all aspects of British life could in theory be affected by Brexit. For example, a visa process for British citizens visiting European countries for holidays or for work could be introduced, and imports and exports from and to EU countries might also be affected. However, there’s one particular area which could be particularly at risk from Brexit, and that’s the financial markets.

London is currently a hub for financial services, and many European finance jobs are based here. And with certain markets – such as the forex world – facing particular threats, the risks are quite widespread. So, what problems is Brexit likely to cause this large, dynamic and vital industry?

The story so far

The financial markets have already reacted to the developments that have happened so far in the Brexit saga – and not always in a good way. As any fundamental analyst can tell you, all of the major financial markets are susceptible to political instability; when the results of the Brexit vote were first announced, for example, some stocks on the British stock market dipped by over 20%.

Markets are unpredictable at times and there’s no sure way of knowing how they will react to particular circumstances. Evidence so far suggests that the likelihood is that they will decline in value following the exit from the EU but that’s not certain. On some occasions so far, they’ve actually managed to avoid falling – and that may well happen again. After two leading Cabinet ministers (Boris Johnson and David Davis) resigned over Brexit, the FTSE 100 actually went up – and closed the day up about 70 points.

Jobs in the industry

One particular area which is likely to face trouble, though, is employment. London is currently one of the largest financial services hubs in Europe and it employs thousands of people in financial roles. For those without British citizenship, or individuals who work for financial institutions that value the ability to move staff across borders at short notice, their jobs could be under threat.

Future recruitment might also be at stake. Continental Europe has some of the world’s leading business schools, such as INSEAD in France. If European citizens attending those institutions find that they can’t take up internships or graduate jobs in the City of London or elsewhere in Britain, they may opt instead for the easier choices of Frankfurt, Milan, Paris or other emerging financial hubs.

Case study: foreign exchange markets

Given that Brexit is basically a foreign policy issue, it makes sense to look at the foreign exchange market as a major area which could face changes. On the whole, it doesn’t look stable: on the day of the two high profile Cabinet resignations, the pound went down almost a whole percentage point against the euro. Most of Europe, of course, has a single currency – which means that any fears about the overall European economy could cause the euro to decline in value against other currencies. In the long term, should the markets judge that Europe will be the main loser from the Brexit deal then it’s likely the value of the currency could go into decline – especially against the pound.

Again, however, it’s important to remember that nothing is guaranteed. Ironically, the only thing that is predictable is unpredictability – which is why it makes sense to be as well-informed as possible about what’s going on. Daily forex market views by Fxexplained.co.uk provide the tips you need when you’re considering what aspects of your currency portfolio to hold or sell, while it’s also wise to tune into the news – especially if you use fundamental analysis.

In future decades, Brexit is likely to be seen as one of the most significant historical events the country has faced since the Second World War. All kinds of sectors and walks of life are likely to be impacted in some way, but the financial services markets could be significantly changed as a result. Nothing is certain until the deal – if, indeed, there is a deal – between Britain and the EU is worked out, implemented and no doubt tweaked. But it’s wise for all those in the financial world to start thinking about how they’ll respond to the inevitable challenges that Brexit might bring.

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