Moody’s latest research note underscores that Brexit, essentially, is “a little local difficulty.” Profits were made in the markets on volatility after the result of the vote was announced, but the fundamental risks are contained and different from the Lehman Brothers GFC trigger.
Thus far, Brexit has fallen considerably short of being the next Lehman Brothers. As far as the US is concerned, Brexit’s ultimate effect may closely resemble the impact of Y2K’s arrival, which did not impart the IT-related havoc that many had predicted.
For now, at least, Brexit lacks the enervating surge in actual and potential defaults that magnified the losses stemming from Lehman’s demise. Put differently, the latest jump in uncertainty lacks anything comparable to 2008’s extremely elevated incidence of mortgage foreclosures.
Thus, the swelling of credit spreads and seizing up of financial markets that ordinarily accompany a meaningful crisis have yet to materialize. Moreover, industrial commodity prices never sank in a manner that otherwise would confirm global distress.
Brexit has made champions out of astute traders. The big winners of the highly volatile past week included those who were long high-quality, long-duration credit and gold and short equities on the eve of June 23’s Brexit referendum. Not long thereafter, those who loaded up on equities toward the end of trading on June 27 emerged victorious.
Depending on timing, Brexit rewarded both bears and bulls. For example, after plunging by a cumulative -10.9% from the close of June 23 to the close of June 27, the Stoxx Europe 600 index subsequently rallied by +6.8% through June 30. Ironically, the UK’s FTSE 100 stock price index more than recovered from its -5.6% plunge of the two trading days following June 23’s Brexit vote with an +8.7% surge during the final three days of June.
The US equity market’s performance was in between the broad European stock price index and the UK. After sinking by -5.6% from June 23 through June 27, the market value of US common stock subsequently rebounded by +4.6% as of the early afternoon of June 30.
