Impact Of The Brexit Referendum On Global Capital Markets (Essay Sample)

Impact of the Brexit referendum on global capital markets
Table of Contents TOC \o "1-3" \h \z \u 2.0 Brexit impact on the global capital market PAGEREF _Toc465083924 \h 32.1 Short term impact PAGEREF _Toc465083925 \h 32.2 Long term PAGEREF _Toc465083926 \h 43.0 Impact of Brexit to United states PAGEREF _Toc465083927 \h 54.0 Brexit impact on ford company PAGEREF _Toc465083928 \h 65.0 Conclusion PAGEREF _Toc465083929 \h 86.0 References PAGEREF _Toc465083930 \h 9
1.0 Introduction
On 23rd June 2016, Britain citizens voted successfully to leave the European union (EU). The reasons behind the push for British exit (Brexit) included the concern for global competitiveness, European debt crisis, concern of immigration among others. The exit of the United Kingdom from the EU triggered a new era for the Britain people as a new relationship emerged between the EU and the UK and the world at large. Brexit has a short term and long term impacts on the social economy of the UK, EU and the global capital market at large. Some of the short term impact are already emerging and more impacts are expected to are yet to come. Even so there are many uncertainties in the impact of Brexit on the global capital market CITATION Fis16 \l 1033 (Fischer, 2016).
This report aim to evaluate the impact of the Brexit on the global capital market, its impact on the united states of America as a country and the ford company operation.
2.0 Brexit impact on the global capital market
The exit of Britain from EU have impacted the global capital market and EU capital market with short term and long term effect.
2.1 Short term impact
The first short term impact of Brexit is the weakening of the Britain pound due to uncertainty issue in the capital market. This resulted to heightened market volatility that impacted the market structure. Some of the investor transferred their investment to safe havens such as gold and dollar that had minimal risk. This resulted to reduced demand on the Britain pound and impacted the countries that utilized the currency. The net asset prices in different market respondent to the Brexit different. Even so, bonds and assets relating to UK pound sharply reduced and this in turn have increased the prices of UK equity in the global capital market. The impact of the change in demand impacted the global capital market at large CITATION Fis16 \l 1033 (Fischer, 2016).
The Brexit caused the financial market volatility that resulted to monetary policies formulation with respect to alleviating the pressure of currency appreciation to ensure economic stability. Some countries’ central bank moderates their country economic liquidity in order to ensure the market was kept afloat. Even so some countries such as Australia did not do much changes as it impacted less by Brexit. Investors before and after the Brexit reduced their investment due to market uncertainty. This resulted to slow capital market as less investment was undertaken and most of the investor preferred liquidating their assets. This had ramification to the global capital market CITATION Tec16 \l 1033 (Technavio, 2016).
2.2 Long term
There was many economic-cooperation between different countries in the world with the EU. Brexit will have ramification to this economic cooperation that will in turn influence the capital market transaction between these countries.
The EU was the Centre for global capital investment and the exit of Britain from it will impact the global capital market. Britain was the Centre for investment as it allowed investor to get access to other EU countries through the pass porting privileges. Brexit will thus limit the attractiveness of the EU market to foreign direct investment which will in turn result to lower global capital market growth. The multinational companies in UK will have to open subsidiary in the other EU countries for it to operate efficiently and this will increase the cost of operation of such organization such as banks.
The U.K is among the largest economy in the world importing billions of pound worth of products from other countries. Depreciating pound lower the purchasing power of the UK consumer and this reduces the volume of commodities imported. This thus slows down the economy of the other countries and the global economy at large. The economy of Britain is expected to decline and this in turn result to reduce profitability of European companies that will in turn reduce stock market operation across Europe and the world at large.
Brexit is expected to result to lower the global prices of equity across the world due to decline in global capital market. The reduction will have far reaching impact on the company’s investment in foreign countries. The forex exchange and interest rates in the long run are expected to be impacted by Brexit. The interest rates are expected to increase and the foreign exchange altered due to change in economic stability of different countries. The import and export globally will highly have impacted due to expected increase in cost of export to Europe.
3.0 Impact of Brexit to United states
The Brexit impacts on the global economic market are felt by the U.S same as other countries that were the main trade partners with the EU prior to UK exit. Due to uncertainty in the capital market due to Brexit, most of the investors transferred their investment to less volatile currencies such as U.s treasury bond, Japanese yen and gold. This commodity had high demand that the U.S treasury bond reached its highest price value. The effect on the U.S stock market was short lived as the implication of the Brexit reached an equilibrium.
The interest rates due to Brexit that was anticipated by most of the companies will be felt as they reduced the profitability of the company and thus their stock market operation reduced. Even so, the impact of Brexit on the U.S market was minimal due to less GDP percentage depending on international trade and Federal Reserve System kept on hold increase in interest rates thus leading to the U.S market having high liquidity. The process of commodity in U.S such as crude oil reduced due to Brexit. This would result to people investing in other sectors of the economy and will improve the economy of the country. The country will be a good destination for direct foreign exchange and some of the companies might opt to leave London. The increase in foreign domestic investment increase foreign exchange between U.S and the investors origin thus strengthening U.S economy and capital market CITATION Adr16 \l 1033 (Nikiforov, 2016).
The Brexit had impact on the global equity prices which are expected to reduce to the shrinking of the Britain economy and declining of European stock market. The effect too is expected to reach the U.S especially for pound bonds. The foreign exchange between the U.S, the EU and UK will be impacted in the long term. Initially, U.S was negotiating with the EU as a block and the UK exit will mean new memorandum of understanding and corporation will be required for continuous trading with the Britain. This is expected to increase the cost of operation of the country. The monetary policy of the U.S was impacted in relation to the capital market. There needs to be precautions taken in the capital market due to existence of uncertainty especially for the bank industry that have invested in EU. The ripple effect of the Brexit on the banks and organization that have invested in Britain and the EU will be felt by the U.S economy CITATION ICM16 \l 1033 (ICMA, 2016).
4.0 Brexit impact on ford company
Ford is an American multinational company with its headquarters in the U.S. The company is among the top motor vehicle brand in the European union. The company have invested in many plants in the European countries. The Brexit however developed a risk in the operation of the company with a forecast of $1 billion loss when the Britain leaves EU. The Brexit thus had many impact on the company performance CITATION Pet16 \l 1033 (Campbell, 2016).
After the Brexit, the company revenue from sales of car brands reduced due to the economic slowdown and market uncertainty after the Britain exit. The company income thus reduces and this impacted on the company shares which reduced by 9 percent. The company warned the possibility to closing some of its plants to expected low performance and most of its employees were expected to lose their jobs CITATION Pet16 \l 1033 (Campbell, 2016).
Doing business in the U.K according to analysts will be more expensive due to the loss of some of the privileges that were there due to block bargaining power of EU. The company thus opted to increase the prices of it car product in the U.K as it weighs its option of exiting the market. If the U.S won’t negotiate on economic partnership with the U.K, Ford will have to pay more for...