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Specialist Meric Greenbaum works at his post on the floor of the New York Stock Exchange, Friday, June 24.Richard Drew/The Associated Press

Utterly blindsided by Brexit, investors around the world now find themselves having to navigate a market roiled by the potential for great political and economic upheaval.

On Thursday, as the final votes were being cast on Britain's membership in the European Union, investors were still happily bidding up U.S. stocks, right to the closing bell, which nearly rang in a record high for the S&P 500 index.

So certain were markets of a victory for the status quo that the surprise majority vote to leave the world's largest trading bloc crushed sentiment.

The result struck at investor confidence globally, with riskier assets including stocks suffering steep losses on Friday as investors clamoured for the perceived safety of gold and government bonds.

The equity sell-off wiped out an estimated $2-trillion (U.S.) in value globally, as European stocks were hit hardest. The British pound went into a free fall, hitting its lowest level since 1985. And the flight to safety lopped a bit more off what little remains in the way of yield on major sovereign bonds – those not already yielding negative rates, that is.

Whether or not that global reaction proves to be excessive, Brexit has likely ushered in a new phase of volatility either way, said Charles Lannon, head of global equity mandates at Toron Asset Management International.

"You'll see a whole host of strong up and strong down days in the coming weeks, which is never fun for investors that have an inappropriately risky portfolio," he said. "But as a professional investor, you live for stuff like this."

Brexit was merely the first step in a political repositioning that will take years to unfold. As an expression of nationalism and protectionism, it could "signal the beginning of the end of the EU as we know it," Benjamin Tal, CIBC World Markets' deputy chief economist, said in a note on Friday.

An ensuing recession in the United Kingdom is a "real possibility," CIBC said. And outside of the EU, Brexit could lower global GDP growth by 0.1 to 0.2 percentage points a year over the next three years, according to Citigroup Global Research.

But the long-term economic costs are very much unknown. That, of course, didn't stop the market from making a wild guess.

Bourses in Frankfurt and each Paris fell by 7 per cent to 8 per cent. Italian and Spanish markets posted their sharpest one-day drops ever, falling more than 12 per cent, led by a dive in European bank stocks. Britain's big banks took a $100-billion battering, with Lloyds, Barclays and RBS falling by as much as 30 per cent, although they cut those losses in half later in the day.

The shock waves resonated in North America, as the Dow Jones industrial average fell by more than 600 points to end the day at its lowest level since mid-March. The S&P/TSX composite index fell by a relatively modest 1.7 per cent, as Canadian losses were mitigated only by the strength of gold stocks. Gold spot prices rose as high as $1,358 an ounce – the highest since early 2014.

Meanwhile, demand for the safest sovereign debt rose, pushing global bond yields ever lower. U.S. 10-year benchmark government yields fell as low as 1.4 per cent on Friday morning, the lowest since 2012. Canadian 10-year yields fell by as much as 230 basis points to a low of 1.06 per cent. (A basis point is 1/100th of a percentage point.)

But while fear was certainly apparent, panic, for the most part, was not. "Markets might be unhappy but are not unruly," as chief U.S. market strategist at RBC Dominion Securities Jonathan Golub said in a note.

The VIX index, a measure of volatility, rose meaningfully, but at 25.8 is still well below levels reached in previous periods of market stress, including last February, Mr. Golub said. "Similarly, credit spreads are modestly wider but well below stressed levels."

Negative sentiment in response to Brexit is rooted in concerns about waning global economic growth, said Bruce Cooper, chief investment officer of TD Asset Management. "The underlying dynamic is that we're already in a low-growth world, which introduces an element of fragility."

But decent U.S. economic readings recently may have helped to prevent a deeper selloff. "The largest economy in the world is ticking along okay," Mr. Cooper said, citing low unemployment, improved housing activity, and growing wages.

And yet, the global economy is set to post its second straight year of declining growth, Mr. Lannon said. That makes the market vulnerable to even relatively minor economic threats. So the geopolitical saga kicked off by the British referendum will likely hold the market in its thrall, he said.

"Over the next few weeks, you could see a lot of choppiness just driven from news flow. There will be plenty of 2-per-cent up and down days, I should think."

In that kind of environment, the average Canadian investor should avoid the temptation to act on fear, said David Baskin, president of Baskin Wealth Management.

"If profits aren't going down, what is it I'm worried about exactly?" he said.

"We know that mutual fund holders and do-it-yourself investors are going to do the exactly the wrong thing. They're going to sell at the bottom. Then they'll stay out of the market or buy back later with regret."

With files from Reuters

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