Brexit – Britain's exit from the European Union after 43 years of wealth-enhancing membership – was not supposed to happen.
In recent days, sterling and the British and European stock markets had climbed steadily in anticipation of a pro-EU vote in the British in-out referendum. The economic case for staying put had been made, so why would Britons vote against their economic interests?
The markets kept rising when the first polls were counted overnight; sterling hit US$1.50, its highest level since December. Then – kaboom! – the Sunderland riding went overwhelming in favour of Brexit, a surprise. Sterling sank, then kept sinking. The fall quickly went vertical as the Brexit trend gained momentum.
When it was still dark in London, sterling ended up losing more 10 per cent, its biggest daily fall on record, taking it to about US$1.34. Emerging market currencies soared. The Brazilian real, Russian ruble and Argentine peso all gained almost 10 per cent against sterling. FTSE-100 futures lost more than 7 per cent and U.S. stock-index futures fell more than 3 per cent.
Even oil, which was thought to be Brexit agnostic, was down. Shortly after dawn, Brent crude, the international benchmark, had lost 6 per cent, taking it below US$48 a barrel.
A global bloodbath, in other words. Sell-offs this steep and fast rarely happen. You generally need a catastrophe like the collapse of Lehman Bros. to trigger violent market plunges. Yes, investors can botch it, spectacularly so. "The pols and the bookies got it wrong again," said Steen Jakobsen of Denmark's Saxo Bank.
He expects the Bank of England to cut interest rates today in an effort to quell the storm. The European Central Bank, however, may be out of ammunition.
Investors were no doubt over-reacting. Britain will not leave the EU tomorrow. Negotiations to extract itself from the 28-country union will take at least two years and Britain could very well negotiate a Norwegian- or Swiss-style trade association that preserves its access to the EU, which soaks up more than half of Britain's exports.
But it may not, and if it doesn't, industrial risk will emerge along with trading risk, indeed already has.
Big companies that set up shop in Britain, among them Airbus, Japan's Nissan, Canada's Bombardier and the consumer products giants did so on the assumption that they would have unfettered, barrier-free access to the entire EU market, the world's largest, forever. That assumption is now on the verge of vanishing. The share prices of the companies with businesses on both side of the English Channel are bound to suffer. In Asian trading, the British banks HSBC and Standard Chartered took a beating.
Industry's fear is that the EU will not go easy on Britain as it tries to negotiate a new access deal to the EU. Why would it? If the rump EU gives Britain a sweetheart deal, other EU countries might be tempted to launch me-too referendums. Were that to happen, the EU would be finished.
"The key question will be whether the UK's divorce from the EU can be a friendly one, which will limit the economic pain, or whether it will break down in acrimony," said ING Financial Markets economist James Knightley. "If it is the latter, a toxic political environment could lead to protracted negotiations, resulting in significant economic distress for the UK and Europe more broadly."
Both Britain and the EU have entered the great unknown. No member country has ever left the EU before, there is no playbook. Investors hate uncertainty and uncertainty will be in surplus not just for days or months, but potentially years.