- How Brexit could hit Canada
- Global markets bloodied
- Pound touches lowest level in three decades
- Bank of England pledges to protect financial system
- G7 finance ministers, central bankers ready to act
- Oil prices sink in fresh threat to Canada's economy
- Loonie tumbles along with other currencies
The Brexit hit
The mess that is Brexit is going to wash up on Canada’s shores. The question is how hard.
According to the Nomura group today, the impact will be “relatively small and negative”
“The weaker economic activity in Europe resulting from a Brexit and its impact on trade will be the most direct channel impacting the Canadian economy,” Nomura economist and foreign exchange strategist Charles St-Arnaud said today.
“Canada sends about 3.5 per cent of its exports to the U.K. and about 4.5 per cent to the rest of the EU,” he added.
“There should also be some second-round effects from the impact on the U.S. economy and financial conditions, lower commodity prices and the increased uncertainty.”
The timing, of course, couldn’t be worse for an economy already hammered by the oil shock.
“The tighter financial conditions, ower commodity prices and heightened uncertainty are all likely to weigh down growth, as businesses are likely to further delay investment projects,” Mr. St-Arnaud said.
“Similarly, some households could delay spending due to the uncertainty.”
Mr. St-Arnaud believes the Brexit fallout could shave economic growth by about 0.2 of a percentage point in the second half of this year, with some spillover into 2017.
That won’t be enough to prompt the Bank of Canada to cut its benchmark interest, though, he added.
And it could well hold down the Canadian dollar.
The direct hit to Canada won’t be known for awhile, said senior economists Jennifer Lee and Benjamin Reitzes of BMO Nesbitt Burns, though they, like Mr. St-Arnaud, expect the impact will be small.
“The most immediate impact on the North American economy will come from the financial market volatility that we are seeing in the aftermath of the vote,” they said.
That’s the short term.
“In terms of longer-term impact, a Brexit means a delay in the [free trade agreement] currently being negotiated between Canada and the EU, as EU negotiators are likely to focus on negotiations with the U.K.,” Mr. St-Arnaud said.
“Moreover, it means that the U.K. will not be part of this FTA,” he added.
“This means that Canada and the U.K. will need to negotiate their own FTA. However, we believe that it will be some time before any agreement happens, as we think the U.K. is likely to prioritize with the U.S., the EU and China.”
CIBC World Markets, in turn, believes the Canadian dollar, already whacked today, could slide a further 5 to 6 per cent.
Canada’s Finance Minister sought to reassure the country both on the economic and market front after he spoke with his Group of Seven peers and central bank chiefs.
“While some market and economic volatility can be expected, the Canadian economy is well placed and our financial institutions are well funded,” Bill Morneau said.
“Global markets are resilient and orderly, and we will continue to monitor developments in the world economy.”
A I'd love to (and may one day) see ...
The shocking results of the Brexit referendum sparked a “bloodbath” across financial markets today, as stocks and certain currencies plunged.
“Unquestionably, this is bad for markets and qualifies as a potential global deflationary and growth shock.”
The Bank of England moved quickly to assure the markets that it has a plan in place and will do whatever is necessary, raising questions for other central banks across the globe.
“The Bank of England is monitoring developments closely,” it said in a statement.
“It has undertaken extensive contingency planning and is working closely with HM Treasury, other domestic authorities and overseas central banks,” it added.
“The Bank of England will take all necessary steps to meet its responsibilities for monetary and financial stability.”
Bank of England Governor Mark Carney moved quickly to calm markets, saying he was prepared and has already acted.
“Inevitably, there will be a period of uncertainty and adjustment following this result,” Mr. Carney said.
“But we are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning.”
“Some market and economic volatility can be expected as this process unfolds. But we are well prepared for this.”
Mr. Carney, the former Bank of Canada governor, said the central bank stands ready to pump more than £250-billion in emergency funds into the system if needed.
Group of Seven finance ministers and central bank chiefs issued a statement this morning saying that they're tracking developments and will act as necessary.
“We recognize that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability,” they said.
“G7 central banks have taken steps to ensure adequate liquidity and to support the functioning of markets. We stand ready to use the established liquidity instruments to that end.”
“The surprise Leave victory in the U.K.’s Brexit referendum has changed the calculus of global markets. We have seen the biggest intraday volatility in the pound on record, as evidenced by it hitting a yearly high and yearly low within hours of each other.”
Angus Nicholson, IG
The fallout in global markets was fast and harsh.
Tokyo’s Nikkei plunged almost 8 per cent, and Hong Kong’s Hang Seng by about 4.5 per cent.
In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were down by between 3.2 and 8 per cent. However, the FTSE 100 managed to close higher on the week.
Big European banks such as Barclays and Deutsche bank were hit hard, their stocks falling sharply.
“The fact that markets were positioned so wrongly has contributed to this morning’s bloodbath with the pound plunging 10% from a six-month high of 1.5000 to a 31-year low of 1.3228 in the space of a few hours.”
Global government bond yields also fell sharply. British yields came back somewhat, though, amid speculation that the Bank of England could be poised to cut interest rates, said CMC Markets chief analyst Michael Hewson.
Britain’s pound was bloodied, eroding to its lowest level in about three decades before paring some of its losses.
“The Canadian dollar has tanked. I’m shocked at the bloodbath in global markets.”
Like other currencies, the Canadian dollar also sank, sinking below the 77-cent (U.S.) mark at one point.
“My jaw has dropped to the floor on the news,” said Rahim Madhavji, president of KnightsbridgeFX.com.
“We are seeing a strong flight to safe haven currencies such as the U.S. dollar,” he added.
“Commodity currencies such as the loonie are taking a hit. Oil is down significantly.”
“The markets could need a hand to go through a historical moment ... Political and financial uncertainty, high volatility, choppy market conditions are on the menu.”
In the commodities markets, oil prices retreated sharply, with West Texas intermediate slumping to near $48 a barrel, raising further questions about Canada's embattled energy industry, whose troubles have sparked a recession in Alberta.
Gold, in turn, rallied by about 5 per cent.
“Given the universal repricing out of ‘Brexit’ risks from financial markets over the past few days, the leave vote has come as massive shock to markets and investors. The U.K. will likely bear the brunt of the macro, political and financial uncertainty generated by a Brexit.”
Senior market analyst Ipek Ozkardeskaya of London Capital Group said the focus will now shift to the Bank of England.
“Quick measures should be put in place in place in order to fight the excessive volatility in the pound, the stock and the bond markets,” she said.
“This being said, given the low-to-negative rate environment in the U.K. and across the euro zone, the BoE’s manoeuvre margin is disturbingly low.”
But the issues go well beyond the Bank of England, to the European Central Bank, the Federal Reserve and the Bank of Canada, which has already cut interest rates twice since the initial days of the oil shock.
Clearly, those central banks had been counting on a Remain vote, though standing by for the shocking turn.
Mr. Carney said he expects commercial banks to draw on the emergency funds when needed “just as we expect them to draw on their own resources as needed in order to provide credit, to support markets and to supply other financial services to the real economy.”
British banks are strong, he added, having raised billions in capital.
“The U.K.'s vote to leave the EU has predictably undermined the prices of industrial commodities ... Once the dust has settled on the shock result, we suspect that the prospects for all these commodities will be determined by other, more specific factors.”
Julian Jessop, Capital Economics
CIBC World Markets analysts warned today that the turmoil will be ongoing, and dramatic.
It expects the pound to fall by up to 20 per cent in the coming months, and the U.K. to plunge into recession. The Canadian dollar could well fall a further 6 per cent in time, CIBC said.
“Equity markets were very complacent going into the referendum so they will need to reprice,” it added.
“Expect a massive exodus away from European equities into North American market equities.”
Also now in question is London a global financial hub.
“A number of global banks could potentially relocate some of their operations out of the U.K. and into other EU financial centres in the years ahead,” said Jennifer Lee and Benjamin Reitzes, senior economists at BMO Nesbitt Burns.
“A Brexit will be messy, and will act as a further dampener on North American growth.”
BMO Nesbitt Burns