With 10 days remaining to the June 23 U.K. referendum on Britain's exit from the European Union, or "Brexit" as it is more commonly known, Britons appear to be leaning toward severing ties with the EU. For months, polls had predicted a near certain rejection of the U.K.'s far-right parties, however, splintering opinions within the Conservative Party have turned Brexit into a mainstream position. The "Bremain" camp, touting continued solidarity with the EU and a will to remain in the European Union is led by none other than Prime Minister David Cameron. He is joined by the left-leaning main opposition party, Labor, however their joint support for "Bremain" appears headed for failure according to the latest polls.
Global financial markets have been depressed on news of the increase in likelihood of a "Brexit." The pound sterling is at multi-month lows and European bourses have suffered across the board. United States equities and markets are also down for several weeks now indicating skepticism as to the U.S. economy's continued strength going into the November presidential election. Turkey's equity markets joined its fellow emerging market brethren in falling late Monday, continuing a month-long trend of depressed stock prices. The Turkish Lira, conversely fell below TL 2.90 on Friday, extending a month-long trend following speculation on whether the Federal Reserve (Fed) would raise interest rates, speculation which was answered on the heels of abysmal jobs data from the U.S. Labor Department.
Commodity traders looked to gold and oil, as they often do in times of uncertainty, pushing both commodities higher last week. Gold is on the brink of testing $1,300 an ounce ahead of the vote and perhaps much further should Brexit be revealed in the election results. Oil also rallied last week but fell below $50 a barrel on Monday. While the Brexit would strengthen gold, oil would almost certainly fall as economic woes in Europe will be bad for energy demand and thus oil would continue to move lower.
Despite polling data, I find it hard to believe that Britons would vote for leaving the European Union. While the costs of remaining in the EU may be high for the U.K., leaving may ultimately prove to be much more costly. This will probably be clearer in the days before the election and the electorate will reject the Brexit.
An exit from the eurozone was last averted by Greece several years ago and an exit from the EU itself was never really on the table despite near catastrophic economic problems. For any member of the EU to decide to leave at such an early stage would almost certainly be the first step in an unraveling of the union. While the U.K. was neither a party to the Schengen agreement that allowed visitors to the continental European countries to also visit the U.K., nor a member of the common currency, the euro, it was a major force in the union. Dominated by France and Germany, the inclusion of the U.K. aided all parties in increasing cross-border trade and cooperation among financial markets. An unraveling of said cooperative agreements will be lengthy and arduous.
A vote for "Bremain" will strengthen the union in general as the first major test of its ability to whether political and economic uncertainty, especially in the face of a growth in far-right nationalist parties among members of the union. A close call in the election would allow for continued negotiation between the U.K. and EU, allowing the U.K. to spend less toward common programs while retaining many of the benefits of membership.
An outright rejection of the EU and vote for "Brexit" would be disastrous for the pound sterling (as we have seen ahead of the election) as well as for European markets in general. Look for EU markets and the EU to fall by double digits following any vote for "Brexit." The U.S. dollar would be the main beneficiary of an unraveling of the EU-U.K. partnership; however a strengthened dollar would continue to hurt U.S. exporters and job growth in the U.S.
A vote for the Brexit would also very much benefit Donald Trump, the Republican party's presumptive nominee ahead of his party's nomination convention. Trump wasted no time in trying to score political points following the massacre in Orlando early Sunday and he may use momentum from any successful Brexit vote to rally nationalists in the U.S., long absent from the voting booths in presidential elections.