The sad news of the terrorist attacks in Brussels dominated the headlines this week. The immediate reaction in the markets was to buy safe-haven assets such as the U.S. dollar and gold in a risk-off sentiment while global equities sold off.
However this reaction proved short-lived, as markets quickly seemed to assume we were back to business as usual.
What persisted after this news, however, was the weakening of the British pound sterling. Investors immediately shifted their sights and began to take the possibility of a Brexit more seriously: Consequently, the GBP has hit a two-year low and is stuck there for now.
The term Brexit refers to the possibility that Britain could exit the European Union. As we’ve mentioned before, a referendum on Britain’s continued membership in the EU will take place on June 23. Opinion polls still show the pro-EU votes to be slightly ahead, but the markets don’t seem to trust those polls.
Just two weeks ago, Bank of England (BOE) Governor Mark Carney said that the EU vote is his country’s biggest domestic risk to stability. According to analysts, a Brexit would heighten expectations for a recession and the BOE would need to add economic stimulus immediately, drawing up contingency plans so that banks would be able to continue to do their business and avoid an exodus of firms.
Those that favor a Brexit are defying economics, choosing political and philosophical views instead. Slogans such as ‘control our border,’ ‘make our own laws’ and ’get money back from Brussels’ are all easy to understand. While it is highly questionable whether those actions would be easy to execute, it is understandable that the recent attack in Brussels may be swaying voters in that direction.
The reality is that this topic, once considered a non-issue, is leading to increased fears of nationalistic movements rising up within Europe. French far-right leader Marine Le Pen called for an immediate closure of the French-Belgium border after the attacks and her popularity immediately went up.
A Dutch referendum regarding the EU’s Association Agreement with Ukraine will be another test on April 6. The Dutch parliament had approved visa-free travel for Ukrainian citizens into the EU, so if the referendum is rejected, that will be taken as a vote of non-confidence in the Dutch government. Should this happen, it would probably shake the euro, too.
My View: The rattling in Europe reinforces the fact that the U.S. dollar is the safest-haven currency for now. While immigration is a hot-button issue in the U.S., we certainly don’t have as much immigrant risk as Europe does. Clients who have exposures to the GBP may wish to consider possible foreign currency hedges.
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