European Union and Brexit

Brexit - Financial Market & Institutions In June 2016 majority of British citizens voted to withdrawal from the European Union (EU). Since then there has been immense debate over the impact of the withdrawal on the UK, other EU countries, and the EU as a whole. One of the areas where the withdrawal may have a devastating impact is the trading market. Focusing on the market perspective, this essay discusses the impact of Brexit on the trading market. The essay also considers the implications of the exit on the pound.

UK's trading market occupies a crucial position in the economy of the UK, the EU, and the world at large, meaning that Brexit could have catastrophic impacts on the market. Contrary to what many expected, the stock market was insignificantly affected following the referendum. Nonetheless, this does not necessarily mean that the outcome would be similar if Brexit actually happens. According to Stevenson (2017), there may be no significant impact in the early days, but there could be cycles of stock market volatility as the negotiation process proceeds.

The negotiation process, which is expected to last about two years, formally commenced on March 28, 2017 after the UK signed the Article 50 of the Treaty on European Union notifying the EU of its intention to leave the union. As the negotiation proceeds, investors are likely to respond based on changing negotiation outcomes, thereby causing market volatility. Investors will be keen on the impact of negotiation positions on individual companies. This is likely to create valuation variances in some stocks as investors adjust to negotiation outcomes (Stevenson, 2017).

In the meantime, UK firms will be concerned about access to EU markets. This will be dependent on the agreement the UK reaches with the EU. The UK may negotiate free trade agreements with the EU or resort to World Trade Organisation (WTO) regulations. In the event of unfavourable outcomes, UK firms may experience difficulties accessing the EU market. This may affect firms' financial and stock performance in the long run. Impact on the trading market may further affect the pound.

Indeed, immediately after the referendum, the pound depreciated against the dollar and other major currencies. Though the pound has recovered to some extent, it is yet to reach its pre-referendum levels (Brinded, 2017). This has negatively affected sterling traders. Furthermore, the movement of the pound has been more volatile in the wake of the referendum compared to previous periods. The volatility has driven the pound downwards, consequently increasing market uncertainty. The pound may become even weaker after the UK eventually leaves the union.

This would be caused by the negative economic effects the withdrawal may generate such as reduced market access, reduced investment, and constrained trade activity. Even so, some analysts have maintained that the impact of Brexit on the pound will not be long-term, especially if the UK negotiates favourable trade agreements with the EU (Blitz, 2017). However, this does not necessarily mean there will be no uncertainty. Overall, with the invocation of Article 50 about three months ago, negotiations to divorce the UK from the EU are already in progress.

Since the referendum, considerable volatility in the trading market as well as the pound has.