24 Jun 2016

Brexit: memories of the great financial crash

Not since the great financial crash had the atmosphere on a trading floor felt so febrile. We were there at 7.30am though it was clear from the bleary eyes that many traders had been up all night. For this was not the outcome that they or the markets had been expecting.

24_markets_r_w

In fact the market had priced in the exact opposite. But throughout the night as the results started to trickle in what many thought would never happen, happened. Sterling duly tanked and with it the FTSE tumbled, losing more than 8 per cent at one point. We were in unchartered territory here, that much was clear.

Traders on the sterling desks screaming into their mouthpieces, juggling two phones at once. Then the news came that David Cameron had resigned and everyone looked around in disbelief. It felt like a Lehman moment. A referendum result spiralling out of control. The problem is, as history has taught us, markets hate uncertainty and so much of what lies ahead is uncertain.

There is no precedent for a country – especially one the size of the UK – exiting the EU. There’s no rule book to follow, no plan B, as George Osborne has warned.

Predictably the banks and housebuilders were hardest hit with Taylor Wimpey at one point down 42 per cent. The crème de la crème of Britain’s businesses from Virgin to Marks & Spencer to Vodafone had pleaded for the status quo – made their case for the economic dangers of Brexit. But in the end the electorate chose to walk away.

No wonder the boss of the CBI, Carolyn Fairbairn was forlorn when we met her a while later. She told me she’d been up most of the night and was “very sad, heartbroken” about what had happened though she insisted that businesses would bounce back “because they always do”.

But until some of the big questions start to get answered – crucially what type of trade agreements will now be agreed and how much access will be given to the single market – the reality is many of them will retrench. Sit on their hands, delay decisions and postpone investments. It’s what businesses always do. Go into risk averse mode.

John Mills, the Labour backer and one of the lead spokespeople for Business for Britain, was bleary eyed too. And he certainly wasn’t in champagne-popping mode. He admitted it felt somewhat uneasy as he watched events unfold but reiterated he still believed Britain would be better off out than in.

Mills downplayed the prospect of a recession, saying that people – and markets – always over-reacted on these occasions. The doom and gloom merchants were out in 1992 when Britain was forced out of the Exchange Rate Mechanism – but rather than a hike in inflation and massive job losses, Mills said Britain entered a period of strong economic growth over the next decade. “I’m not sure the economy will turn down,” he said.

Much of that has to do with how the consumer reacts. With house prices potentially set to fall and the value of pensions and savings declining, the danger is that over time, people will start to rein in their spending. And that, in turn, could precipitate the very recession they are trying to avoid.

By the close of markets, the FTSE had regained some of its value but if the US stock market is anything to go by – the Dow is down 471 points, or 2.6 per cent – it’s clear investors are anything but calm. A recession may not be imminent but we’re certainly in for a bumpy ride.

Follow @siobhankennedy4 on Twitter

Tweets by @siobhankennedy4