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Brexit Commentary 2016

Markets react to the United Kingdom’s EU exit (Brexit)

On Thursday, the United Kingdom (U.K.) voted to leave the European Union (EU), in a somewhat surprising move. The markets’ immediate reaction was less surprising. Markets seemingly anticipated a "stay" decision and had rallied in the days prior to the referendum, but started to decline after the 52% to 48% vote went the other way. Given the unanticipated decision, it is not astonishing that the British pound fell sharply - briefly to a 30+ year low against the U.S. dollar - and the U.K. equity market followed suit. American equity markets were down about 3% on Friday, while international equity (e.g., Germany and France) and currency markets declined more. Many investors, predictably, turned toward what they deem to be more stable investments like U.S. Treasuries and gold.

For now, the dollar is rallying versus the pound and euro, reflecting a flight to safety. Global investors are watching to see how the scope of this major change will impact British economic growth rates over the next few years as well as European politics, currency and economic reforms. Several countries’ central banks have offered reassurance that they will provide liquidity if needed. Because the European Union allows for the easy flow of goods, services, capital and people across the borders of member countries, economists expect the U.K. to now face restraints in foreign trade and global finance, which could have a negative impact on the U.K. economy and currency, according to some economists.

In the short run, markets will likely remain volatile until some sort of clarity emerges, which may take a while. A strong dollar makes our goods more expensive for those outside of the United States. The same is true in China, as their currency increased as well against the pound and euro. It is likely that interest rates will remain low for longer and we may not see another interest rate increase this year.

We are so interconnected globally, at this point the long-term effects are not known. One thing for sure, is that there will be wide public speculation and people who claim to "know" how this will all play out will emerge. In our view it is not likely and will take some time for this all to work itself out. This was not expected, but there can be benefits as well as negative consequences to such a historic move.

We will be analyzing how markets are reacting, including currencies and interest rates. Our quarterly newsletter will be out in a few weeks and will contain the most current updates as well as our observations and any recommendations, so you will have some insight on how your portfolios are performing.

Please call our office in the meantime if you have any questions or concerns.

Best Regards,

Sherri Stephens, President
Financial Advisor, RJFS
Stephens Wealth Management Group

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Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and Sherri Stephens and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur.

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