Panic over Great Britain’s startling vote to exit the European Union sent global financial markets skidding anew Monday, with shock waves felt from Shanghai to Wall Street.
The British pound touched 1985 levels against the U.S. dollar. Germany’s DAX exchange finished more than 3 percent lower and the Dow Jones industrial average fell by 1.5 percent, or 260 points. China’s central bank intervened to depreciate its currency, the yuan, against the dollar by 0.9 percent in an unexpected move.
By midday Monday, analysts estimated that more than $4 trillion in stock value had been erased across the globe.
British Prime Minister David Cameron told Parliament on Monday that his Cabinet had created a special unit to negotiate the departure from the EU and, in an understatement, noted “there are going to be adjustments within our economy.”
The top U.S. diplomat, in Brussels for meetings, effectively said the Obama administration would keep its fingers crossed.
“The vote did not come out the way President Obama and I and others hoped that it would, but . . . we respect the rights of the voters and we respect the process,” Secretary of State John Kerry said Monday. “So it is now incumbent on leaders to implement the will of the people and to do so in a way that is responsible, sensitive, thoughtful and, I hope, strategic.”
What does it all mean for you? Here are some answers to questions about U.S. fallout from the Brexit vote.
Q: Is it a mistake to be in the stock market?
A: U.S. stock prices are falling in tandem with shares in Europe and Asia, roiled by uncertainty, which is never welcome in financial markets. In the weeks ahead, however, U.S. stocks and other financial instruments here are likely to become a haven as Britain, the second-largest economy in the EU, negotiates its untangling from the trading bloc. Latin America’s giant Brazil is in prolonged recession, China is growing at subpar rates and Russia and other energy economies are squeezed by low oil prices. It all makes the United States the cleanest shirt in the dirty pile.
Q: Is my retirement plan safe?
A: In the short term, stocks are likely to remain volatile, and if your retirement investments are heavily in stocks, it is going to be a bumpy ride. But if the 2008 financial crisis is any guide, stock prices do bounce back, especially since the United States is one of the few countries exhibiting steady, albeit not stellar, growth. Most financial analysts warn against selling stocks when the markets drop sharply, because you lock in losses. Analysts generally warn that the closer you are to retirement, the less exposed to stocks you should be, especially investors within five years of shifting to fixed incomes.
Q: How will Brexit fallout be felt in the U.S. economy?
A: The most obvious impact will be on U.S. exports, which by the minute are becoming more expensive relative to the British pound, Japanese yen, the euro and other currencies. That makes imported goods cheaper, and while that is a windfall for U.S. consumers it will likely widen the trade gap with the rest of the world if prolonged, especially with China. This raises the prospect of new political frictions, given that trade has been a divisive campaign issue.
If the dollar remains strong, U.S. beef, chicken and farm products will become more expensive abroad, giving a sales advantage to Brazilian beef, Argentine soybeans and Ukrainian wheat. For U.S. companies manufacturing and selling into big markets abroad — companies such as automakers Ford and General Motors — overseas earnings become weaker when converted into dollars.
Britain accounts for only about 4 percent of U.S. exports, cautioned Jay Bryson, a global economist with Wells Fargo Securities in Charlotte, North Carolina. And exports make up about 10 percent of the U.S. economy, so even if the dollar remains unusually strong, it won’t be crippling.
The bigger threats may be indirect. If stock prices don’t rebound and stay volatile, Bryson said, over time that might make U.S. consumers reluctant to spend and might repress risk-taking in the economy.
“It’s not going to happen overnight,” he said. “These things are very difficult to quantify.”
Q: What does the Brexit vote mean for real estate?
A: If the turmoil gripping financial markets lasts for weeks or months, the Federal Reserve is likely to hold off on its long-awaited next increase in the benchmark interest rate called the federal funds rate. Long-term loans such as mortgages and car loans take their cues in part from the Fed’s rate.
“Against this backdrop, we no longer expect a 25 basis point federal funds rate hike at the September (Fed) meeting,” Samuel Coffin, an economist with global bank UBS, said in an investment note.
The Fed’s most recent meeting, earlier this month, left financial markets expecting two more rate hikes this year, the first in September. That’s unlikely if the turmoil persists, and it means mortgage rates and car loans would stay at the current levels, which are quite low by historical standards.
Q: Is the Brexit good or bad for gasoline prices?
A: In the short run, the financial turmoil has pushed down oil prices. A prolonged divorce from the EU would likely dampen demand for oil in Europe, adding to the downward pressure on its price and that of its byproduct gasoline. Over the next several years, U.S. and Canadian production will grow, according to forecasts from IHS Energy, a leading research group, and that, combined with a weak global economy, that makes the return to $100-a-barrel oil seem unlikely. Oil contracts for August delivery plummeted by almost 8 percent over the last two trading days in New York, settling Monday down 2.8 percent at $46.33 a barrel.
Q: Is there a message in Brexit for America?
A: Yes, according to Michael Hartnett, chief investment strategist for Bank of America Merrill Lynch in New York.
“The Brexit vote was a shock to Wall Street because an electorate in a country with no economic or financial crisis voted to dramatically change its political status quo,” warned Hartnett in a note Monday to investors. “This partly reflects the fact that economic recovery in recent years has been a. deflationary and b. unequal. Wall Street has prospered; Main Street has not.”
What he means by deflationary is that wages have been largely flat, so those with investment income, more likely with upper-income individuals, have done far better than those who live off wages or salaries. It’s often shorthanded as income inequality, and this long-running trend helps explain the anger among U.S. voters against trade, immigration and a number of other policies tied to globalization that are drawing attention in the U.S. campaign and Britain’s Brexit vote.
Hannah Allam and Lesley Clark contributed to this article.
Kevin G. Hall: 202-383-6038; @kevinghall; email@example.com