What Britain Leaving The EU Means
The EU (European Union) was established following the end of WW II in order to offer financial and structural stability for European countries. Since its establishment, the EU has grown to a membership of 28 countries, abiding by various rules and policies set forth by the EU Council.

One of the responsibilities of member EU countries is to accept and honor immigrants and citizens from other EU countries as part of the human rights initiatives recognized by the EU. Immigration has been a topic of contention among various EU countries for sometime. This was a decisive factor for Britain leaving the EU since its economy and cities have been inundated by foreign-born immigrants seeking jobs and a better quality of life.

The markets have reacted negatively to the announcement, pushing down stocks, the British pound, and bond yields as investors

brexit blue european union EU flag on broken wall and half great britain flag, vote for united kingdom exit concept

seek the perceived stability of bonds as markets worldwide acclimate.

Since Britain has been part of the EU since 1973, it is expected that the unraveling of British ties from the EU could take years. Contracts, employees, and laws will all have to be revised, reshuffled, and rewritten in order to accommodate the divorce between the two.

Now that the British have decided on leaving the EU, many believe that another referendum could possibly be presented in France and other EU countries. The concern of a domino affect is very realistic, as several other EU members are experiencing similar frustrations as Britain.

Expected effects in the U.S. include: Prolonged low interest rates More assets flowing into the U.S. from abroad U.S. companies altering European contracts Stronger U.S. dollar versus the British pound and euro
Sources: EuroStat, EU Council, Europa.eu

Emerging Markets Excel – EM Update
Emerging market equity indices advanced towards the end of the second quarter, excelling past larger cap international counterparts. Companies within emerging economies reacted negatively to Britain’s vote to leave the EU as the question of what contracts and employment agreements may become null once the exit occurs.

A broadly used and recognized index of emerging countries, the MSCI Emerging Markets Index, declined to include Chinese stocks in its broad array of emerging market equities. The reason cited was the continued difficulty of getting money in and out of the country without limits, a prerequisite for inclusion into the index.

Sources: MSCI

Equity Update – Domestic & Global Stock Markets
U.S. stocks fared better than international stocks following Britain’s announcement on leaving the EU. U.S. equity markets were resilient once the surprise of Brexit unfolded, with the S&P 500 Index and the Dow Jones Industrial Index both positive for the year.

Domestic equities are more insulated from global developments and any other major equity markets since American companies generate 70% of the revenues from the United States. Japanese companies generate 50% from within their economy only and European companies generating a mere 49% from Europe only.

U.S. equities are considered attractive relative to negative yielding government bonds in Asia and parts of Europe, even as the U.S. 10-year note finished below 1.5% in June. The S&P 500 index currently carries 60% of its stocks with a dividend yield higher than the 10-year treasury bond yield.

The primary British equity index, the FTSE 100, tumbled in June following the Brexit vote. Companies within the index generate about 75% of their revenues outside the U.K., with many maintaining contracts and arrangements with other companies based in other EU countries. Since the actual extraction of Britain from the EU may take years, decisions for capital spending and expansion by European companies may be hindered.

Certain equity sectors are becoming increasingly sensitive to what the presidential candidates are proposing. Concerns lie with those sectors where newly enacted regulatory policy can inhibit growth and profits. Other sectors are being adversely affected by low rates, such as banks whose earnings are hindered by low rates, which limits the amount of profits they can earn as deposits fall and loan rates drop.

The Department of Labor reported that average hourly earnings grew by 2.5% over the past year, thus placing pressure on corporate earnings as wages move up. Many analysts believe that wages will continue to increase as unemployment rates remain below 5%, enticing companies to keep performing workers and paying them more.

Sources: Department of Labor, S&P, Bloomberg

Federal Reserve Changes Its Tune – Monetary Policy
The events in Europe along with an IMF report released in June indicating that U.S. economic growth would fall short of expectations, prompted the Federal Reserve to subdue its pursuit of any additional rate increases this summer.

Britain’s vote on the EU exit sent U.S. government bond yields to new multi-year lows as well as dimmed trade growth prospects between Europe and the U.S. The dollar’s recent rise is also a headwind for the U.S. since a rise in the dollar’s value drags on U.S. exports and puts downward pressure on U.S. inflation, which is well below the Fed’s 2% target for inflation.