Stocks, bonds, and currencies around the world have moved in lockstep with expectations around the June 23 U.K. referendum, with risky assets like stocks and oil gaining when betting firms and polls suggest a victory for the ‘Remain’ camp, but falling when the odds appear to favor the ‘Leave’ campaign.
The latest Brexit opinion polls are sending mixed signals. A survey by pollster Survation Ltd. and another by YouGov PLC showed the two sides in a close race, with Survation putting the ‘Remain’ camp slightly in the lead and YouGov placing the ‘Leave’ camp just ahead. More polls on the referendum are expected before Thursday’s vote.
Major debate has unfolded between those backing the exit and those backing staying in the EU. Pledges by Leave backers have been bashed by those seeking to stay in the bloc, calling their pledges of no shift in funding as "dishonest and patronizing."
Referendum results are expected Friday morning. The voting stations will close at 10 p.m. local time, or 5 p.m. ET. There will be some exit polls, but the BBC said it will not conduct one because the margin for error would be too great in this referendum. Results will be counted and released by area beginning after midnight in Europe, but since the total number of votes will determine the outcome, officials may not be able to call the election with certainty until the very end. Those final tallies will come in throughout the night, finishing up by 7 a.m. local time. At that time, 2 a.m. ET, the Chief Counting Officer should be able to announce the winner.
No states have ever left the EU before, so this is uncharted territory. If the U.K. votes to withdraw, its leadership would have two years to negotiate the terms of departure and organize new trading arrangements with hundreds of countries, including the United States. The UK would most likely stay a member of the EU until 2020 in the event of Brexit. “There is a broad understanding that although Article 50 of the Lisbon Treaty stipulates a two-year negotiation period for the Brexit ‘divorce,’ in reality, both sides will probably agree for the UK to actually withdraw from the EU at the end of 2020, when the current 2014-2020 multi-annual financial framework’ (MFF) comes to an end,” said AgraEurope Editorial Director Chris Horseman. “In the UK’s case, this would give it more time to prepare for the significant challenges of life outside the Union, while the EU, for its part, would not want to lose the UK’s net contributions midway through a financing period. So saying that UK farm subsidies are ‘safe’ until 2020 is really saying nothing more than ‘EU farm subsidies are safe for as long as Britain is still in the EU.'"
Potential impacts should the vote favor the Leave campaign are complex and subject to debate. With that caveat, the following are some potential implications:
- Impact on the U.K. Uncertainty is usually bearish to many markets. Many economists believe that the U.K. could go into recession which could unsettle economies all over the world. However, some analysis released recently showed that in the long run, the U.K. economy could actually grow at a faster clip without EU regulatory and other constraints. In the longer term, by removing itself from the EU market, the U.K. would lose the free trade privileges it enjoyed. Conversely, the EU would lose the second-largest contributor to its operating budget, and nearly 15% of its GDP.
- The International Monetary Fund warns that a Brexit could lower the output of many economies, including the US by up to half a percentage point. The euro or pound floundering next to a strong dollar would be a blow to American exporters.
- Potential political instability could be a result for Europe on the whole. If other states follow suit and leave the largest trading bloc in the world, the entire continent would be weakened, some note, falling into the shadow of a looming Russia. The future of NATO itself could even be at risk, observers note.
- Financial markets have focused on the referendum more than other trading. Recent polls that suggested the Remain campaign will win out has led to rises in global stocks and has impacted bonds and gold. So should the eventual result favor the Leave campaign, volatility in some markets would be the likely outcome.
- Key market impacts would be currencies, notably the dollar, British pound and Japanese yen. A vote to leave the EU would likely provide safe haven rallies for the dollar and yen, and a decided bearish impact for the pound.
- US interest rates. A Leave vote would also likely up already high odds that the US Federal Reserve would be very cautious in the timing of the next hike in US interest rates.
- A stronger dollar would raise the prices of US exports, as dollar-denominated goods become more expensive for buyers with weaker currencies. That would likely mean less competitive US agricultural exports. It would make imports cheaper for US consumers, a deflationary impact that would again give the Fed more reason to delay further interest-rate hikes.
- A flight to safety in the wake of a Brexit would be US Treasurys, which have recently seen the 10-year yield at two-year lows. While any Leave win could impact US bonds, most traders would focus on the impact on the US dollar as the key barometer for other markets.
- US Federal Reserve comments. Federal Reserve Chairwoman Janet Yellen before the Senate Banking Committee on Tuesday said that she is not taking sides ahead of Britain's June 23 vote on whether to leave the European Union, but that the US central bank is monitoring the situation carefully. Yellen was cautious, saying she doesn't "want to overblow the likely impact" of a Brexit, but she added that the Fed is monitoring the situation closely. She said that whatever British citizens decide will have "economic consequences that would be relevant to the US economic outlook." Should Britain decide to exit the EU, Yellen said that markets are likely to react in "a kind of risk-off sentiment ... that we might see flight to safety flows that could push up the dollar or other so-called safe-haven currencies." Yellen said, however, that she does not believe that the US would see a "Brexit-induced" recession.
- Investment impacts. International investors have chosen the U.K. as their base because it is part of the EU. Departure would lead many companies to at least reconsider their location.
- Potential impact on US agriculture. Senate Agriculture Committee Chairman Pat Roberts (R-Kan.) declined to comment on how a Brexit would impact crop and livestock trade with Britain. The Obama administration has not said much on the impact, either. “I think there are far more comprehensive issues relating to the EU and the U.K.'s role in the EU in that vote, and obviously the people are going to make a decision that they think is in their best interest,” USDA Secretary Tom Vilsack said June 16.
- Impact on TTIP. Vilsack said he is more concerned with completing the Trans-Atlantic Trade and Investment Partnership (TTIP) agreement currently being negotiated between Europe and the US. Britain leaving the EU is not going to derail US trade priorities for Europe, like the food safety and simultaneous buy-and-sell (SBS) issues related to commodities futures trading, Vilsack said. “I'm focused, frankly, in terms of TTIP, not so much on that decision but on the decisions that the negotiations are taking place in terms of geographic limitations, in terms of biotechnology, in terms of beef access, and some of the other SBS issues, pathogen reduction issues we've been talking about all the time,” Vilsack said. Some industry analysts agree that a Brexit would not derail TTIP negotiations.
- Beyond agricultural trade, leaving the EU would likely require Britain to strike new trade deals with the US, but Britons might have to wait, President Barack Obama said. “Maybe some point down the line, there might be a U.K.-US trade agreement, but it's not going to happen anytime soon because our focus in negotiating is with the big bloc, the European Union, to get a trade agreement done, and U.K. is going to be in the back of the queue,” Obama said during an April 22 press conference with British Prime Minister David Cameron.
- Agricultural trade between the US and U.K. is small compared to total US agricultural exports, but it makes up a significant percentage of sales to the EU. In 2012, the U.K. — a net importer of food — bought $2.4 billion in US agriculture, fish and forestry products, according to a report by USDA’s Foreign Agricultural Service. That compares to $8.1 billion in US agricultural exports to major EU members as a whole. Most US agricultural exports to Britain and the EU are bulk commodities, while the US imports largely high-value, consumer-oriented agricultural products.
- Agriculture and the U.K. Agriculture is a cornerstone of the European Union, and Britain exiting would leave a policy vacuum that may be difficult to fill. Britain's exit would also leave the group's Common Agricultural Policy (CAP), a multi-state system that creates standards for crop subsidies as well as environmental and food safety regulations. The CAP has been a factor in the Brexit debate. Many U.K. farmers oppose the rules imposed by EU regulators, such as a possible ban on the use of the herbicide glyphosate, while most Britons believe it pays a steep price for the CAP relative to the “returns” it gets.