As U.K.-based banks wait to see what life will be like after Brexit, one word -- passporting -- will speak volumes. If Prime Minister Theresa May can maintain the passporting rights of City of London banks, the U.K. stands to retain its status as a hub of global finance. If not, hope isn’t lost, but the alternative to passporting requires an arduous approval process and provides no secure basis for long-term planning.
1. What is passporting, anyway?
Passporting refers to the right of companies authorized in one country of the European Economic Area -- currently comprising the 28 EU states plus Iceland, Liechtenstein and Norway -- to sell their products and services throughout the bloc, accessing a $19 trillion integrated economy with more than 500 million citizens. There is not one financial passport, but rather a series of sector-specific agreements covering everything from banking to insurance and asset management. It’s why global firms such as Goldman Sachs or Morgan Stanley
The vote has come and gone. A major European nation has chosen to leave the EU. The markets have had their obligatory decline. A weekend has passed. It is time to think about what exactly has happened… and what it means, if anything.
The real drive to leave had little to do with economics. It had a great deal to do with immigration. The EU’s economy has been in wretched condition since 2008.
The EU has been unable to forge a plan that would fix dire unemployment in southern Europe and revive the stagnant economy. The EU’s founding treaty promised prosperity. It has failed. Germany has the healthiest economy in Europe, but even it struggles to grow.
The case for staying in the EU was that leaving would ruin the British economy. This assumed, of course, that staying in a broken union would help the economy. The logic of that escaped me. It is hard to see any economic benefits that would be lost. As I put it in my book Flashpoints, “Britain will avoid the destabilization in Europe by pull
Next week will be a historical one for both the United Kingdom and the global economy. On June 23rd the British people will decide whether to leave or stay in the European Union. Polls have been mixed over the last couple months, but the latest out show momentum for leaving, which is scaring the markets.
Loss of British sovereignty is the fundamental reason for leaving the EU, as many supporters want to take back control of U.K. borders in order to curb immigration. Those that wish to stay in the EU say there are severe short-term economic consequences that would make trade difficult and slow the economy. Even President Obama recently said that if there is a Brexit, the U.K. would go to the “back of the queue” in American trade deals.
While debate and speculation is running rampant, markets are watching the British Pound closely. Last week U.S. indices tracked and moved with the Pound tick for tick, showing that traders are very concerned about the upcoming vote.
So how can you profit
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The global economy has regained some composure, according to asset management firm Schroders. In their view, markets have regained a risk appetite following action by central banks, the normalization of commodity prices, and a lack of materialization for tail risks such as a U.S. recession or a Chinese hard-landing:
While volatility is indeed near its YTD low with the benchmark VIX down 32% since the start of the year, we would point out that this is potentially some calm before the storm.
Here are some upcoming waves, and we’ll see how they break:
Earnings and Buybacks: The blended earnings decline for the S&P 500 so far in 2016 Q1 is -8.9%, according to Factset. When earnings season is done and if this stays on target, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. That said, companies are doing whatever they can to stifle these declines via share buybacks. S&P Dow Jones says that nearly
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