The stock market is an integral part of our infrastructure as a society which, thanks to The Wolf of Wall Street, most of us are aware of. However, what actually goes on inside it is usually of little interest except when it goes wrong. 30 years ago, on 19th October 1987, the financial markets went drastically wrong on a global scale. Commonly referred to as ‘Black Monday’, that morning saw the biggest drop in value of the FTSE100, and took almost two years to be put right. 30 years on, how at risk are we of another financial crash? With no deal for Brexit still an option, is Britain teetering on the brink of an economic disaster?
With no deal for Brexit still an option, is Britain teetering on the brink of an economic disaster?
Black Monday was a result of a number of factors no longer relevant today. A storm; which closed the London stock exchange, coupled with the introduction of computers and, of course the liberal economic policy of Thatcherism, resulted in the worst day in finance since the 1929 Wall Street Crash. Some suggest that the crash was merely a return to normal after the sharp boom in the months before, others argue that tension between the United States and Iran were heavy factors. Either way, the effects were devastating and affected almost every country in the world.
Perhaps more in our living memory is the 2008 financial crash which saw the terms ‘credit crunch’ and ‘recession’ handed out like sweets. A period of financial prosperity, funded by a boom in house prices and cheap mortgages, swiftly fell apart and culminated in the first run on a British bank in 150 years and the bankruptcy of many. The effects stretched far beyond our shores, proving particularly catastrophic in Greece and Ireland. Billions of dollars were needed to simply ensure the whole financial system didn’t fall apart overnight. If anything, Britain was one of the lucky ones. Thanks to the 2012 Olympics and, so I’m told, 50 Shades of Grey, the economy grew ever so slightly for the first time since the crisis.
Billions of dollars were needed to simply ensure the whole financial system didn’t fall apart overnight
With political uncertainty at a new high as a somewhat unclear Brexit deal looms, could we be at risk of yet another economic downfall? In the 12 months following the decision to leave the European Union, the value of the pound fell by 12%, 10% of which occurred in the first 24 hours. The cost of living has risen by 2.9%, whilst wages have only increased by 2%, and inflation is soaring. Is this a prerequisite for disaster?
It’s true that the patterns in the value of the pound, when related to the euro, can be mapped according to speeches made by May on the theme of Brexit. Investors crave clarity regarding the future plans of the UK before piling money into it. From the start of that Brexit speech to the end, the pound had jumped to roughly 1.148 from 1.138 only to whither back to 1.143. I suppose you could call that balance.
On the flip side of the coin, on 1st July 2016, the FTSE100 hit a ten month high amidst the chaos. The drop in the pound coupled with slashed interest rates led to a whirlwind of bargain hunters who helped the market rise by 7.2%. Businesses dealing primarily in dollars or importing to the UK found themselves in prime position and the dreaded Brexit effect appeared to have been dodged.
on 1st July 2016, the FTSE100 hit a ten month high amidst the chaos
Fast forward to today’s news and the picture isn’t quite as rosy. A lack of visible progress in the Brexit negotiations has contributed to growing anxiety within the business sector which has led to a joint letter from 5 lobby groups representing millions of employees sent to Brexit secretary David Davis. The letter calls for an urgent transition deal with the European Union in order to safeguard jobs and investors.
Again, the lack of clarity and certainty around Brexit is causing significant worry to investors but this doesn’t appear to be reflected in the stock markets. Of course there are peaks and troughs but on the whole, we’re definitely in the green.
As a strong Remainer, I am finding it somewhat difficult to read that Brexit isn’t all bad. That’s not to say I want us to plunge back into the depths of recession – my prospects of owning a house are low enough as it is. However, what is clear is how unclear the future is. Not a single country has ever left the European Union before so, like Guinea Pigs in a lab, every step the UK takes is a precarious one which is, inevitably, bad for business.
what is clear is how unclear the future is
Perhaps even worse would be a U-turn and an announcement of ‘no deal’. A rejection of a deal with the EU could potentially prompt a second referendum. The outcome of such is almost a complete unknown, given the constant ebb and flow in opinion. What’s more, without a deal, the UK would crash out of the EU and find itself in new territory with few allies and even fewer tools to help itself back on its feet.
Trade tariffs could be increased to as much as 40%, making many exports impossible. Not only would trade be affected but also banking companies themselves. ‘Passporting’ rights afforded to EU members allows British banks to do business throughout the EU without special permissions or setting up a branch which, collectively, brings in 9 billion pounds in revenue each year. Without these passporting rights, the banks will likely leave Britain and set up offices in Paris, Frankfurt, or Dublin in order to retain their business with millions of EU citizens.
Even ahead of the referendum results, the Treasury forecasted what could be the worst outcome. The model expects the pound to drop by 15%, inflation to rise by 2.7%, and unemployment to rise by 820,000 in two years. Sounds familiar? Maybe Theresa May should take the reins and steer us out of this minefield of negotiations. Maybe.
Going back to square one would undeniably be disastrous for the economy. If faith in the FTSE100 and the pound is low now, it doesn’t stand to imagine what will happen if no deal is reached.