Sell-off across markets knee-jerk or likely to continue?

In a game changer event, Britain has voted to leave the 28-member European Union. The outcome shook financial markets creating seismic waves across assets. Following the result, David Cameron said he would resign as Prime Minister by October after Britons ignored his pleas to stay in the European Union and voted in a referendum to leave. UK economy enters a period of huge uncertainty and weakness as a result of UK's vote to leave the EU.  

Today’s vote, if ratified by Parliament, would immediately invoke Article 50 of the Lisbon Treaty, which provides for members leaving the EU. The EU has to be notified of its withdrawal and once Britain invokes Article 50, it will have a two-year window in which to negotiate a new treaty to replace the terms of EU membership. The EU may decide to strike a hard bargain to discourage other countries from leaving the EU.

Quitting the EU could cost Britain access to the EU's trade barrier-free single market and mean it must seek new trade accords with countries around the world. EU officials have said UK-based banks and financial companies would lose automatic "passport" access to sell services across Europe if Britain ceased to apply the EU principles of free movement of goods, capital, services and people. The key issue that the UK will face in negotiating a FTA with Europe will be the trade-off between how quickly they want a FTA formalised, and the scope of coverage of the FTA.

"We see the odds of a UK recession within the next 12 months as now 60%. We pencil in year-end targets for GBPUSD of 1.20 and 0.50% lows in 10y gilts,” said TDS in a report.

Pound bashed to multi-year lows against majors, but downside seems to have paused for now. Slight recovery seen in GBB crosses, but follow-through selling likely to continue as markets digest the enormity of today’s decision. GBP/USD was trading at 1.3925 up from lows of 1.3226, while EUR/GBP at 0.7985 lower from highs of 0.8314. Despite the 9.8% fall in GBP/USD that we have seen overnight, there is a grave danger of further weakness in the weeks ahead. 

"We continue to look for GBP/USD to trade in a 1.30-1.35 range for now and eventually, towards 1.20-1.25. EUR/GBP will rise further and indeed has already risen faster than our initial estimates, but we don’t expect a move to 0.90,” said Societe Generale in a report.