The BREXIT is coming the BREXIT is coming!!! Yelled the Americans, and on Friday June 24th it happened. The British voted to leave the European Union, and subsequently the American Markets fell over 4%, blue chip stocks like IBM to growth stocks like UA (Under Armour) all took a hit in the market. The news media had a field day and the repercussion of one country was felt around the world. So why did this happen?
The answer is simply currency risk; currency risk is a type of risk that is assumed in the market for when different economies currencies go up and down. We are allowed to bet on currencies going up and down in the market and the United States is heavily invested in anything from the Yen to the Sterling Pound. Now, we would assume this would only be concentrated on the currency market, but not when you take into consideration that the majority of US based companies do business with foreign countries in their respective currencies.
For Example, IBM, sells software in London, now the companies in London pays IBM in their own local currency and IBM takes on the risk of the currency going up or down. Now in the case of BREXIT, them ending their union partnership set red alerts to weakening their currency. This effects IBM’s overall revenue because they have pounds that were once worth $1.75 that are now worth $1.40 and just like that IBM has realize 40% lose in their international net profits. This will translate into their earning per a share being lower and dropping their stock based on the news.
As you can see this is a classic domino effect of one political decision. Now we do not fully understand repercussions of this decision yet, but two things are for certain, One the US market will feel the effects negatively and two I am packing my bags to travel to the UK to take advantage of the weakened pound!
Watch Brexit John Oliver to learn more