Understanding the Brexit

As shockwaves from Great Britain’s vote to exit the European Union rippled across financial markets Friday, markets saw a hike in the value of the dollar as investors seek safety in U.S. Treasurys. In turn, the so-called Brexit (Britain’s exit) could yield record low mortgage rates and pave the way for an uptick in refinance activity.

What does this mean for Movement?

Chaotic Brexit predictions are plentiful today, but we’re optimistic about what it means for interest rates.

Yields on the 10-Year Treasury, which affect mortgage rate activity, fell to an intraday low of 1.48% early today and have come back to about 1.58% in afternoon trading. Those numbers are four-year lows and are influenced by the jump in foreign demand for U.S. government debt.

As yields rise and fall, so go mortgage rates. That means the Brexit vote could drive rates to historic lows in the coming weeks. That dip would come at a time when rates on conventional 30-year mortgages have already fallen to a nearly three-year low. Such a drop could be a boon for our customers looking to refinance.

Now is an important time for Movement Loan Officers and our real estate partners to manage their clients’ expectations and possibly encourage them to lock in a rate while they’re low. Most economists still have long-term forecasts of rising rates, but a period of historic lows is now more likely the rest of this year.

“At this point, it is unclear whether this will just be a short term disruption, or whether it will have a longer term impact,” Mortgage Bankers Association Economist Michael Fratantoni said. “Our best guess at this point is that the impact on the mortgage market will be to keep mortgage rates lower for longer, likely leading to another pickup in refinance activity.”

What’s going on in the stock market?

Almost immediately after the referendum results were announced, investors hurriedly pulled their money out of the U.K. as the euro tanked and stocks in Germany, France and England took a descent.

U.S. markets didn’t fare much better: Stock indexes, including the Dow Jones Industrial Average, Standard & Poor’s 500 and Nasdaq, plunged by the time trading floors opened Friday morning. The U.S. markets were down nearly 3% in afternoon trading.

The British pound plummeted to its lowest level since 1985, and sterling dropped more than 10 percent to its lowest level in over 30 years.

What about oil?

In the days leading to the Brexit vote, some analysts rebuffed notions that Britain’s leaving the EU would directly affect oil prices. But, they warned, market sentiment could take a hit.

By Friday morning, crude oil prices in global markets began to tumble, with some observers saying prices may continue falling in coming months as investors who bet on higher oil prices retreat. Others say the fluctuations could stabilize since the U.K. is not a major player in the global oil market.

What does this means for U.S. business?

U.S. Federal Reserve Chair Janet Yellen told Congress this week that Brexit could have “significant economic repercussions” on the U.S. and “usher in a period of uncertainty.”

Global uncertainty, plus the chaotic nature of the 2016 Presidential election, is likely to lead to increased business volatility. Those conditions will continue to push investors to safety: US Treasurys. Expect a strong dollar and low interest rates to continue. As noted, this is a short-term boon for refinancing activity.

A stronger dollar would make American products more expensive, which may squeeze the demand on U.S. exports and slow the economy. The exodus may also jeopardize America’s longstanding relationship with the EU, a strong trading partner.

Still, the U.S. economy remains one of the strongest in the world. And while growth has been slow, expectations remain unchanged that the U.S. economy will be among the safest worldwide.

What is so important about the Brexit anyways?

The European Union formed after World War II as a political and economic partnership between 28 European countries to encourage their cooperation and suppress future conflict. It has led to common currency, trade agreements and other economic policies that favor the European continent as a whole.

However, citizens in Great Britain have become increasingly frustrated by a number of EU policies, including immigration and a refugee crisis and billions in tax dollars that leave the country to support the union.

The decision to leave the EU comes after a simple referendum asked British voters to choose whether the U.K. should remain within the bloc, or leave it. To the surprise of pundit and politician alike, voters endorsed departure, much of their animus fueled by intense dissatisfaction with the EU’s political leadership.

The results prompted Prime Minister David Cameron to announce his pending resignation.

Now that the alliance is severed, Britain’s large economy risks becoming an economic outsider, as new trade and economic policies will be renegotiated in the coming years.