Investing.com - With the pending June 23 referendum on the U.K.’s membership in the European Union (EU) causing volatility in financial markets on a daily basis recently, experts sized up the consequences for the U.S. if Britain opted for a Brexit, as a vote to leave the 28-member bloc is known.
Current state of play
The major issue for financial markets has been the level of uncertainty surrounding the vote itself, making pricing in an outcome relatively difficult.
Global market volatility was high with shifts in trading occurring with practically every poll released on the upcoming referendum.
As the vote neared, surveys released earlier in the week were once again showing the Remain campaign taking the lead with some experts suggesting that the tragic murder of Jo Cox, a Labour Party member and supporter of EU membership who was stabbed and shot allegedly by Thomas Mair who shouted “Britain first” before the attack, turned the tide of opinion.
On Tuesday, two separate polls showed a mixed picture.
An ORB poll put “Remain” back in the lead for the first time in almost a month with 53% of those Britons planning to vote in favor, with 46% preferring a Brexit.
However, a YouGov survey showed “Leave” ahead of “Remain” with 51% to 49%.
Meanwhile, the probability of a "Remain" vote implied by Betfair betting odds rose to 78 percent, up from a range between 60 and 67 percent on Friday.
Even so, the fact remains that both the Remain and Leave campaigns appeared to be neck-and-neck in the citizen surveys heightening uncertainty over the final outcome.
Only a minority of polls released in the last month had shown more than a 5% lead for either group with many showing at least 10% of voters undecided.
With this level of uncertainty ahead of Thursday’s decision, London traders were preparing for all-nighters and brokers were warning that there could be difficulty carrying out trades due to high volume and volatility after the final results were revealed.
Polls open in the U.K. on Thursday at 6:00AM GMT, or 2:00AM ET, and close 21:00GMT, or 17:00ET.
Initial results from the 382 voting regions were scheduled to be released at midnight GMT, or 20:00ET with the final results expected to be reported on Friday at 6:00AM GMT, or 2:00AM ET.
Policymakers warn of danger of a Brexit on a global level
While the U.K.’s decision affects its membership in the EU, a vote to leave would have far-reaching consequences, according to global policymakers who had been launching warnings for the better part of the year.
U.S. President Barack Obama warned as far back as April that the U.K. might well end up at the “back of the queue” in working out a new trade agreement with the U.S. if it left the EU as the priority would be working out a new deal with the bigger European bloc.
The U.S. is the biggest investor in Britain with approximately $588 billion in 2015 alone in a variety of sectors from banking to manufacturing.
Political leaders from the International Monetary Fund (IMF) managing director Christine Lagarde to the secretary general of the Organization for Economic Cooperation and Development Angle Gurría commented on risks from the Brexit on the global economy.
It would “be bad for the U.K., it would be bad for Europe, it would be bad for the world, including the United States,” Gurría said in an interview with the Washington Post.
“You already have enough uncertainty in the world today,” he added.
Even the head of the Federal Reserve Janet Yellen explained that the uncertainty surrounding the outcome of the referendum had been a factor in the U.S. central bank’s recent decision to hold interest rates steady instead of moving forward with policy normalization.
Yellen warned in her June 15 press conference that a vote to leave, known as a Brexit, “could have consequences for economic and financial conditions in global financial markets.”
“If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy,” she said.
Concern for U.S. companies
Apart from protecting their investment interests, U.S. companies had been showing their backing for the Remain campaign.
Ford Motor Company's (NYSE:F) U.K. division sent letters to its employees insisting on the importance of the U.K.’s membership in the EU, while U.S. banks including JPMorgan Chase & Co (NYSE:JPM), Goldman Sachs (NYSE:GS), Citigroup (NYSE:C) or Morgan Stanley (NYSE:MS), anxious to avoid the headache of deciding whether they would need to change operations to the Old Continent, had reportedly spent hundreds of thousands of dollars in funds to back the Remain campaign.
Indeed, KBW estimated that a vote to leave would hurt U.S. banks’ profits in 2017.
These analysts predicted a 9% hit to Morgan Stanley’s earnings per share (EPS), an 8% decline for Goldman Sachs, 7% for J.P. Morgan, 6% for Bank of America (NYSE:BAC) and 5% for Citigroup.
But some experts had suggested that a Brexit would only have a small impact on U.S. companies as S&P 500 firms have only a 2.9% sales exposure to the U.K., according to FactSet estimates.
The largest exposure comes from the Energy sector with 6.4% of revenue in the U.K., followed by Information Technology and Materials with 4.0% and 3.7%, respectively.
However, even though the impact on sales would be relatively small, it wouldn’t help those S&P 500 companies that are exposed while their second quarter revenue was already forecast to decline at annualized rate of 5.1%.
Since a vote to leave would also affect the U.S. trade agreement with Europe, Citigroup analyzed the wider relationship between the U.S. and the EU.
“With Europe directly accounting for 9% of S&P 500’s constituent sales, of which a good chunk comes from stable businesses in areas like food, drugs and beverages, a Brexit vote is unlikely to be disruptive,” these experts said.
In any case, the largest impact would most likely come from the effect on currency markets.
Analysts unanimously agreed that the pound would suffer with the U.K. Treasury having predicted a 12% drop in sterling.
George Soros, the hedge fund billionaire who earned fame by betting against the pound in 1992, said on Tuesday that a vote to leave would trigger a bigger and more disruptive sterling devaluation than the fall on "Black Wednesday". He said the pound would fall by at least 15%, and possibly more than 20%, to below $1.15, if Britain opted to leave.
For U.S. companies, exports to the U.K. were $56.1 billion to the U.K. in 2015, according to Department of Commerce data.
A drop in cable would undoubtedly cause a hit on this number as a weaker pound would make U.S. products more expensive.
Overall, analysts from Euromonitor International predicted that a Brexit would cut U.S. real gross domestic product growth by 0.5% in 2017.
Though a relatively small amount, it could raise concern for the U.S. economy that is struggling to reach solid growth above 2%.