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4-Traders Homepage  >  Equities  >  Nyse  >  General Motors Company    GM

Delayed Quote. Delayed  - 06/24 10:02:09 pm
28.35 USD   -4.93%
06/25 BREXIT ROILS ST : U.S. 'best house in bad neighborhood'
06/24 Factbox - Business reaction to Britain's decision to leave the EU
06/24 GENERAL MOTORS : GM's success due to innovations, $2.2 billion inves..
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Brexit roils stocks: U.S. 'best house in bad neighborhood'

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06/25/2016 | 02:07am CEST

June 25--First, let's all take a deep breath.

Second, please don't look at your 401(k) for awhile.

For the optimists among us this is the perfect time to take that European vacation. With the pound sterling hitting a 31-year low on Friday and the euro softening those dollars can buy more over there than they could last week.

That's where the good news stops. Now that British voters have chosen to leave the European Union there will be plenty of rocky consequences, but where and how traumatically they fall is far from clear.

Why does it matter to us?

* Related: Brexit: Fierce impact on stocks, retirement, college savings plans

* Related: 'Brexit' is here: What happens next

Stock markets had a meltdown Friday. The Dow Jones Industrial Average plunged 611 points, or 3.4%. The Standard & Poor's 500 index tumbled 76 points or 3.6%. The tech-oriented NASDAQ composite was down 4.1% in its biggest one-day loss since 2011.

Automakers weren't immune. General Motors lost 4.9% of its value; Ford, 6.6% and Fiat Chrysler, 12.3%.

* Related: Brexit means short-term savings on travel to Europe

While the specific issue was different, the undercurrents driving the U.K. vote are similar to some of the dynamics roiling our presidential election campaign.

* A feeling among the "Leave" campaign that membership in the EU was stripping Britain of its ability to control a massive wave of immigration. It's unclear how much an independent Britain can reduce immigration.

* "Remain" supporters argued that the EU, imperfect as it might be, was a better vehicle for competing in a global economy than going it alone. But many "Leave" voters countered that those economic benefits had failed to trickle down to them.

* Frustration that the EU was an elitist bureaucracy centered in Brussels, Belgium, which had little understanding of life for commercial fishing workers in southwestern U.K. or factory workers.

"I think the big question is whether elites take this seriously and finally modify their thinking on the neoliberal agenda" of free trade and austerity in government spending, said Michael Belzer, a labor economist at Wayne State University. "Trump and Sanders capitalized on this in their U.S. campaigns. Polarization between economic winners and losers has not only hampered growth but may get worse."

While the process for completing Britain's exit will take about two years, there will be pain in the near term.

UBS, the Swiss-based bank, predicted U.K. economic growth will fall from a meager 0.4% in the first quarter of 2016 to zero by the end of the year.

General Motors and Ford have substantial manufacturing, engineering and financial service operations in the U.K. Both companies supported the "Remain" campaign.

While the exit could result in significant tariffs on vehicles and parts exported from Britain to Europe, that will depend on a prolonged period of negotiations. EU officials may not want to impose tariffs that would be seen as punitive on UK companies.

"Continental Europe will make it difficult to import vehicles from the UK only to the extent they are willing to see their shipments to the U.K. drop reciprocally," said Erik Gordon, professor of entrepreneurship and technology at the University of Michigan Ross School of Business.

Don't expect automakers to make quick decisions on this.

"It is important for GM's local operations that negotiations on the UK's future relationship with the EU are concluded in a timely manner," GM said in a news release. "It is also important that business continues to benefit from the free movement of goods and people during this period."

Ford issued a similar statement.

"Ford's priority has always been the need to maintain a stable trading environment so that we can continue building a strong and sustainably profitable business in the U.K. and Europe, and provide a more secure future for our nearly 14,000 direct employees in the U.K.

"We will continue working toward this goal with key stakeholders in the UK and across the other member states and EU institutions to ensure they understand our concerns, which mirror those of the majority of the U.K. and European auto industry."

Fiat Chrysler has a much smaller presence in the British market, selling 18,665 new cars there in the first quarter of 2016, compared with 93,900 for Ford and about 75,000 for GM's Vauxhall brand.

"The U.K.'s exit from the European Union is not expected to have significant impact on FCA, either in industrial or other terms, although the result of the referendum raises questions about the future of Europe," a company spokesperson said in a statement from Italy.

But Fiat Chrysler would be seriously impacted if the unraveling of the EU spreads to Italy where the anti-establishment 5-Star movement has now officially called for a referendum on whether to keep the euro as Italy's currency.

So far neither GM nor Ford have changed their guidance to investors about their financial performance in Europe for the rest of the year. GM reports its second-quarter results on July 21. FCA reports July 27, Ford follows on July 28.

Before Thursday's referendum GM CEO Mary Barra and Chief Financial Officer Chuck Stevens said the company is on track to at least break even in Europe for the first time since 1999.

Financial services jobs may be the most vulnerable to moving out of the U.K., U-M's Gordon said.

"If there is a tilt in power, it is more likely to be between London and Paris or Frankfurt than between London and New York," Gordon said. "The U.S. remains the most regulated and the least likely to pick up business from London."

Makers of Scotch whisky -- who export more than 90% of their product -- have called on the British government to ensure their access to European markets is not threatened.

Michigan State University economist Charles Ballard cautioned against quick conclusions about the referendum's impact in the U.S.

"I hope that what will emerge will be a sort of 'EU Lite' for the U.K., where they won't be a part of the EU anymore, but trade arrangements will be not very far from what we have now," Ballard said.

The U.K. accounts for less than 3% of the world economy.

"I have seen some projections that Brexit will eventually reduce the size of the British economy by 7%," Ballard said. "If we multiply those two together, the overall effect would be a shrinkage of the world economy by one-tenth or two-tenths of a percentage point. By itself, I don't believe that's enough to trigger a global recession."

Don Grimes, another U-M economist, said there could be a window for homeowners to refinance their mortgages as global investors seek security in U.S. treasury bonds. The yield on the 10-year bond fell nearly 10% Friday morning to 1.57%, the lowest it has been since the summer of 2012.

"I would look to refinance very soon," Grimes said.

But in the next days and perhaps weeks markets will be volatile. Panic is not a sound investment strategy.

Just remember. The sun came up this morning. It will set tonight.

Next Friday automakers in the U.S. will report June sales that are expected to be near record levels. The U.S. housing market has been showing signs of strength.

Overall the U.S. could be the safest haven in a turbulent world.

As CNBC's resident sage Jim Cramer put it Friday morning, "We're living in the best house in a bad neighborhood."

Contact Greg Gardner: 313-222-8762 or ggardner@freepress.com. Follow him on Twitter @GregGardner12

___

(c)2016 the Detroit Free Press

Visit the Detroit Free Press at www.freep.com

Distributed by Tribune Content Agency, LLC.

© Tribune Content Agency, source Regional News

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