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Europe’s Brexit Hangover

The market reaction to the Brexit shock has been relatively mild, because it was regional rather than global, with the impact concentrated in the UK and Europe. But the risk of European and global volatility may have been only briefly postponed.

NEW YORK – The market reaction to the Brexit shock has been mild compared to two other recent episodes of global financial volatility: the summer of 2015 (following fears of a Chinese hard landing) and the first two months of this year (following renewed worries about China, along with other global tail risks). The shock was regional rather than global, with the market impact concentrated in the United Kingdom and Europe; and the volatility lasted only about a week, compared to the previous two severe risk-off episodes, which lasted about two months and led to a sharp correction in US and global equity prices.

Why such a mild, temporary shock?

For starters, the UK accounts for just 3% of global GDP. By contrast, China (the world’s second-largest economy) accounts for 15% of world output and more than half of global growth.

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