Having voted to leave the European Union, Britain's financial markets and outlook are becoming more, not less, European.
The pound and British bank stocks have plummeted, government bond yields have sunk, political uncertainty is unnerving investors and interest rates and growth are all set to fall.
That may all sound familiar to investors across the English Channel, who have been dealing with stagnant growth, ever-looser monetary policy and some of the world's lowest bond yields for years.
"The path for the U.K. politically is extremely uncertain, and it seems like there'll be a material downward shift in the economy," said John Wraith, head of U.K. rates strategy at UBS. "That immediately throws up similarities with the problems you've had in the eurozone."
The yields
In the wake of the June 23 referendum, the yields on 10-year British government debt, gilts, hit record lows and fell further than those on other European sovereign bonds.
The spread between yields on 10-year gilts and 10-year German bunds is now below a percentage point for the first time in two and a half years. As recently as March 2015, that spread reached 1.67 percentage points.
Mr. Wraith forecasts the spread will decline to just 0.45 of a percentage point by the end of 2015.
In part, that is because of rapid changes in expectations for monetary policy.
The central banks
In recent years investors talked of a divergence in global monetary policy as they predicted the U.S. Federal Reserve and Bank of England would increase interest rates as the European Central Bank cut them and pursued ever larger bond-buying programs to stimulate inflation.
At the end of last year, markets were predicting that the Bank of England would hike rates by 0.25 of a percentage point within a year, increasing them to 1.5% by 2019.
Now, the U.K.'s monetary policy is expected to drift further from the Fed and closer to Frankfurt and the ECB. Investors expect the BOE to cut rates as early as next week and foresee them staying below their current level of 0.5% for the next five years.
The ECB's deposit rate is currently at minus 0.4%. Investors say they believe Brexit has further postponed the Federal Reserves' path to rate hikes, but analysts suggest the Fed will resume increases in interest rates in 2017.
The BOE may even restart its bond-buying program, which could also mimic the ECB's decision to buy corporate debt. Goldman Sachs predicts the bank will add £100 billion of additional quantitative easing from August, half of which will be spent in the corporate bond market.
The pound
Since Brexit, the pound has fallen by more than 11% against a basket of currencies and currently trades at $ 1.30, a 31-year low.
That is mainly because investors expect U.K. economic output to fall. But expectations of lower rates aren't helping. When rates fall, bond yields follow, leaving them less attractive to international investors. In turn, that weakens the currency.
As the ECB cut its rates, the euro slumped by more than 20% against sterling between July 2013 and July 2015. Since Brexit, the pound has fallen 10% against the common currency.
The banks
Falling rates aren't doing any favors for the eurozone's banks. The sector has other worries too, with bad debt piles in Italy, Portugal and elsewhere.
Britain's banks had also been hit hard this year, but since Brexit that punishment has turned into a beating. Share prices for British banks listed on both the U.K's FTSE 350 index and the eurozone's Euro Stoxx index are down by more than 20% in dollar terms.
Economic Growth
U.K. growth has been stronger than in the eurozone for years, but that trend looks likely to end.
"We've revised down our growth forecast from 2.1% next year to 0.7%, and it feels like we're on the optimistic end of the scale," said Liz Martins, U.K. economist at HSBC.
Political instability
For years, many markets in the eurozone have been battered by political concerns. Nations from Spain to Italy and Belgium have struggled for periods to put in place a government while investors often complain about the inability of the French and Italian governments to put in place structural reforms they believe are needed to tackle low growth and high unemployment.
Since the 2008 financial crisis, political and financial turbulence in continental Europe has washed up on U.K. shores. Following Brexit, global investors have a new concern in Europe: the U.K.
Write to Mike Bird at Mike.Bird@wsj.com
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