Brexit

Here's the real reason markets are freaking out

Brexit lowers rate hike expectations: Pro
VIDEO5:3805:38
Brexit lowers rate hike expectations: Pro

Global markets are getting ripped apart after the U.K. voted to leave the European Union.

U.S. markets opened sharply lower, with major averages down more than 2 percent. Japan's Nikkei index was off nearly 8 percent, the German DAX plunged almost 6 percent and broader European indexes fell as much as 9 percent before coming off their lows near the end of the sessoin.

Why is the market reacting in such an extreme manner? Because nobody saw this coming, and nobody knows what happens next.

Essentially, the vote confirmed the worst fears of investors this year, namely that some type of unforeseen event would come along to derail an already fragile global economy. Never mind that it will take years for the British exit, or Brexit to play out: The unexpected development unwound what many on Wall Street called a "relief rally" this week predicated on the EU staying intact.

The news that the process is about to begin was enough to rattle global markets, particularly considering that investors were following the lead of polls and prediction markets and figuring the decision to leave wouldn't happen.

"The reaction we're seeing in markets today is far more exaggerated and far more pronounced because it was so unexpected," Kristina Hooper, U.S. investment strategist at Allianz, told CNBC.

Hooper said the firm conducted a survey of its institutional investors earlier this year and "what we found was event risk was one of the top risks they named for this year. I think this is a perfect example of that."

Hooper advised investors "to be opportunistic" and "not to panic."

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