Welcome to the first of our daily updates in the lead up to the Brexit vote – and its repercussions – on 23rd June. Brexit has been a hot topic for some while amongst asset managers and professional traders. It has been surprising to The Armchair Trader just how many professional money managers have been ignoring the vote on the assumption that the UK will vote to stay in the EU.
However, as the date of the big vote nears, and it looks as if the Leave campaign is closer to winning than many political analysts have expected, The Armchair Trader has detected an air of panic on trading floors, as risk teams have started hedging their bets, and finding this an increasingly expensive process.
We are finding that the trading community is largely falling into two tribes – those that want to see if they can make money out of the sudden market reactions to the result, and those that want to find ways of protecting existing assets, including exposure to UK stocks and GBP.
Survation published an EU referendum poll today, with research that has been commissioned by IG Group. This was a data weighted report which also assessed respondents on the likelihood of their voting in the first place. While there is plenty of technical detail available in the report about different segments of the UK population (e.g. trends via age group), traders will want to know exactly whether the UK will be voting to leave the EU next week.
The bad news is that it is still too close to call. Those likely to turn up to a polling station next week are voting 50.8% in favour of leaving, meaning that this vote looks to be balanced on a knife edge. Even if the country does indeed vote to secede from the EU, it would do so against the wishes of almost half of the population. Looking forwards, it would be a very brave government that would decide to push this through against the wishes of half the constituency. It presages a period of extreme political turmoil and uncertainty for the UK regardless.
What if the UK narrowly votes to remain in the EU? Again, the country is faced with a situation where a substantial proportion of the electorate is in favour of leaving the EU, and has been narrowly cheated of this prospect. It provides enormous impetus for the Vote Leave lobby, both within the ranks of the Conservative party (with the prospect of a potential leadership challenge to prime minister David Cameron) , and more widely in the country, with the UK Independent Party likely to pick up yet more votes from disgruntled citizens at the next UK election.
For traders and investors in UK assets this promises to be a highly volatile moment. It is very difficult to apply fundamental or technical analysis to a situation that is being driven by political and demographic issues. Fundamentally, the UK economy is in much better shape than the Eurozone, the big question for investors being whether it can stay that way after leaving the EU?
There is obviously some selling going on ahead of the vote, with the FTSE 100 down 200 points or so over the last five days, and given the narrowness of the polls, we would expect that to continue. There is more volatility in the GBP/USD pair, but bear in mind that many forex traders were waiting on a Fed decision this week. Gold on the other hand has been on a nice upward streak going into next week’s vote, and was nudging $1320 at time of writing.
Fall out in the currency markets should the UK vote to leave could be considerable, if the fears being expressed by central banks are anything to go by. The Bank of Japan has said the fall in yields of JGBs and a rise in the yen can be attributed to uncertainty over the EU’s political future. Janet Yellen, in her speech yesterday, admitted that the Brexit vote played a part in the Fed’s decision to keep US rates where they are. Lael Brainard, a member of the Fed’s board of governors, said she expected “a significant adverse reaction” in global markets if the UK were to vote to leave. And a Bank of America poll of global fund managers has found Brexit as the number one to the global economy in the eyes of professional investors.
There has been heavy buying of government debt generally by investors seeking a safe harbour, pushing down yields on government paper. Banking stocks were also down today.
Much of the Brexit trading action has been in the GBP thus far, with many traders expecting to see a substantial shift in the value of Cable once the votes are counted. Analysts are likening the potential swings in the currency markets to other historic shivers, like Black Wednesday in 1992 or Lehman Brothers in 2008. What makes this a little different is that those events were more surprising, coming at the market out of the blue. Yes, there were rumours in 2008 that something was not right with the banking system, with the collapse of Bear Stearns the year before an early indicator, but in this case we know when the vote is going to happen and we know when the results will come out. Brave forex traders will be at the desks all night long (or all day if you are in Australia) as Cable is likely to see some historic moves, with potentially mind boggling amounts of money stacked up on both sides of this trade ($6 billion is already stacked against sterling as it slides to a key historic threshold against the USD).
It is no surprise that many brokers have been raising margins ahead of the vote, nervous as they are of being able to honour high volumes of CFD trades and spread bets. Traders will need to stay cool and keep one eye on the accuracy of the quotes they are receiving through the night after polls have closed. Make sure you have plenty of coffee!