“Brexit is the most significant political risk the world has experienced since the Cuban missile crisis,” said Ian Bremmer, president of Eurasia Group and a highly seasoned political risk analyst at lunchtime today. He was speaking just before US markets opened, and hours after the United Kingdom referendum on EU membership had been won by the Leave camp.
For markets in Europe it was very bad news indeed. Sterling fell off a cliff overnight as it became clear that the vote was already going the way of the Leave campaign. When the equity markets opened, all the major European stock indices followed suit. One hedge fund manager told The Armchair Trader this morning that he was “extremely worried” and did not expect sterling or the FTSE to return to their recent highs for a long time.
The EUR was also off more than 2% against the USD, while there was a massive rush into the JPY. We have also been hearing rumours that the Swiss National Bank may be forced to intervene in the CHF market, as traders have started purchasing CHF assets as they exit sterling.
The vote will have more profound and long-reaching repercussions for the EU and the UK once this period of market volatility dies down. Several hedge fund managers professed today that they were adopting a wait and see approach ahead of the US market reaction and the next couple of trading days to see how severe the damage really is.
Gold has proven, as predicted, to be one of the strong upside stories of the day so far. At time of writing it was trading at between $1320 and $1330. What was most interesting were unconfirmed reports from the trading desks at some banks that the London market had actually run out of gold bullion, and that further stocks have been ordered from banks in Germany. There are also only a limited amount of small bars and gold coins left in London stocks.
Other commodities markets were less volatile. There has been an initial sell off in oil, which was largely to be anticipated. Base metals had a somewhat better time, with copper being the prime southward mover, down 3% at $4682/t.
In terms of the actual trading infrastructure of the City, no major problems have been experienced thus far. Some traders in shares reported that a number of broker sites were down temporarily due to traffic issues, as retail investors checked the values of their portfolios as the UK stock market opened. Thomas Cook suspended online currency transactions at lunchtime today, amid huge volumes of demand for non-GBP currencies. It also announced it was imposing a £1000 limit on high street transactions.
Just some major implications for traders as we continue into the last few hours of trading before the weekend:
Scotland will likely call a second independence referendum in an effort to remain inside the EU. However, this will not happen before the government there has carefully considered all its options. In particular, it will have to weigh up the value of EU membership versus the fall-out from leaving the UK. In some respects, Scotland may be in a better position now, as it will not only be able to preserve more jobs north of the border, but will be able to attract jobs and businesses from the UK.
The threat from Standard & Poor’s to review the UK’s vaunted AAA debt rating is no idle one. In particular, the credit rating agency had been threatening to potentially downgrade the UK to single A status on its government debt, although we at The Armchair Trader feel this will not happen overnight. Remember, the UK is still one of the top 10 largest economies in the world, and has been regarded as a stable investment destination. A great deal will depend on the next few months, as we see how the Brexit vote plays out with big businesses. If some hallmark names start to relocate to the EU, it will have further repercussions. UK 10-year bonds were already being smashed in the market this morning – this could be an interesting market to short in the next month or so.
Several traders were also taking positions in silver rather than gold in the course of today. In addition, silver miners (e.g. Mexico’s Fresnillo was up 12% at lunchtime) were seeing substantial gains.
The UK Property Market
The property market is likely to suffer for the rest of this year. While the course of UK interest rates is not clear, given the economic circumstances globally, we’re not likely to see a rate rise unless inflation takes off. However, UK house prices and commercial property prices are likely to take a significant hit, and many companies related to the construction industry saw their shares being sold down today. This could well mark the high point of the UK property bubble, with even over-priced London real estate likely to come under the gavel.
It is important in these current circumstances to consider what options major investors actually have. Whenever the primacy of the City of London is questioned, I always ask readers to consider the alternatives – which other city in the European time zone can replace London as a financial hub? The danger here is that London will lose much intra-European business to Frankfurt and Paris, and bilateral business between the EU (particularly the Eurozone) and that third countries will now by-pass London. But the EU still seems amazingly adept at mis-playing its hand of cards: for example, the ongoing rumbles about imposing a Financial Transaction Tax on European share transactions has been costing it dearly.
Reasons to invest in the UK will not go away – even UK gilts will remain attractive to investors in the medium term, because what are the alternatives? Eurozone debt is also being sold, and investors are trying to steer clear of emerging market debt if they can. The EUR itself will go through a particularly testing time in the next few months, and it will be up to the ECB to try to breathe some confidence into that market. Frankly, we doubt we’ll see any.
London – and the UK economy – is going to suffer, there is no doubt about that. For many traders using CFDs, options or spread bets, there exists a significant opportunity to make money on the short side of trades. We will continue to see extreme volatility in financial markets over the next weeks, but, as the man said, “the opportunities are there if you can think like a bear.” Taking just one example, hedge fund manager Crispin Odey reported that his fund was already up 15% today on the back of FTSE shorts. Time to profit from panic.