Brexit is here

We wake up this morning to the news that the Brexit side has won.  Quite a shock to the markets which in the last few days have been increasingly discounting the risk of such an event, most notably seen in the appreciation of the Pound and higher equitiy indices.  This morning Asian stock markets ared won 8% (Japan) and the Pound has tumbled significantly vs all currencies overnight.  GBPUSD down initially 10% now stabilising at the time of writing at -7%.

Whats next?

- Well Cameron will likely signal he will resign, but likely only after leads the government to transition to a post-EU world which may take 2 years.

- Markets will be highly volatile over coming 2-3 trading sessions as the implications and consequences are digested.

- Will central banks and notably the BoE be forced into action to stabilise the markets? If the GBP continues to fall they may even have to raise rates prematurely to defend the currency.  If trade and the economy weakens substantially, they may have to go the other way and move towards negative rates.  Most likely though is the implementation of fiscal measures such as liquidity support lines to banks and perhaps additional USD/GBP swap lines to the Fed to support the financial system and ensure ample liquidity.

- European equity markets will fall next week, perhaps up to 10% as uncertainty dawns on the political future of Europe and its economic consequences which are clearly negative in the short term (which is exactly what markets focus on)

- Politically there will be a wave of discussions around European nations and strengthened resolve among the anti-establishment and right wing parties to push for referendums to leave Europe.  Scandinavia and Holland are likely to try and follow UK's lead.   France and Le Pen will get further support for their agenda.  In the US,  Trump and his supporters will feel a sense of justification for their cause and brand of isolationist-protectionist politics.

Interesting times indeed!   Volatility is here and it is good for trading :)

Thoughts on Brexit and US Fed

Couple of comments on 2 key events this summer

1. Brexit vote 23/6 looks more likely judging by the sharp depreciation of the Pound in last 3 weeks, backed by polls showing gap is narrowing (to zero).  

I still believe the British people will do the right thing and vote to remain in the EU and hopefully reform it within using their clout.

If they do remain in, markets will rebound providing a good selling opportunity for longer term holds. Also I plan to sell GBPSEK above 12.10-12.20 if it rebounds from current 11.75 area levels.   Volatility is most clearly expressed in the currency which is going to see some dramatic swings in the next 4 weeks so be braced for anything.   Again,  expect the GBP to bounce back sharply the day after the vote for a couple of days when it is clear Remain camp has won


2.  Fed hike in June looking less likely on back of weak payroll & Brexit.  Expect hike on July 27th.

Why would Yellen risk raising rates before Brexit vote?  Second, any hike must be data dependent, and the most recent US payroll number on Friday for the month of May disappointed with only 38k jobs created vs 162k expected.   This may be seasonal, but certainly doesn't strengthen Yellen's resolve to hike.     Third, the Fed has made a point of preparing the market well in advance of a hike so it isnt a surprise -  they are doing this now and would not be a surprise now if it occurred in July 26-27 rather than June.