How Did the Markets Get the Referendum So Wrong?

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How Did the Markets Get the Referendum So Wrong?

How Did the Markets Get the Referendum So Wrong?


The Market and Political View from Adam Jepsen, Founder, Financial Spreads.


If ever proof was needed that the financial markets just aren't that clever, this could be it.

We know the markets get things wrong.

We have learnt this lesson before.

We will be taught this lesson again.

And it seems that we like to learn the hard way.

There's a sort of quasi-sadomasochistic feeling to the whole thing.


- - - - False Self-fuelling Prophecy Rather Than Self-Fulfilling Prophecy - - - -

There could be a horribly simple explanation for why the markets called the referendum so badly.

  1. We had a false self-fuelling prophecy rather than a self-fulfilling prophecy.

    Investors were looking at the bookmakers' odds for guidance and reassurance.

    Gamblers were looking at the financial markets for guidance and reassurance.

    Each assumed the other was right and they just fuelled each other to the point where the odds for Brexit were an astonishing 9/1.

    As we wrote yesterday, when the odds were a miserly 7/1, this is a bizarre mispricing in a two horse race.


  2. Key data was ignored

    The polls clearly showed the referendum was a two horse race and that there was a lot of variance including, depending upon the poll, of 5-15% of "don't knows".

    Related to this is a possible (or probable) detachment between the general public feeling and the City.


  3. Much of the 'clever money' decided not to trade. Thankfully this included many of our account holders. This lead to light trading volumes.

    If volumes are light then it is easier for the markets to get carried away. See point 1 above.


- - - - How Bullish Were the Markets Leading Up to the Vote? - - - -

FTSE Futures opened the week at 5994.5 and rose to a high of 6327.3 (up 5.55%)

DAX Futures opened the week at 9698 and rose to a high of 10337.5 (up 6.59%)

GBP/USD opened the week at $1.4358 and rose to a high of $1.5018 (up 4.60%)

These are all very risk-on moves.

(The FTSE then crashed 10.3%, the DAX crashed 11.4% and the GBP/USD crashed 11.9% - this was a pile-up).


- - - - The Signposts Were There - - - -

There wasn't a signpost saying Brexit but there was one saying 'Caution'.

As we mentioned in the run up to the vote:
  1. One large high street bookie had already said the average bet size on Remain was about 5 times bigger than those on Leave. Naturally, that would certainly skew the odds.

    The bookmaker also said 62% of bets were on Leave.

    The headline odds said one thing, the number of individual bets said another.

  2. As above, while the polls did favour Remain, they were fairly well balanced.

    This should have highlighted the need for caution, particularly when the "don't knows" often accounted for 5-15% of vote.

  3. Many firms, Financial Spreads included, were reporting low trading volumes




By Adam Jepsen, 24 June 2016


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