Referendum Traders Beware, Remain Has Not Won Yet and Potential Market Moves
The Market and Political View from Adam Jepsen, Founder, Financial Spreads.
Referendum Traders Beware, Remain Hasn't Won Yet and Potential Market Moves
The financial markets seem to be ignoring the risks and taking the latest polls as the actual Referendum result.
Yesterday, the FTSE 100 closed about 150 points higher and sterling gained 2 cents against the dollar.
Given the EU referendum is an unprecedented event, one might expect the markets to be cautious and taking money off the table. That certainly wasn't the case with Monday's trading.
The Remain campaign had a positive weekend but the vote on Thursday is far from a foregone conclusion:
- The polls are still fairly well balanced albeit favouring Remain
- The "don't knows" often account for 5-15% of vote and could easily shift the balance
- It's plausible that Leave campaigners are more motivated and therefore more likely to vote
- Younger voters seem to favour Europe while older voters are more inclined to Leave, yet older voters are more likely to actually cast a vote
- A number of newspapers are firmly in the Leave camp and they could still influence some Remain voters as well as those who are undecided
The current risk-on sentiment could well be misguided.
- - - - Potential Market Moves - - -
We have been writing to clients and warning them about the hazards of trading the referendum
due to the possibility of some extreme volatility around the event.
With the markets in seemingly bullish mode that could make the volatility even more severe should the Leavers win the vote.
If so, while unlikely, it would not be a complete surprise to see extreme moves such as:
- GBP/USD could drop 15% to around $1.25 but perhaps not $1.10 as some have predicted.
Having said that, George Soros, has come out and said that if there is a Brexit then GBP/USD could drop more than 20% and fall below $1.15.
To give the scale of this move a little perspective, when the UK left the Exchange Rate Mechanism in September 1992, the biggest single day drop for GBP/USD was about 4.5%. The pair dropped about 11% over the course of the month.
- EUR/GBP could move 5% higher and that would still be a very big move but it won't be on the scale of GBP/USD. This is because a vote to leave would hurt both sterling and the euro
- The FTSE 100 could drop 400 points as investors move their money into safe havens.
- The DAX 30, which is normally more volatile than the FTSE 100, could also be hit. The DAX 30 could drop 600 or 700 points.
This kind of market action is tempting for investors but it also makes it difficult to trade profitably.
The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.
By Adam Jepsen, 20 June 2016