On Wednesday last week I bought a copy of one of those finance magazines you see in newsagents, ‘Smartinvestor’ or ‘Money’ or ‘StockTipper’ I think. (I like to continually change what I read so my brain doesn’t get stale) The magazine was on my desk for a few days and I flicked through some of the ideas which were good and was looking forward to really digging in to it over the weekend in an effort to find some post-Brexit gems for clients. On Friday evening I gave up on that idea and filed the magazine under ‘N’ for ‘Never going to read.’ Why?
All bets are off.
I cleared the schedule for the weekend, picked up a Financial Review and a Financial Times and have buried myself in Brexit since Friday night. There’s been much written on it over the weekend and I won’t rehash it but I’ll offer a few warnings and tips:
- Beware anyone trying to get you to buy stocks just “because it’s much cheaper now than last week.” That’s a dangerous game to play. There will be a time to buy but indiscriminate buying on drops will end badly. Know how & why the fundamentals of your favourite stocks have changed. Ask questions.
- The Yen is still seen as a safe haven.
- This was arguably the biggest ‘Black Swan’ event of our lives and failure to act now is either failure to protect, failure to benefit or a combination of both.
- Central Banks now come in to play again. Rate cuts here and in the US again could save the day.
- We have an election of our own this weekend. Remember that?
At the end of this article I leave a run through of how our Friday went in the form of a “brain dump” as the day wore on. A good insight into what was going on in the dealing room and what I was thinking over the day. I apologise for the scratchy nature of it but there’s a Link here (see below):
Friday night followed our day with the US market being off also. The caution that I asked people to exhibit last week turned out to be justified and my Friday afternoon note began with “The unthinkable has happened.”
Volatility
Volatility has spiked and I’m reminded of this which I posted in my 6th June note regarding the Volatility Index changing direction every 9 weeks.
This was June 4th. Flat, calm. Now look at volatility.
Those two last bars into July are what came next in a colossal spike. Very accurate. Source: Bloomberg
So it looks like there is something to be said for patterns. Based on the above expect more of this for about another 7 weeks. Remember volatility increases are bad in the current climate since (as I’ve stressed many times) big Index Funds and ETFs are geared to move money to cash if volatility (the VIX) increases. That move in turn causes volatility to rise and the image of a dog chasing its tail is the best way to describe what comes next.
The End of Days looks like a lot like this, apparently…
Currency
Meanwhile Pound Sterling is incredibly cheap so those last minute tickets to Wimbledon just became a real possibility. If you shop online at Marks and Spencers then buy boots so you can fill those boots with more cheap goodies. My point is that while banks and large companies will have to make exit plans from the island so that they can better deal with their EU counterparts, England doesn’t suddenly or completely shut down because of this. Things are still being made and can be bought. If you want to play, look at retailers who will surely see trade spike due to currency benefits and stay as far away from banks and any company that makes or sells goods dependant on the EU working well. (Imagine a British company that makes auto parts using French materials that are then sold to VW. If you see that, run)
But I’ll cross for an English cameo by popular demand and here is our man with a finger on the pulse of the hedge funds, David Pain:
“Markets now enter a huge period of uncertainty. As I expected it was the periphery which suffered most from ‘Brexit’. The major reason for this isn’t because these markets are most directly affected (although they are). It is because the focus now turns on to the likelihood that the rest of the EU breaks up. There are two ways this can play out. Firstly that Brexit does indeed lead to a wave of populist/nationalist fervour across the continent which sees the likes of Geert Wilders in the Netherlands, Marine Le Pen in France and Pablo Iglesias in Spain taking greater control and thus pushing for their own referendums. Or alternatively Brexit leads to a greater union on the continent. For the meantime the market seems to be discounting the former with Spain in particular down 12.35% on Friday. (Important to note Spain has an election this Sunday).
Going forward it is difficult to be hugely positive. At some point one does feel the US could catch a bid due to its ‘safe haven’ status. However this is mitigated by the fact that they have their own populist problem to deal with (Trump) and their market is amongst the most expensive in the world. Payrolls also come out this Friday and will be hugely important in determining whether or not the prior months terrible numbers were a one off or part of a growing trend.”
Uncertainty
What I find quite apparent is that now, similar to Melbourne Cup time when everyone becomes an expert in the field of thoroughbred racing, you’ll see a few wannabe political pundits stick their head up with a view. That should get interesting.
If you see through all the clutter you’ll find one rule that will ring true through July:
Markets hate uncertainty.
If there’s questions over political leadership, questions over what EU “deal” the UK will bargain, questions over Scotland etc then expect those days to be down. Up days will be on certainty- certainty on US rates, certainty on who the PM will be, on where companies will be domiciled. Even if it’s bad news, the market will see certainty in a positive light.
There will be more to write and more to discuss and it’s good that we were cautious last week. I leave this with you from Emanuel Derman, Financial Engineering Professor at Columbia University:
“To all who argued the financial world would’ve collapsed without the bailouts: The political world is collapsing now because of the bailouts.”
Very well said. Stay safe all an all the best,
James
Appendix 1: A Day in the Life- Friday 24th June 2016
Early in to catch the news and follow up any currency moves, Twitter already buzzing with different stories of how the vote went, the weather in England. Farage had basically conceded. Someone asked Boris on the tube how he thought Leave went. “We lost” was his response. Betting numbers still showing remain strong, Sterling at the highs of the year. Should be a good day for buying, catch that relief rally through to early July then buy gold again.
The mood in the office is always good. The VFS team culture is strong and ego and negativity are always left at the door. The TV is on and volume up as we see some early numbers come in. Finding the best channel was an early problem but settled on Sky News which was running straight off BBC. English people telling me English news, brilliant.
Gibraltar strong stay, obviously. “Why obviously?” Little lessons in geography going on around the office. Explanations that any precinct ending in “…shire” would probably vote leave and anywhere you have a football team would vote stay.
Southampton the first test of this theory, should be out soon. I’ve already started on some other work I was planning since this appears to be a non-event. Market’s up, a little early selling to lock in some profits for the weekend. Someone walks out of an office “Look at the pound. This is happening.”
Me: (Still stubbornly sure of the polling and betting odds.) “These are early results from the rural north, wait till the cities come in and balances this out.”
Pound is live and news is slightly delayed. We know results seconds before they’re shown based on the GBP/USD cross shifting up or down by significant figures.
Lunch and this starts to look very, very real. Pizza ordered, review positions. Stocks show red across the board. The two stocks everyone was talking about this week (Henderson and Clydesdale) are taking a beating. Texts from clients, friends, enemies and colleagues. No one has been spared.
The afternoon was more of the same right through to BBC ‘calling it’ and it being undeniable. Our trading team opened a short index strategy for our managed accounts as insurance on Thursday which was now substantially in profit. Good news on a shocking day. That’s why you buy insurance.
Analysis of what this means for England, for Scotland, for Ireland and for us. Which countries will be next to leave? Which markets should we be shorting?
Cameron HAS to quit over this, surely? More uncertainty. As predicted FTSE isn’t off as much as the rest. US futures are limit down.
It’s going to be a long weekend.
Text the wife, cancel the BBQ.
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