The following guest post is courtesy of Shoaib Abedi, Director and co-founder of online trading services provider ICM Capital. ICM Capital is a UK headquartered company licensed and regulated by the Financial Conduct Authority (FCA) in London, with six offices spread around the world.
Uncertainty is the most important word that market participants can’t get out of their heads as the global financial markets welcome another week of trading following the shocking news of a Brexit actually going ahead. Succeeding this historic time for the financial markets and a tense few months of anticipation, the final outcome has formally been declared and Britain will cut its ties with the EU after more than four decades of being bonded together. Uncertainty causes risk aversion and this is never good news for equity markets and for high return assets.
While we all witnessed the shocking free-fall of the British currency on Friday as it slid by the most on record against the US dollar, and reached its lowest level since 1985, the big losses on stock indices and the safe haven rallies were the main focus for many traders as it seemed a to carry a heavy weight on their portfolios.
Volatile trading conditions surrounding the British pound were expected by market participants and that is why many preferred to stay away from Cable till the referendum results were out, while others who love taking risks, took positions in the hope the results would be in their favour, some might say this is verging on gambling behavior.
Now with the results being very real and for many a shocking opposite to what was expected, those who traded the news are either big winners or big losers. This week will be a fresh start to traders making their way to building new positions. It’s likely that many will move towards currencies considered safer such as the US dollar and Japanese yen or gold often traded as a safe haven during volatile geopolitical events.
The main driver for the market over the next few days will be more details on the process of the Brexit. When can it happen? And how it will happen?
Because for now the UK has not yet triggered the irreversible Article 50, the untested procedure that governs how a member state of the European Union leaves the bloc, which means the markets, will be waiting for clues on how and when the UK will start the negotiations for a Brexit.
UK Prime Minister, David Cameron, in his resignation speech said that he will leave the task of implementing the Brexit to his successor. The UK publication, The Guardian, quoted an EU source that the EU president, Jean-Claude Junker, called Cameron to ask him to trigger Article 50 quoting Junker to Cameron: “The decision of the British people was crystal clear, and the only logical step would be to implement their will as soon as possible.”
This is again putting extra pressure on market uncertainty and the risk aversion will keep driving market movers, the downside pressure on equities, high yield assets, and the British pound is not over yet.
As long as the exit process is not clear, traders will continue focusing on safe havens for conservative traders, while aggressive traders will keep following short term momentum either on the downtrend or for fast trades during rebounds.
But wise traders should consider the high risks associated with the markets at the moment and may be better off hedging different market instruments to protect their long term trades till the markets calm down and things start to get clearer.