Let me sum up a bit of how I see things at the moment.
Due to this “black swan event” the markets are very shocked. At the moment no one truly knows what will happen.
The scenarios look like this:
- (this is what actually is happening) UK vote to leave and will leave.
To this first scenario there are different problems which will hit the markets. Uncertainty is the first one. With Cameron resigning and leaving the decision onto when to sign in article 50 of the Lisbon EU agreement he created a information vacuum that will be explained further in point 2.
This vacuum is creating insecurity and uncertainty for at least 3 months. Something which is very bad for any markets as then wild speculations on outcome grow the fastest. At the moment we have been gifted a “thinking time” of 2 days of a very long weekend. In this weekend it is already clearly visible that UK is deeply divided in its opinion and actions- which brings me to point 2.
- UK is deeply divided onto the outcome of the referendum. A lot of people only now see and feel the negative effects. Blindly following their Brexit-leaders before the vote they now see heavy weaknesses within the brexit leaders. The brexit leading voices failing to deliver promises or actions by remaining surprisingly silent and not showing any signs of a plan that has been developed in the case that they truly win the referendum.
More then 3 million people have signed a petition which would declare the referendum of the brexit vote as invalid. Scotland has announced a new Scottish referendum leaving the UK. Even London has started ideas (which cant be taken serious) to separate from the rest of the UK and declare itself a city-state like Monaco or Vatican and join back the EU without the rest of the UK. North Ireland is contemplating about reuniting with the republic of Ireland.
Spain has already started to create pressure on UK and Gibraltar regarding Gibraltar.
All the peace (Ireland and Gibraltar) that has been created and developed over the last 30 years in those regions is at stake.
- EU falling apart. A very unlikely scenarios which as well is rather far away (months or even years to start referendums in other countries) so this does not need much consideration at the moment in the short run for the next few weeks/months.
We have minor movements in Netherlands, France and Italy, lead by rather inexperienced politicians. Taking into consideration that those countries are founding countries of the European Union and the people of those countries always witnessed the positive sides of the EU by their own eyes (something which UK never truly did simply because of the fact that it is a semi-isolated island) it is clearly visible to anyone that the “European Union- Spirit” is much stronger in those countries and goes above economical considerations only. Polls showing that people are unsatisfied with the EU and its actual direction in France, Germany, Netherlands etc. but other polls as well show that 80% of the population of those countries actually does not consider to leave the EU but rather reform it and change the directions.
- EU taking the brexit vote as warning signal (which is actually happening right now) and changes a lot of things with which people are unsatisfied.
Lets get clear on this. Things that the average person, or average voter, things are the EU’s fault, usually are not true. As we can see on a lot of polls it is very clear that most people actually don’t know which laws (especially the ones they are fuzzed up about) come from the EU or from their own Government. The information of what the EU is doing or not doing is very bad. As I have observed a lot of people put false blame on the EU for things that concern their life, thinking it is a regulatory from the EU, but in fact it is just either rational economical development (supply & demand) that is accountable for the English steel industry to decline (just one of a million examples- but this one from eddieb is very fitting). Or like one fisher in Scotland tried to blame the EU for tightening the fishing quotas and pushing him out of the business, while in fact, the fishing quatoes in the EU stayed the same and spread the same over each country since 20 years- the only reason why he got pushed out of his business is because England was spreading the allowed amount of fish that can be fished more towards the English fishers away from the Scottish fishers. Another Scottish lady got fuzzed about that she can not sell her cigarettes in her store by putting them into the sales shelf but have to put them somewhere where none can see it (to not make commercial for cigarettes) – thinking it is a EU regulatory but in fact was a regulatory introduced by the Scottish parliament and is existent only in Scotland.
The list of things that are actually truly EU’s achievements is very long.
But the problem is that public does actually not know what the EU is doing and what the purposes are. It is very wrong informed and that will be changed in the future.
The never ending story of “blame the EU when you fail” has become a practice in most European countries in the last 10 years. For every crisis or minor problems the local politicians start blaming the EU and trying to create “a common enemy for the masses” like it has been done in the UK for the last decade. This is a very dangerous and self destructing tactic which will be looked upon much more in the future. Have you any time heard that California blames Washington D.C. For anything? Rarely- because the USA is considering itself a state and not just a economical society which is looking how to gain more money over the other member states.
This brexit is a wakening up call to all leaders in the EU, if its EU leaders or country leaders plays no role. Things must change and people must be informed better to actually understand what is going on since 20 years since the EU has been formed in its existing stage.
- United Kingdom falling apart.
As well rather unlikely scenario but more likely then the EU falling apart in the short run.
Lack of leadership, lack of a clear direction, lack of a common social feeling of being “United Kingdom” from the side of Scotland and N. Ireland.
- United Kingdom making a complete U-Turn.
Considering the lack of leadership, the sheer amount of protesters and petitions it is possible that UK makes a complete U-Turn and tries to stay within the EU. BUT negotiations or demands from UK to the EU to stay are very unlikely to be fulfilled. In fact as I see it, the EU is staying very strong and united in this case at the moment. In order to strengthen the EU it is not possible to go any foot long into UK’s direction and offer them anything. So it is very unlikely that the EU is going to offer UK anything to pull them out of the misery they got themselves in. It is rather likely that the EU will offset all the negotiations and deals which UK had for themselves (which no other country had) and put it in its place as a normal and regular member without any different treatment then the other 27 member.
- UK getting a new leadership which will not sign the article 50 of the EU agreement.
Taking into consideration that over 66% of the parliament of the UK has voted to stay in the EU, and that the vote was so close- taking into consideration that UK is strongly divided and split up into 2 corners – taking into consideration that the population is unsatisfied with its actual leadership – taking into consideration that boris johnson is missing a lot of leadership skills in this very same moment – taking into consideration that the Conservative party is very unclear in their directions – taking into considerations a lot of people resigning from their chairs – taking into consideration the political earthquake in London = it is very likely that the labour party will win a future election – the labour party being pro EU.
So if you need a clear direction for the markets within the next few weeks: there is no clear direction. As long as this political chaos in UK is going on the markets will be shaken up and down on every new rumour/news. That is one of the reasons why the EU leaders are pushing UK to immediately sign the EU- article 50 agreement. This way uncertainty is being reduced and time is being gained to find clear directions and what to do. The next 3 months -until the article 50 agreement is signed- will be defined by ups and downs on rumours.
Even tomorrows Monday – the first trading day – will start with a rally in the markets (DAX, FTSE, Dow Jones) based on rumours and direction finding, supported by the petition and hopes of the 3 million who signed the petition. Later that day, or later that week the markets will start trending down again when those rumours/hopes are being destroyed by the speech of (not even important which) politician in London.
One thing is clear. The general direction of the markets is DOWN. But it is a very bumpy ride. With markets trending with very high volatility up and down for the next few months. It is a market that kills swing and long term traders if they do not have a loose stop loss. It is a market that benefits day traders who live from short term trends and fast changing directions.
So my advice/what I will do the next few weeks is to simply stick to day trading. Not hold any position over night unless it is very visible that the trend will last more then only a day- only trade what you see and not what you anticipate as the times are way to uncertain. Stick to a very tight money and risk management and expose the balance to as less risk as possible.
Happy trading,
Tommy
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