Pound, markets and gold – let’s get Brexit into perspective

New York (Jun 26)  Yes, Brexit has been bad for UK markets, but No it has not been nearly as bad so far as many had feared. It’s generally been far worse for global ones!

Immediately prior to the referendum vote market indicators had been riding very high in anticipation of a Remain victory.  The pound had spiked to over $1.50 against the US dollar – its highest level for around 7 months and the post-Brexit vote headlines have all tended to look to the British currency’s fall against that level – currently around 8%.  But compared with just over 2 weeks ago it is only down less than 5%.  Bad, but not quite so horrendous, and so far way short of the kind of fall predicted by some very high profile investors and analysts.  The knee jerk reaction though, once the Leave vote had become a virtual certainty, was for the pound to spike down to around $1.324, thus a peak to trough move of around 12% - in actuality a move from a spike up to a spike down – but that is what media headlines will have led with.  The reality is a somewhat less calamitous fall once the smoke had started to die down, although still an extremely significant one.

And of the major currency markets the media mostly refer to, the pound was indeed by far the worst performer.  But in contrast, let’s take the most followed UK stock market index – the FTSE 100.  From media headlines who would realise that the FTSE 100 level as I write at around 6,139 is actually 3% HIGHER than it was only just over a week ago when it fell below the 6,000 mark, is up, albeit by a small amount, on the year to date and fully 10% higher than it was at this year’s low point to date in mid-February.  This is no UK stock market crash as some would appear to have us believe.  Some might reckon this is just a mild correction.

On the other side of the coin let’s take the gold price.   ‘Gold price soars’ the media headlines will tell us, but it actually fell back from a knee-jerk peak of $1,360 as it became apparent that Brexit was likely to carry the day, down to below levels it had already previously eached as recently as in mid-June, coming back down nearly $50 or so once the markets had time to digest the reality.  Sure it spiked up over $100 from around the $1,250+ level it had fallen to when the world had anticipated the Remain vote would prevail, but for significant periods in the previous month it had been much higher peaking at around the same level that we saw at the weekend’s close only a couple of weeks earlier.

Indeed the global stock market reactions to the UK decision have mostly been as bad, or worse, than in the UK itself.  For example Japan’s Nikkei was down 4%, the Dow by over 3%, Germany’s DAX by 7%, the French CAC Index down 8% with the major Italian and Spanish Indexes down around 12%.  So the real Stock Market carnage has not been in the UK so far (where the FTSE 100 was actually up over the week, probably helped by some major resource stocks in the Index), but in Global markets – particularly in Europe.  One wonders now whether the Brexit decision is the trigger which will now prompt a global fall in stock prices which could match, or even exceed the 2008 market crash as some well-thought of economists have been predicting.  Is the House of Cards going to collapse?

Monday is thus going to be a very interesting day in the markets indeed.  Will we see further carnage in global Indexes as the ramifications are digested?  Will the UK Indexes plunge as the fall in the pound sterling parity against the dollar might suggest?  Or will we see something of a recovery across the board, including in the pound, albeit perhaps a temporary one?  Markets tend to over-react to bad, or good, news so it’s a definite possibility.

We suspect global stock markets face an unsettled few days, weeks, or months.  Precious metals may continue to gain as safe haven buying accelerates.  We saw an absolutely massive 18.1 tonnes of gold going into the GLD SPDR gold ETF on Friday.  Will we see more big rises in the week ahead, or are profits going to start to be taken?  GLD is a good proxy for precious metals investment interest and although there may remain something of a concerted effort by the bullion banks to stabilise the gold price, the flows into the ETFs will be further pressuring already tight supplies of available attributable physical gold and one scenario is that the gold price could burst upwards rather than downwards.  OK – something of an oxymoron but perhaps an apt representation of possibilities.

Look out for volatile markets, we don’t think they will settle down again for some time to come as politicians blow hot and cold over the impact of the Brexit on the UK, European and global economies.  It could presage a very rough time ahead on global markets.

Source: SharpsPixley