Today is a historic day in World financial history, which will be recorded in our memory forever! And it was a long and sleepless night all over the world as financial markets were frozen in agonizing suspense.
We should admit that Britons are firm and consecutive in pursuing their goal of independence. Almost a quarter century ago, they decided to withdraw their currency from the European Exchange Rate Mechanism (ERM) and they didn’t turn off their road yesterday on the final referendum.
Bookies and analysts got it all wrong as they forecasted the win of the "STAY” option, but more and more we have witnessed that all efforts to calculate human emotions and perceptions fail. The economic consequences for Brexit are harmful to the UK in a short term, but they still voted to leave. People are irrational in their behavior and the realization of this fact would bring the dramatic changes in the economic science in the future.
This “Black Swan” event gives all of us, first the once-in-a-lifetime experience of real time observance and secondly, it is the rare case for the analytical study of such events.
It’s good for educational purposes to see how risk aversion works at such events. It’s in human nature to avoid risk. Below are two charts with the performance snapshot just 1 hour after the official results were out representing opposite camps. In the first chart, there are so-called ‘safe havens’ and in the second chart, I gathered risky assets. The charts are observing only a short period of this week for a close look.
Chart 1. Safe Havens: Gold Is Unrivaled
Chart courtesy of tradingview.com
On the chart above, there are 5 instruments: 2 precious metals – gold and silver; 2 currencies – Japanese yen and Swiss franc – both are represented as inverse pairs for comfortable comparison and the currency index – dollar index (DXY).
Gold attracted the most demand in safety pursuit, although it wasn’t obvious yesterday when the metal showed the most negative dynamics during this week. And if we measure the surplus from yesterday’s low gold gained more than 6% at the top remaining the ultimate safe haven again and again!
The Swiss currency is the disappointment of the week at the safety brink. Yesterday it was a leader with almost a 1% gain for this week, but the new day has singed the wings of luck for the franc. Later on, the Swiss National Bank confirmed that it had made an intervention to curb the soaring Swissy. And this explains everything – investors still rely on the franc, but they can’t compete with the central bank.
The dollar (DXY) and the yen shared the second place among safe havens with the minimal superiority of the dollar. The Bank of Japan made a verbal intervention to soothe the nervous market but didn’t act and that kept the yen gains.
The third is silver, the ‘two-headed dragon’ – one head is precious and the other one is industrial and it mixed the metal’s performance, which earlier could manage to beat gold in the second quarter this year.
Chart 2. Risky instruments
Chart courtesy of tradingview.com
On the second chart, I put a comparison of the following 5 instruments: British pound, euro, copper, S&P 500 index and the crude oil (WTI).
The risk appetite wasn’t at the expected reflux at all during the week. Both copper and oil were at the top with 4-5% gain before the vote. The S&P 500 was also gaining at a more moderate pace. Among currencies, the birthday currency (GBP) was on a roll before the vote and it didn’t give a sign of the following collapse. The euro was almost flat these days.
And then there was thunder. And we lost the pound so quickly, more than a 1500 pips loss, minus 8% for the week and minus 11% during a few hours after the preliminary results showed the winning of ‘leave’ option. Yes, the $1.30 margin was predicted in case if Brexit comes true and we almost reached there at 1.3226 low. Mr. Soros, who once made his fortune on such an event in 1992 predicted the $1.15 level for the pound in case of Brexit. Let’s see!
The losers made the following ranking: 2) S&P 500, 3) euro, 4) crude oil. And we have one survival – the industrial metal, the core of the world infrastructure, which was supposed to lose, despite all kept its 1% gain for this week. It’s amazing as copper can be placed among safe havens right after the silver in the first chart according to performance.
Afterword
Both charts show how human emotions if they are united and strong, can move markets dramatically. People still tend to avoid risks. We also witness that gold is again the top safe haven. Our perceptions despite being true can be spoiled by central banks’ actions like in the Swiss franc case. Copper also showed surprising stability; maybe it was just forgotten by speculators.
Anyway, one thing is for sure; such strong moves can be used for profit only with the large margin of safety. Even exchanges lifted their margin requirements at least for 200%.
In the end, I would like to remind you of some old market wisdom – Buy Rumors, Sell Facts! And it’s quite possible that we will see a sell-off in safe havens and a buy-back in risky assets soon.
Intelligent trades!
Aibek Burabayev
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
To parahrase a famous political axiom, It's NOT the economy, stupid. It's immigration.
The butterfly effect is the concept that small causes can have large effects. President Obama recently traveled to Great Britain and strongly urged its people to stay in the European Union. This past week, the Brits rebuked President Obama and its own Prime Minister Cameron by voting to leave the EU.
I believe that President Obama is indirectly responsible for Britain leaving the EU, for undermining the EU, and ultimately, for threatening the demise of NATO.
When President Obama abandoned Iraq without leaving a small residual military force, he allowed ISIS to fill the void and unleash a torrent of terror across the region. This resulted in millions of refugees fleeing to Europe, including Great Britain. The EU, whose policies welcomed the refugees, soon became overwhelmed by them. The Brits rebelled against their Prime Minister and his EU policy of allowing Muslim refugees to flood Great Britain. This caused him to call for a popular vote on leaving or staying in the EU. Had it not been for this very emotional 'refugee' immigration issue, I believe that the Brits would have voted to stay in. The EU's immigration policies made the small difference needed to swing the vote in favor of leaving.
It is now likely that other EU nations, such as Italy, Spain, and France may soon follow the UK's example and vote on whether to leave the EU. If the EU were to dissolve, it could undermine NATO and threaten its very existence. If you think this can't happen, remember what became of the Warsaw Pact after the U.S.S.R. dissolved.
Thank you Tony.
May I add to your comment about Obama.
It is the first time ever that a US President has interfered in an election in a friendly country.
It didn't work out!
The polls showed that his visit and his rather strange threats had increased
the number of Leavers by 3% .
As you say, it probably made the small difference between Remaining and Leaving.
Aibek, you have not understood what was on offer:
Brexit meant that Britain would be free of interference by European bureaucrats, free from burdensome EU taxes, free from foreign bureaucrats deciding what they wish to be done, free from foreign bureaucrats running down our industry and reducing our power supplies.
Stay meant that Britain would be bound to follow the Lisbon Treaty into "ever closer union" -which was one of the
founding tenets of the Lisbon Treaty.
This "ever closer union" includes an EU army, agreement to unlimited and uncontrolled immigration, an unspecified rise in membership fees from July, and further rises in VAT[sales tax] on utilities in the Fall.
To call voters that wanted Brexit irrational is itself very irrational.
The FTSE 100, after a few wobbles, has stabilised itself within 100pts of what it was.
We are OK..................and from now on we will get better.
The Eurozone is dying, and because even Joe Public recognises that, it is no reason to call the voters irrational!
Today it was revealed that the Emperor has no clothes.
If you don't understand that, ask at any primary school, they will explain the parable.
So are you saying a replay of "America 1776" ?
No. We were never garrisoned by Hessians although it has now been revealed that if we had voted "Remain" Cameron planned that we would have been garrisoned by the EU Army from 24th June.
More like the Titanic:
The EU socialist monster has hit an iceberg and is fatally holed.
The British Prime Minister was frantic to stay on board as he had been offered the Presidency of
the EU in 2017. His desperation and lack of self respect in grovelling to Brussels sickened a lot of Brits. and certainly influenced many.
The rats felt that it was better to climb into the lifeboats, and watch the incompetent crew
try to organise themselves.
It won't be particularly nice in the lifeboats, cold, wet and blocks of ice floating around, but
we won't be sucked down by the vortex, and we have the warming feeling that no longer will we send $500million a week to Brussels to bolster up the economies of the weaker members of the EU. There are better times ahead.
The British public have made a wise, long-sighted decision.
Steveh you are spot on. Not all can see the truth. It will affect us here in the USA as well with a stronger dollar. However, it's always best to do the right thing. Let's Hope for the best.
There are 3 things to remember:
1) the sky is not falling
2) it is a referendum ( the exit may or not happen)
3) nothing major will happen for two years plus.
I'm buying the bargains.
Note to the stock market and the fear mongers : "Tomorrow, tomorrow you are only a weekend away"
See you at the bank .
I also found same conclusion, please read my comments in inos recent other posts.
Dear Aibek,
Thanks for giving micro analysis of "Human Factor" good study you have made.
As you have point-out like "Both charts show how human emotions if they are united and strong, can move markets dramatically. People still tend to avoid risks"
I think, We must refer History, which tell us that "Human emotions - as specially when they are in collective form and on mass basis, never sustain for longer period" speculators are batter aware of this fact, and so they shape their game just accordingly. Anyway, it will be interesting to observe "What next?"
Regards
Rasesh Shukla.