The Certain Uncertainties of Brexit in the Financial Markets

It’s strange, but Brexit has happened. The world woke up this morning to the news that Britain has voted to exit the European Union. And without going back and forth, this means only one thing for the financial markets globally: UNCERTAINTY.

The reasons for that are simple. In the 59 years the EU has been in existence, nothing like this has ever happened. So there’s no historical yardstick of how this would pan out over the short term, long-short term and the actual long term.

Second, the result of the vote itself is suggestive of a country with its people having widely different opinions. That only 51.9% of the 79% Brits that turned out to vote wanted to exit the EU, while 48.1% wanted to remain says it all. That was a narrow win for the ‘leavers.’ And truth is the 48.1% on the losing side won’t take it lightly with the government going forward.

Both of these points, at the minimum gives credence to the ideology that we face uncertainties. That uncertainty extends into the markets for sure. Therefore, here are some market trends that you can expect.

(Short term) Stock Market Volatility

During the UK trading hours, the FTSE dropped by as low as 8.7%, although it gained to close at a 1.9% loss. This, definitely, wasn’t what was expected, considering that strengthening the UK economy was top of the reasons for EU exit. But that’s just the theory. Most of the time, market reality turns out differently just as the FTSE showed on Friday. Since that were the case in the UK, you should expect that stock market around the globe would be volatile as well, since the UK economy is one of the biggest in the world.

And it’s already happening. The Dow Jones average fell by about 500 point after the US market opened. “The yield on the U.S. 10-year bond hit its lowest since 2012,” according to Reuters. In fact, Reuters claims that the outcome of Brexit has brought the largest shock to global financial markets since 2008 – the time of the last global financial crisis.

The volatility in the stock market would pretty much remain for at least a couple of weeks. Things might get smoother when there is a clear sign that the move would be beneficial over the long haul.

Currency Movements

Obviously, the pound sterling would be more unstable than most currencies – assuming the nations that own other currencies are not facing bigger uncertainties. For instance, the pound dropped by 7.5 against the dollar following the announcement of the Brexit vote. The pound fell to its lowest point since 1985. This is evident in real life by the admission by various forex companies, like Currencies Direct LTD UK that they have seen a lot of activities due to the Brexit. The reason is that fears about the future of the UK economy triggered financial system participants to seek refuge in safe-haven assets. Currencies of countries that have huge association with the UK, euro in particular, would also be volatile.

Increased Demand for Gold
Those who know about gold probably already know that the price of gold thrives at the mention of uncertainties in the equity and fiat currency markets. The reason is that money managers around the world would want to preserve their assets by investing in safe-haven assets – a class to which gold belongs.

Here’s proof. CNBC reported that gold prices moved up sharply in the Asian markets following Brexit results. It also says gold gained by as much as 8.2%, breaching its two-year high in the process. That’s because investors are demanding more gold to preserve their wealth

Of course, Brexit opens up a number of profit-making opportunities. For instance, as seen with the weakening of the pound against the dollar and the increase in demand of gold, the forex market and gold market present attractive opportunities. So you can expect to receive scads of advice per day on how to play Brexit. Some of them would work, some wouldn’t.

But I believe that the best way to play Brexit is to stick to your investing discipline. That’s what would pay off over the long haul. That is why I steered clear of issuing any advice below each expectations above.