ETF Securities Research Blog

BREXIT – Uncertainty to Reign Supreme

We have seen a classic fear trade in Gold and Sterling this morning with a reversal of the complacent relief rally we saw earlier this week.

The biggest moves have been expressed in the Sterling, which has sold off against the US dollar to levels not seen since 1985. Gold has risen in value by 6%, the largest move since January 2009 but so far ranks only in the top 20 daily moves, with the largest being 13.3% in January 1980.

  • The fear trade may well be justified as it brings into question the cohesion of the EU project, other member states are now likely to consider referendums stoking EU break-up fears.
  • For the UK the next key question to consider is when will Article 50 be invoked? This states the formal mechanism for leaving the EU and details a 2 year timeline for departure. UK politicians may attempt to delay invoking article 50 in order to buy time and informally negotiate with EU member states, leading to further uncertainty.
  • There could be another Scottish referendum
  • Economist forecasts for UK GDP growth in the coming years vary from -9% to +2% highlighting significant uncertainty over the real impact on the economy
  • Gilt and Bund yields are likely to fall in the long-end as growth and deflation fears escalate
  • Expect cyclical equities to sell off the most, particularly financials and the energy sector, whilst healthcare and utilities are to be seen as safe havens
  • A July and September rate hike for the FED is now off the table
  • Gold could rise to $1400 whilst other precious metals such as platinum, offer attractive fundamentals

In this environment uncertainty will reign supreme, when will it subside? this is an open-ended question…

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