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Week Ahead: What ‘Leave’ means for markets

The turmoil in the currency markets as the referendum votes were being counted was a testament of how wrongly traders have been positioning prior to Friday.

City of London
Source: Bloomberg

Even as early as 5am in Asia on Friday, the final polls suggested that ‘Remain’ is expected to be the outcome, with soundbites from pro-Brexit UKIP leader Nigel Farage to the same effects.

GBP slumped as much as over 11%, to the lowest since 1985. Safe haven assets were highly sought after, which saw massive gains in gold, JPY, CHF and USD. Strangely, we saw GBP recovering rather substantially in early London hours, which makes one wonder if the central banks are defending their currencies.

According to Bloomberg, the Swiss National Bank has intervened in the FX markets to curb excessive strength in the Swiss franc. Japanese yen also retreated from the psychologically 100 level.

Nonetheless, Asian equities were under heavy pressure through the day. European stock indices were smashed in early trade, with the DAX one of the most affected. The next question traders will be asking is what will happen next week.

UK Prime Minister Cameron announced that he will step down in October during the Conservative Party Conference and said categorically that a new leadership is needed to steer UK in the Brexit reality.

More broadly, I expect the European Union to face political and economic contagion risks. Market participants will begin to speculate on similar referendums from dissatisfied EU members. According to a HSBC report, the countries who most viewed the EU negatively are Cyprus, Austria, Greece and Czech Republic.

Growing perception that we could see unbridled contagion spreading throughout the EU will hit the European economies hard, as well as the euro and European equities. This means that risk off sentiments would likely dominate markets next week. Safe haven assets may continue to see strong demand.

In the next week, we would continue to watch out for fresh developments on the Brexit front. At the same time, market participants should monitor the ECB forum where Fed chair Yellen, ECB President Draghi, BoE governor Carney and PBOC governor Zhou Xiaochuan are among the key speakers. Their views on the implications of the Brexit outcome could provide clues on how the global central banks will do in the near future.

In Asia, China’s manufacturing PMI, industrial profits, as well as meetings from the Bank of Korea and Taiwan’s CBC could be of interest. In Japan, the Tankan reports, CPI, jobless and retail trade will also be released.

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