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Where Next?

28 June 2016 by Mark Holman

After watching England being humiliated by Iceland, I had to laugh at the speed at which Roy Hodgson managed to trigger his own Article 50 last night. If only the markets could be so simple! However there are so many uncertainties and many difficult questions to answer.

For example:

When we notify the EU that we wish to trigger Article 50 and leave the EU, will we leave with a similar trade deal to the one we have or will the Europeans seek to make an example of us and give us less favourable terms?

Boris said yesterday that if he was Prime Minister then he would seek to keep access to the single market by complying with all their rules and allowing the free movement of people. This obviously raises the question as to why we just had a referendum? But seemingly we can take his comments with a pinch of salt because he also said “people’s pensions are safe,” and “the pound is stable, the markets are stable, and that’s all very good news.” From a markets perspective, I am a little nervous about our former mayor becoming PM!

Having said that though, if we did keep the same trade deals with the EU, then we are likely seeing a market overreaction to the current uncertainty.

Also to be considered is the possibility of a second vote. Whilst currently this is speculation only, it cannot be ruled out completely.

Then of course there is the reaction from the rest of Europe. There are no fewer than 5 general elections coming up in the next 18 months. There will be campaign promises from some parties which will offer their own referendum on EU membership. Do the voters latch on to a once in a lifetime opportunity and vote these parties in order to have their say? Or do the voters do as they did in Spain at the weekend and rally back to the incumbent out of fear of change? We just don’t know….but it’s certainly a worry.

Clearly markets are in risk off mode at the moment, and a lot has been written about the magnitude of some of the short term moves, some of which have been bigger than those experienced during the financial crisis. A large reason for the moves is simply uncertainty – and we all know that the markets hate uncertainty. This in itself is not a risk but it does add to the risk premium which is driving markets at the moment. However this might eventually be an opportunity as markets overcorrect.

At the moment the questions above are just too difficult to answer, so the markets are right to be nervous. However, not all of the answers to these questions are necessarily going to be negative, meaning that markets could still bounce strongly, as well as having even more downside ahead. Let’s not forget that.

In short, where next from here?

We think it makes sense to keep most of our hedges on, despite the big moves, but make sure they are liquid and can be lifted should a less bleak or clearer picture emerge.

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