I’ve had some very surreal conversations about Brexit over the days since the unexpected vote to leave. One of the sane questions that I was asked was why the UK would delay invoking Article 50 to start the exit process, and the answer is obvious of course. France particularly is terrified that if there was to be a referendum in France then the result would be a ‘Frexit’, as the EU is even less popular in France than it is in the UK. France are therefore threatening to economically punish the UK harshly for leaving the EU, to discourage others, including themselves, from following the UK out. For the UK to invoke Article 50 before negotiating the broad strokes of an exit with that threat on the table, would be to allow France free rein to try to carry out that threat, while the UK had sacrificed the option of not leaving if the terms were too harsh.
There is increased uncertainty until Article 50 is invoked but this is a very uncertain process. It is not yet certain whether there will be another Brexit referendum, who would win that referendum if a vote is held, and what terms the UK would be leaving, in the event that the UK does actually leave. Only the hostility of the French seems assured at this stage, and with them this hostile, it’s hard to see the UK being stupid enough to surrender any bargaining chips that they might very much need later to protect themselves.
Much to everyone’s surprise, including mine, the Brexit campaign won the UK referendum by a healthy margin and it seems the UK is starting down the road to leaving the European Union. There were big reactions overnight on the markets, and much gloom voiced and written about the danger and the instability of the Brexit, but personally I think it’s a good thing, and if you believe that it’s always better to stick with the devil you know, then I’d suggest perusing the writings of the US founding fathers for a series of opposing opinions. Change sometimes works out ok, and it’s worth remembering that the only situation for humans that is ever really stable, is death, which is a high price to pay for certainty. Any good outcome always involves taking a risk.
Just about the only bright spot for me today has been my Steelcase short, which tumbled about 13% after hours yesterday. I promptly covered this morning, for the reason that it was awfully close to a huge amount of trading activity (tinted below) which I felt would represent a strong base. Good thing, too, as it is erasing most of its drop. The closer it gets to its gap, however, the more appealing it will become to re-enter this as a short.
The markets have been moving significantly on every new Brexit poll and moved up hard overnight on polls showing that the Remain camp now have a clear lead. My working assumption all along, as I’ve mentioned regularly, is that Britain will vote to stay out of fear of change. The status quo generally has the edge on these kinds of referendums for that reason.
This gap up may mean that closing resistance at the daily middle bands on SPX and RUT may break today, if bulls can sustain the move into the close. We’ll see whether they can but regardless of that, when there is a likely Remain victory overnight tonight there may well be another big gap up that could well have more staying power.
I’ve been watching the coverage of this month’s potentially market moving crisis du jour which is the Brexit campaign. How long will this remain ‘important’ even if the Brexit camp wins? That’s hard to say. Anyone remember Ukraine? The campaign has been funny in places though, I thought the concern that Britain’s growth prospects might be damaged long term by leaving the slowest growing region in the world was particularly witty, though that may not have been intentionally the case.
How does that impact trading this week? Well I think the Remain camp will most likely win the vote. The status quo always has a big advantage in this kind of poll and fear of the unknown is a potent message, even if uninspiring and suggestive that there is no positive message to sell instead. As you can see from the video below (thanks to @busculture on twitter for sending me this), the Remain message hasn’t really changed since the last Brexit referendum in 1975. They won then, and they’ll likely win now. That should favor the bulls at least initially. Crisis du Jour:
My apologies for the late post, I had a busy morning and I’m not really in the mood today. So far it seems that SPX is feeling the same way, though it is likely compressing for a move to break up or down either today or overnight.
Bulls didn’t follow through on the very impressive opening gap up yesterday morning and lost potential support at the daily middle band, now at 2092, before the close, so there has been no daily closing break back above very important resistance at the daily middle band. With the current HOD at 2091, that resistance hasn’t even been significantly threatened so far today.