Financial market research and analysis

Panic, volatility and risk-off best summarized the Friday’s session from the very early hours of trading in London.

As Britain voted to Leave the European Union, we watched the pound losing more than 10% against the US dollar, the FTSE futures trade 9% lower in Asia. The euro-pound cleared 0.80 resistance and hit 0.83141.

The rush toward the safe haven assets sent gold to $1358, the yen traded at 99 per dollar as Nikkei stocks wrote-off 7% in Tokyo.
The UK’s Prime Minister David Cameron resigned right after the results, adding another layer of panic to the markets as his resignation was not expected as soon, and was clearly not priced in.

A period of a great political, financial and economic uncertainty has just started.

A quick glance to the geographical picture suggests that London, its surroundings and Scotland voted to Remain in the EU, while the rest of the United Kingdom preferred to walk out. This picture will likely bring forward the risks of another Scottish referendum and could cause a further political uncertainty at the heart of the UK, on top of the looming worries regarding the European Union.

Moving forward, attention will shift to the Bank of England. The markets could need a hand to go through this historical decision. Some measures could be put in place if we see an excessive volatility in the pound, the stock and the bond markets. This being said, given the low-to-negative rate environment in the UK and across the Eurozone, the BoE’s manoeuvre margin is disturbingly narrow. And Bank of England’s Governor Carney said to wait and see before intervening in the market.

Next week the UK will announce the final gross domestic product growth for the first quarter. Any disappointment could further dent the appetite in the markets.

To summarize, political and financial uncertainty, high volatility, choppy market conditions are on the menu of the next week. We remind that the volatilities could be two sided. Wild swings in the mood is what traders should be prepared for. Despite waves of upside correction and short-term rallies, the UK markets and the pound are set to remain downbeat.