BREXIT – Market Hype and FUD

I’m adding an image from a comment by “Stan” on this article at Small Dead Animals:
http://www.smalldeadanimals.com/2016/06/online-voting.html
h/t to Another Ian for pointing to it ;-)

Godzilla Attacks For BrExit

Godzilla Attacks For BrExit

On the various talking head TV shows there is an ongoing drumbeat of “End Of Life As We Know It!!!” and “Financial Doom In Our Time!!!!” coverage of the BREXIT. Do the charts support that interpretation of the market moves of the only trading day we’ve had?

In my opinion, no.

Lets look at a bit of the hype and the reality. I’ve heard several folks now say that the £ is at a low not seen in … then they pick various numbers. They keep getting longer, despite no currency trading happening at the moment. Sigh. So what is it? 20 years? 30 years? What? Oh, and they never mention what ‘cross’ they are looking at. Against the ¥? The €? The Swiss Franc? The $US? It makes a BIG difference.

Currency Wars, The Long Horizon

Here are a couple of long term graphs of currency crosses. They each tell a similar story, with variations. I got these from Finviz here:

http://finviz.com/forex.ashx

GBP x USD 22 year chart

GBP x USD 22 year chart

One thing that always causes me heartburn on currency crosses is figuring out “which way is up”. This is measured in that and sometimes that is measured in this and an up in that can be a down in this and… Sigh. Add in that for historical reasons some crosses have the $US first, others the £ and it gets a bit of a mess. In this case, we have the £ in $US. It is about $1.40 to buy one £ and a ‘weaker pound’ is lower on the graph.

Measured in the rubber ruler of $US, the pound is quite low. Yet 30 years low? It is in the noise band of a match to 2009 and 2001. Furthermore, the great loss of relative value was 2009, not now. Frankly, we’ve got one day of panic trades as the major houses were “on the wrong side of the trade” and desperate to get out of positions before a weekend. Having it spike down and recover (as it did) is hardly a surprise.

Note, too, that this graph confounds $US strength with £ weakness. We need to look at the other two major currencies to get more clue as to overall performance.

On this chart, we have the € in £ terms, so weaker pound is higher.

Euro in Pounds 22 year

Euro in Pounds 22 year

In many ways, this is the graph that matters. As an EU member, it is compared to the EU that has been the major cross of interest. Here we see the spike up at the end, but it is relatively tame compared to the total range. Compared to the € the £ is the weakest it has been since about 2 years ago… Suddenly not so scary, eh?

It was far weaker in 2009 to 2011, and is roughly a match to 1994 through 1997. If “exchange rate stability” vs the Euro Zone was a major goal (and it ought to have been) having “basically no change” in 22 years but with wobbles on major events is exactly what would be expected.

Taken together, those two graphs say to me that the present “record low” £ is really a high $US. Certainly not anything exceptional in € terms.

Just to round it out, let’s look at Yen. Divorced from the whole Euro Zone thing, unconnected to the $US, a major currency. Fairly unbiased ruler. On this graph, weaker £ is lower.

GBP in Yen 22 year

GBP in Yen 22 year

Golly. Rough match to 2014, 2009 and 1996, with strong excursions on various panics. Once again we also see the major damage was done in the 2009 Financial Crisis and that recovery from it was weak. (No real surprise as governments set about breaking banks and damaging earnings, and London is a major banking center).

Taken together, those three charts show me a one day panic as traders were on the “wrong side of the trade”, and not much long term history making. The £ is low, but not exceptionally so and the major issue is $US strength. Compared to the € it is absolutely unexceptional.

As the week unfolds, a lot of folks will be setting new bets on currencies. The most extreme volatility ought to be past, as traders cashed out big time on Friday. By the end of the week, I expect it will all be over. With that said, the chart is your friend and who knows what fresh hell of stupidity the political class can inflict. So watch the news.

Stock Markets

I’ve found a couple of charts of the DAX index and FTSE. Being an index it ought to be free of $US contamination. So where are the two major markets in the EU as of Friday? FTSE first, then DAX.

http://finance.yahoo.com/echarts?s=^FTSE+Interactive#{%22range%22:%2210y%22,%22allowChartStacking%22:true}

FTSE post BREXIT 10 year

FTSE post BREXIT 10 year

http://finance.yahoo.com/echarts?s=^GDAXI+Interactive#{%22range%22:%2210y%22,%22allowChartStacking%22:true}

DAX post BREXIT 10 year

DAX post BREXIT 10 year

Both near the end of long secular bull runs up. Both “toppy” with “failure to advance” to the upside the last few years. Both with recent lows forming a base. Very similar, IMHO, to the USA markets.

I’d expect that kind of long term high to result in a break lower. Any excuse will do. In my opinion, BREXIT is just an excuse for the shorts to try running the markets down. It is what they do at the end of every secular bull run.

The panic day barely shows up at this scale, and I’d not expect it to show up. That the DAX took a much larger hit on Friday than did the FTSE says, to me, that Germany is in worse shape out of BREXIT than is the UK. That makes sense as they sell more to the UK then they buy, so any trade fight hurts them most, not the UK.

With that kind of long term ‘set up’, I’d wait before doing any bargain hunting. On a trade basis, there is usally a 3 day cycle. Sometimes only two. Mid-morning Monday ought to be a nice time to reevaluate on a rebound trade (i.e. an oversold buy for a one or two day holding period bounce). But that secular high argues for a longer term reversal to a downtrend, BREXIT or No.

Watching the divergence between FTSE and DAX ought to be very interesting…

In Conclusion

I’m not seeing a reason to jump in big time just yet, but a potential rebound day trade is shaping up. The £ ought to recover in the next week or two, the € not so much. In no case am I seeing anything particularly “historic”. Just regular trade stuff.

The major message seems to be that the $US is out of whack with Europe. But we already knew that…

Subscribe to feed

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money, Political Current Events, World Economics and tagged , , , , . Bookmark the permalink.

37 Responses to BREXIT – Market Hype and FUD

  1. Ron Clutz says:

    The reason for panic is on the part of the ruling elite and establishment insiders. Brexit is a warning that the ideology by which the population is controlled failed to work in this instance. And Trump is another worrying sign to leftist, politically correct, authoritarian regimes.

    https://rclutz.wordpress.com/2016/06/25/brexit-and-the-great-divide/

  2. I was hearing that” pound lowest ever” call and thinking WTF since that implies a very short memory. Back in 2009 and a bit after I was seeing almost parity between the £ and Euro – quite important to me since my pension is paid in £ and transferred to Euros so I can buy food. I had to cut back somewhat. I was not pleased with the loss of income, since that was really a hidden tax to pay for the banks’ bad bets. Over the last year I was feeling better-off as it stabilised at around the 1.40 mark, but since I was pleased when it got above 1.20 I can survive today’s 1.23 rate. That’s about the same as just over a year ago, after all.

    Maybe it’s over-use of the memory-slot that is driving the pundits.

  3. gallopingcamel says:

    Like Simon Derricutt I receive pensions in Pounds Sterling so it bothers me when the exchange rate is low. However I arrived in the USA in 1982 when it seemed likely that the pound was headed for parity with the dollar. In 1985 one Pound was worth only $1.06.

    Somehow the UK survived and the pound bounced back. My guess is that the weak pound will do wonders for UK tourism and it will drive down unemployment. If the next Prime Minister understands the folly of “Open Borders” and “Renewable” energy the UK may well enjoy economic growth the Eurozone will envy.

    The US claims the Chinese are deliberately weakening the Yuan to gain an unfair trading advantage so I guess the Brits will be tarred with the same brush!

  4. gallopingcamel says:

    The BREXIT vote is a huge blow to the globalists who want a single world government. They want the few to control the many so they can’t stand the idea that the many have spoken.

    Already the REMAIN folks are demanding a rerun of the referendum!

  5. p.g.sharrow says:

    I wonder if the re-do people realize that their FUD campaign was actually beginning to fail as people began to think the thing through. A re-do may well end up worse. The EU commissars are doing everything possible to prove just how arrogant and out of touch they are. WWIII is well underway and the Muslim and Communists are beginning to lose ground. The Oligarchs are losing their hidden connections to power as well.
    We live in interesting times indeed!…pg

  6. Well done Chiefio, I thought you might have included gold which has gone up a bit. I have some Newcrest shares in the Super fund but do not trade much. Some years ago I visited the La Ronde mine of Agnico-Eagle Mines in Canada’s Val d’Or area. The ore was multi metal but the mine was called a gold mine. It had a negative cost of gold with the credits of the other metals. I think it was one of the most profitable mines in the world at the time. I wonder if it is still operating. Must look it up

  7. Yes, La Ronde still going but not as profitable. Seems they maybe going into higher grade. Share price has had a good climb since beginning of April. from $C47 to $C67.50. Div has been $0.08/qtr

  8. tom0mason says:

    Hopefully the Bank of England managed to jump in and sell off a little gold to pay-off more of its nation’s debt — never let a crisis go to waste…

  9. R. Shearer says:

    Currencies of course trade relative to each other, but in absolute terms of value, they are all going down.

  10. Pingback: BREXIT – The night after the morning after | Musings from the Chiefio

  11. E.M.Smith says:

    @Cementafriend:

    I’d already covered gold here:
    https://chiefio.wordpress.com/2016/06/16/gold-rising/

    As I didn’t have much to add, I didn’t cover it again. Gold is priced in $ in the charts I’ve found, so not very useful in analysis of £ value. I did look for a Gold-in-Pounds chart as a currency cross of £ to gold, but didn’t find one.

    But yes, despite my personal dislike of gold as a trade, it has been the trade for a couple of months. (Which also means it is likely to thin out in the next month… unless the EU continues to be remarkably stupid and pissy…)

    @TomOMason:

    They are more likely to be buying £ with € and $US. Trying to stabilize the £

    @R. Shearer:

    IIRC, it was Pascal who said, roughly “All paper currencies return to their inherent value eventually; which is zero.”

    That is why in about 1960 I made my personal inflation gauge set. A first class US Postage stamp was 3 ¢ changing to 5 ¢ (that triggered me to do this as it was causing a row in the town), a loaf of bread was a dime, gasoline was 25 ¢ / gallon, etc. All of them are now roughly 10 x that. 95% of the “Gold backed Dollar” value has evaporated in a bit over 50 years.

    I did this as the USA exited the gold standard (raised the price from $35 to $45) and when our coins still had silver in them (but it was being reduced). Prior to that, prices had been largely stable (but with swings as the USSR manipulated huge gold sales).

    BTW, in the family restaurant, a rib steak dinner was $2.85 after we raised it. I remember as I had to help assemble all the new menus that Mum typed up… Now that meal runs about $28 in local restaurants… The matinee theatre tickets for kids went up from a quarter to 35 ¢ where now they run between $4 and $7 so movies have inflated more, or my old farm town was cheap. Watch old B&W movies. They often have prices posted in the background at grocery stores… it is a built in Inflation Index ;-)

    So “strong Dollar” is highly relative….

    Oh, and one other nice inherent inflation index IS the £ as it is a Pound Of Stirling Silver. Stirling is a particular alloy with 92.5% silver in it. So take the market price of silver, multiply by 12 ounces per Troy pound, then by 0.925 to give the present value of a £ Stirling…

    http://www.monex.com/liveprices/

    has silver at $17.80 / ounce, roughly. (So the US Silver Dollar ought to be about $15 IIRC the ratios) and a £ Stirling ought to be 17.80 x 12 x 0.985 = $210 now convert to present pounds at about £1.38 / $US for about 152.5 current pounds / £ Stirling.

    BTW, the current policy of substantially every central bank in the world is that 2% or so inflation is best so that’s their target. The necessary result of this is that the real value of the currency MUST be halved every 39 years. (IMHO, it happens much much quicker…) based on my personal inflation gauge we’ve had 2 x 2 x 2 x 2 = 16 and 1 / 16 = 0.0625 so at least 4 “halvings” of the dollar in 50 years. By the rule of 78s, that makes it (given a 1/2 every 12.5 years) 78/12.5 = 6.24% real long term inflation rate. (Some of that from the astoundingly high Johnson to Carter Years) The point being that a 2% target is often exceeded…

    But I digress ;-)

    Can you tell that currency and inflation or two of my favorite topics? Never get an economist talking about money… ;-)

  12. A C Osborn says:

    Chefio, you missed out another reason why Germany & France should take a much bigger hit than the UK.
    Upon Exit they will have to make up the shortfall of around £10Billion per year that the UK contributes to their finances at the the same time as the EU Budget needs a further £2.4Billion from us now to try and balance it’s books re housing 1,000,000 Economic Immigrants.
    Next Years the EU Budget is going to be even bigger, over a Trillion Euros.
    On top of that they may have to try and account for balancing the books when another 5 poor countries joining the EU.

    The EU is going broke, it has massive immigration, massive unemployment and massive unrest in quite a few countries.
    I think it will implode within 3 years at this rate.

  13. Ian W says:

    The majority for Leave was actually a lot larger based on British votes, but the Remain group that included the Government and Civil service allowed non-British citizens to vote…
    Australian journalist Emma Channon has been living and working in the UK for 18 months.
    She voted — and also voted on behalf of her brother, who lived in London a few years ago and was able to vote by proxy — to remain.
    “When I woke up to the news I was in complete shock. I just didn’t think it would be this result,” she said.

    I have a feeling that it is these non-British that are pushing up the 3 million numbers on the petition for another referendum.

  14. Larry Ledwick says:

    If I understand the purpose/function of the shadow cabinet in Britain’s form of government, it looks like the opposition is getting a major overhaul as a result of Brexit.

    http://www.huffingtonpost.co.uk/entry/jeremy-corbyn-facing-mass-resignations-shadow-cabinet-brexit-civil-war-hilary-benn-heidi-alexander_uk_576f82e7e4b0232d331e1add

  15. E.M.Smith says:

    Bloomberg showing $/£ down 1.x% and off the open bottom while €/¥ is down 6% IIRC closer to 1.6% see below (it went by fast). So a bit down, but reversed for the £. The € down harder and future less clear.

    I suspect by the time I can trade in PDT zone, it will be flat to rising for £ and I’ll have no trade. Part of why I don’t trade currencies… I’m last on the timezone list… I may still have a € trade. We’ll see.

    (Currencies trade 24 x 7 except for a Sunday shutdown… that ends first in Asia…)

    UPDATE: Euro down about equal to £ at
    http://finance.yahoo.com/currency-investing

    so I presume that Bloomberg report was 1.6 and I miss heard it.

    So both currencies likely headed to normal soon.

  16. E.M.Smith says:

    OK, I’m officially confused. Bloomberg TV is reporting 9% down £ $ and 6% type numbers on €, yet Yahoo has very different numbers. I’m going fishing for more sources.

  17. E.M.Smith says:

    Looks like Bloomberg is spinning.

    http://forex.tradingcharts.com/chart/Pound%20Sterling%20(British%20Pound)_US%20Dollar.html?chartpair=Pound%2520Sterling%2520%28British%2520Pound%29_US%2520Dollar&ctype=b&movAvg1=&movAvg2=&tz=GMT&per=1h&sub=Save

    confirms big drop last week, now a bounce at the bottom to not much down.

    Bloomberg is measuring from sometime last week, not from market close or open, IMHO.
    Bad Bloomberg…

    Ok, what I expected is what is happening. A dead cat bounce at the bottom, and not much else.

  18. E.M.Smith says:

    Hmmmm the 5 min chart of $£ is essentially flat from the open, while $€ is wobbling down slowly…
    http://forex.tradingcharts.com/chart/Euro_US%20Dollar.html

  19. Larry Ledwick says:

    The calculated total loss in equities following Brexit is pegged at $2.08 Trillion Dollars. Surpassing 1987 and 2008 crashes. This is partially due to the larger market value in the more recent markets but still a bundle of (pretend) money.

    https://ca.news.yahoo.com/post-brexit-global-equity-loss-over-2-trillion-204154844–finance.html

  20. gallopingcamel says:

    The world should be trying to become more like the USA given that our founders had the quaint idea that the government exists to serve the people, yet I see little sign of that except in countries that were recently part of the Comecon bloc:
    http://www.klaus.cz/clanky/3178

    Sadly we are giving up our freedoms one by one regardless of which party is in power. The relentless malignancy of oligarchy is well advanced and now the tendency is towards the people existing to serve the government as in most countries.

    Why do I think this? There are countless examples but here are some that relate to K-12 education. A bureaucrat drawing lines on a map dictates which school my child will attend. Federal bureaucrats with their “Common Core” dictate the curriculum at each school so even if I could choose which school my child attends it would not matter. When citizens are coerced in this way you have tyranny. Today it is a soft tyranny but we are headed down a slippery slope that will end in the hard tyranny that is all too common around the world. When uniformity is imposed from above creativity dies and it is creativity that leads to greatness. Short of rebellion can anything be done? The recent BREXIT vote gives me some hope for the UK but now they need to get off their backsides and WORK.

    What happens on November 8 in the USA has the potential to increase the centralization of power (statism and oligarchy) or to reverse course by returning powers to the local community and to the people. I will fight for the latter outcome no matter how hopeless the cause may seem.

  21. gallopingcamel says:

    Just in case you have not seen this here is BREXIT the movie:

  22. Another Ian says:

    E.M.

    “He refused to collect economic statistics to avoid officials meddling in the economy.”

    Have you heard of this bloke?

    “Hugh
    June 27, 2016 at 4:34 pm · Reply

    Excellent point, Jo.

    But a pity the map, due to scale, can’t include one of the truly glorious achievements of the British Empire: Hong Kong – perhaps the greatest conscious experiment in capitalism in the whole of human history to date.

    Check out the comments at Wikipedia on Sir John Cowperthwaite, its phenomenally successful Finance Secretary from 1961 to 1971:

    “He returned to Hong Kong in 1945 and continued to rise through the ranks. He was asked to find ways in which the government could boost post-war economic outlook but found the economy was recovering swiftly without any government intervention. He took the lesson to heart and positive non-interventionism became the focus of his economic policy as Financial Secretary.

    [… and here’s my favourite…]

    “He refused to collect economic statistics to avoid officials meddling in the economy.”

    Brilliant! Greatest bureaucrat ever, perhaps?

    Were the European Union governing bodies populated with Cowperthwaite-type bureaucrats, there might have been a reason for staying in.

    I think monkeys might type out Bibles more frequently.”

    From comments at

    http://joannenova.com.au/2016/06/eu-panic-yells-racism-isolationism-at-people-who-held-the-largest-global-empire/#comments

  23. E.M.Smith says:

    @Another Ian:

    Yes, he is one of my heroes!

    I did find it a bit rich calling BrExiters xenophobic and racist for wanting to turn their backs on a white European collective and embrace the rest of world full of blacks, browns, yellows, and reds of all cultures…

  24. Adrian Camp says:

    Xenophobia? Fear of the strange. What we need is a posh Greek word for rejection of the familiar.

  25. tom0mason says:

    Adrian Camp,
    From the online Collins English Dictionary —

    xeno-
    combining form
    1. indicating something strange, different, or foreign: xenogamy

    -phobe
    combining form
    1. indicating a person or thing that fears or hates: Germanophobe, xenophobe

    I believe xenophobia as used above is in the context of ‘hatred of the foreign’.

  26. Adrian Camp says:

    Strange means foreign. In this context it doesn’t mean weird or peculiar. In French it is the same word Etrange = foreign.

  27. LG says:

    From ZEROHEDGE:

    “If anyone needs another confirmation that the European Union is fundamentally the most anti-democratic entity currently in existence, then the following statement by The President of European Parliament Martin Schultz should put all confusion to rest.”
    “Martin Schulz: “The British have violated the rules. It is not the EU philosophy that the crowd can decide its fate”.

    Schulz: “The British have violated the rules. It is not the #EU philosophy that the crowd can decide its fate”. #TBC https://t.co/z0mujO09eG

  28. E.M.Smith says:

    He forgets that a person who is his own sovereign makes his own rules…

  29. LG says:

    Italy eyes €40bn bank rescue as first Brexit domino falls

    “This is the moment of truth we have all been waiting for a long time. We just didn’t know it would be Brexit that set the elephant loose,” said a top Italian banker.

    The share price of banks crashed for a second trading day, with Intesa Sanpaolo off 12.5pc, and falls of 12pc for Banka MPS, 10.4pc for Mediobana, and 8pc for Unicredit. These lenders have lost a third of their value since Britain’s referendum.

    “When Britain sneezes, Italy catches a cold. It is the weakest link in the European chain,” said Lorenzo Codogno, former director-general of the Italian treasury and now at LC Macro Advisors.

    The country is the first serious casualty of Brexit contagion and a reminder that the economic destinies of Britain and the rest of Europe are intimately entwined. Morgan Stanley warned in a new report that eurozone GDP would contract by almost as much as British GDP in a “high stress scenario”.

  30. E.M.Smith says:

    OK, on the 6 month daily chart, SPY is back at the SMA stack from below in a rounding top context. That’s the end of the ‘swing trade’ on Brexit.

  31. Pingback: Swinging EU, Trending SPY, Trading Days | Musings from the Chiefio

Anything to say?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s