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Trading Lessons

Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast

Stock-Markets / Financial Crisis 2016 Jun 23, 2016 - 04:43 AM GMT

By: Nadeem_Walayat

Stock-Markets

The EU Referendum according to the opinion polls is too close to call as illustrated by the most recent opinion polls and resulting momentum analysis that literally puts the vote on a knife edge. However the same does not hold true for the bookmakers or financial markets that are apparently assuming that a REMAIN outcome is a done deal which is set against my forecast conclusion for Brexit, from someone who correctly called both the 2015 General Election that the pollsters got so badly wrong and the 2014 Scottish referendum.


Opinion Polls

Whilst the opinion polls momentum chart clearly shows a trend since Mid May of LEAVE gaining ground against REMAIN which by the start of June had both virtually neck and neck into the 13th of June when LEAVE started to pull strongly away from REMAIN, right up until last Thursdays horrific event that literally resulted in momentum being put into reverse gear for LEAVE that led to REMAIN taking a marginal polls lead that appears to have evaporated in the final day of campaigning to give LEAVE a marginal lead going into polling day.

So it is no wonder that most political pundits are sat on the fence, calling the referendum as being too close to call as now both sides are virtually neck and beck with marginal advantage to LEAVE with only hours until the polls open, though with the momentum in LEAVE's favour which means that LEAVE should continue to improve as people go to the polls.

Financial Markets

The British Pound has leapt higher to the top of its trading range for the year with the latest trade at 1.4683, that is indicative of a market that is apparently strongly discounting a REMAIN vote outcome as the uncertainty of the past 3 months appears to have evaporated (a regulated global investment brokerage).

Similarly UK stocks as illustrated by the FTSE have sharply bounced back in recent days from a three month low.

Whilst UK bonds have in fact been trending in the opposite direction of that implied by increasing risks of a BrExit vote which is indicative of both central bank intervention and safe haven buying, with the most recent rise in the 10 year bond yield to 1.31 indicative of flows back into the stock market and other risk assets. Overall the UK bond market is showing none of the signs of what operation fear has been warning of i.e. for a sharp rise in interest rates, which even if BrExit happens clearly does not look probable.

So with the polls so evenly balanced why are stocks, bonds and sterling so relaxed about the referendum outcome that could yet see BrExit happen? Exactly what message are the markets sending us ?

Is it that the opinion polls are once more badly wrong and that instead REMAIN is heading for a sizeable victory or is it that the outcome of the vote does not really matter as much of the threats from Brussels and promised withdrawal form the single market will soon evaporate as the UK more or less just ends up tweaking its membership of the EU rather than exiting the EU. THAT IS what the markets are saying is going to happen!

Book Maker Odds

The bookmakers are just as the markets strongly discounting a REMAIN outcome, where for instance Betfair's odds in favour of REMAIN have now greatly improved from 1.6 a week ago to 1.29 today. Whilst LEAVES odds have widened from 2.60 a week ago to 4.3 today, again reversing earlier momentum in favour of LEAVE that now gives Brexit an implied probability of just 20% and thus conversely REMAIN on an implied probability of 80%, which in trading markets terms is VERY HIGH, an 80% probability for a particular outcome is VERY HIGH. So where the bookmakers are concerned BrExit is VERY unlikely.

EU Referendum Forecast

And finally my forecast conclusion on the basis of the sum of year long analysis including over 120 articles and over a dozen videos concluded that the most probable outcome was likely to be LEAVE winning on 51.3% against REMAIN on 48.7%.

EU Referendum Forecast - 12th June 16

UK 2016 EU Referendum Forecast

The average of the last 6 polls has REMAIN in the lead on 51% against LEAVE on 49% (11th June). However the REMAIN lead is set against the big picture of momentum being on the side of LEAVE that appears to be ACCELERATING. For instance 3 weeks ago REMAIN were ahead on 54% to 46%, which was typical of the REMAINs lead since the start of 2016 that entered the new year on 56% against 44%.

However, if as I expect that the LEAVE campaign momentum can be maintained for the remaining 11 days then LEAVE should be able to just achieve a tight referendum victory. Therefore the sum of my year long analysis comprising well over 120 articles and over a dozen videos then my forecast conclusion is for a LEAVE victory of 51.3% to 48.7%, a winning margin of less than 2.7%.

But to achieve this victory all Brexiters need to further intensify their efforts because as things stand today (12th June) REMAIN is probably just marginally ahead with less than 1% between REMAIN and LEAVE on an estimated 50.4% REMAIN against 49.6% LEAVE, so there is still a lot of hard work to be done in these last few days do achieve a LEAVE Brexit outcome.

Trading BrExit

In terms of trading the markets, and despite the markets apparently no longer treating Brexit consequences seriously, a case of whatever happens it will be business as usual, nevertheless a BrExit outcome will result in sharp downwards swings for sterling and FTSE, even if the moves prove temporary as the politicians and central bank officials are likely to respond to both with market soothing words of nothing has really changed and of course the Bank of England releasing tens of billions of more market liquidity support.

So taking account of my forecast conclusion for a BrExit outcome then the current stock and forex markets are offering the potential for good risk vs reward short-term trades. However remember that volatility will be HIGH which means that even if one gets the direction right then if the stops are not set wide enough then traders can get stopped out of positions BEFORE the profit making moves take place. Or that of REMAIN does win then the market may gap well beyond ones stops resulting in larger losses than the potential that had been allowed for.

And so also are the bookmakers giving what appear to be good risk vs rewards odds of 4.3 to 1.

Friday definitely looks set to be a very interesting trading day, your analyst hoping he does not get stopped out of short side profit making moves!

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2016 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

JustAnotherExBanker
23 Jun 16, 16:23
Thanks, Nadeem - I've just placed a small bet

Nadeem, I've been following you blog since 2008 and in that time you've been right about most things, especially the most important issues.

At lunchtime today, Betfair were offering 7.9 to 1 odds against Brexit. That seems crazy with opinion polls being neck-and-neck, plus your analysis predicting a win for Leave. Therefore, I staked £30. If it weren't for the wife, I'd have bet a lot more!

Cheers, Robbie.


Nadeem_Walayat
23 Jun 16, 17:31
Trading Brexit

Good luck, I could not reist either and put a little more on ;)

Though where markets are concerned, even if Brexit does not happen, stocks and sterling could still plunge, so it's not black and white, it's a case of managing volatility.

Best

NW


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