Brexit is here — what to expect when Europe opens
- Brexit victory all but confirmed as final results trickle through
- Stoxx 50 likely to be down by 9-11%
- Selloff likely to create some big opportunities in equities
The assertion of Britishness could provide opportunities amid the selloff frenzy. Photo: iStock
By Peter Garnry
Brexit is here, it’s real and the implications short and long term are dramatic. For today, this is what to expect in European equity markets…
STOXX 50 down around 9-11% depending on the opening impact in the banks (Banco Santander, BBVA, UniCredit, Deutsche Bank…). We expect over financials, consumer discretionary (cyclicals), industrials to lead the losses in early trading. Below is our real-time tracker on key markets…
This is the picture from Asia as we speak on sector level…
Panic is obviously a theme in early minutes, but we agree in the Saxo Bank strategy team that policy makers will construct a huge policy response which means that the initial reaction in equity markets creates huge opportunities. Everything will be sold off, so the strategy is to find those stocks that may turn around. Here are our candidates…
• Buy Novo Nordisk (NOVOb:xcse) below 330 adding, should it break down to 320. Its demand profile does not change based on this event.
• Buy the breakout in Randgold Ressource (RRS:xlon) as the stock is expected to open above 7,000 based on price reaction in Asia for gold miners. Given new uncertainty in Europe, gold will have to find a new equilibrium much higher from here. As a result gold will likely continue to trend higher from here simply because pension firms and other big institutional investors will upgrade their portfolio weights in the metal. Alternatively clients could go for the GDX:xlon (gold ETF) in London.
• Buy Barclays (BARC:xlon) if price goes to 140 — 50% of business is still in UK (retail banking and cars business) which is solid. Trading Barclays is high risk so will have to be managed carefully intraday.
• Buy Daimler (DAI:xetr) if price goes to 55 as initial reaction is spillover from Japanese and South Korean automakers (down around 8%), but EUR is down trade-weighted so German automakers should be offset in export markets.
• Sell Burberry (BRBY:xlon) as the company gets majority of sales outside UK. GBP trade-weighted is down around 8% and thus initial reaction will be very bullish for Burberry, but underlying business is weak and Brexit is negative for consumption. If share price goes to 1300 it should be sold.
These are hedge ratios between key indices in case clients want to hedging etc. (based on 1-year of daily observations on the downside)
DAX / FTSE 1.2
STOXX 50 / DAX 0.9
STOXX 50 / FTSE 100 1.2
FTSE MIB / FTSE 100 1.2
Ratios basically shows how highly correlated European equity markets are…
— Edited by Martin O'Rourke
Peter Garnry is head of equities strategy at Saxo Bank