A global bonds selloff has pushed yields up across the board towards post-Brexit highs while the anti-establishment wave sweeping the western world could force a 'No' vote on the Italian referendum in December.
Article / 23 June 2016 at 13:51 GMT

Rain, private polls the last Brexit question marks

Blogger / MoreLiver's Daily
  • Remain leads in the expectations, but last-minute panics possible
  • Private polls by hedge funds could affect prices even when there are no news
  • GBPUSD on way to 1.50, but could see a bump lower first
  • Weather could impact turnout, potentially swaying result
London in the rain
Rain is not ordinarily big news in Britain, but today's torrential downpours 
may have an impact on the referendum result. Photo: iStock 

By Juhani Huopainen

Will the rain hurt Remain?

Weather has provided a last-minute surprise to the Brexit referendum. Thundery showers in southeastern parts of the country are expected to provide an average month’s worth of rainfall during the voting day. The southeast and Greater London is one of the strongholds for the Remainers. It is possible, then, that the rain will decrease the voter turnout in the southeast and thus help the Leavers.

A month's worth of rainfall in one afternoon... omen or sign of the times?
 Chart: Met Office

Beware the hedge funds getting an early peek

The voting ends at 2100 GMT tonight. Yougov will publish a survey of the final voting day’s opinions at the same time. There will be no public exit polls, but the hedge fund industry are rumored to be holding exit polls to get an early indication of the result.

The results of that poll could affect markets even during times when no new data are made public. This could also mean that the eventual investor reaction to the first indicative results could be muted if markets already discount the earlier moves as hedge funds' private information. Whether the exit poll or the early results are market-moving depends on the interplay between the current expectations and the projected outcome.

The current expectations see Remain winning. This is evident from the betting markets, which show Remain winning with a 85% probability, and the financial prices: GBP and stock markets have rallied while safe-haven German bonds have been sold.

If the exit polls and early results do not suggest a clear win for Remain, investors could run for the exits until the final results are out. That could be the last opportunity to clamber aboard the Remain bandwagon.

The first results and the night

The first vote counts will come from areas that are believed to be more tilted towards Leave – thus, unless Leave is clearly ahead in the early results, projections would suggest a win for Remain.

Coupled with the illiquid nighttime session, the referendum’s special nature will make trading a nightmare. Many banks have banned stop-loss orders and increased margin requirements. There will be plenty of option-related interest to drive the markets to both defend and attack option strike levels with spot traders. Algorithmic trading is not guaranteed to react to poll results correctly. More than ever, it is important to keep one's position size small.

The morning brings the result, but no sunshine

When Friday morning comes, the problems will not have lifted. If Remain wins, a return to the status quo of a happy European family is not on the cards. It could be that the European Union will become scared of the possibility of new referendums and could be unable to reform the union or move further toward a federal union. The EU could also prove afraid to properly enforce even the rules it already has in place. 

The Spanish election next weekend could again fail to come up with a sound basis for a new government.

If by some chance Leave manages to win, there would be the added pain of negotiating for two years over how Britain would exit and what kind of relations it would have with the EU after that. 

Whatever happens, Europe never seems to win – and the game will continue.

The EU parliament in Strasbourg
Unfinished sympathy: The EU's problems with both its supporters and its critics 
do not appear set to come to an end anytime soon. Photo: iStock

GBPUSD still has room to gain on Remain

I wrote earlier that the GBP’s weakness since December 2015 has a lot to do with the Bank of England being left behind by the Federal Reserve in the rate hiking cycle. Before the Brexit-scare and when the BoE was seen to follow the Fed in lock-step, albeit with a small delay, GBPUSD was content to trade between 1.50-1.55. Now that it is obvious that the Fed will retain its lead in the hiking cycle, the “fair” value for GBPUSD is probably a bit lower, perhaps close to the 1.5-level.

Since February 2016, GBPUSD could be interpreted to have been trading in either a rising channel or  a horizontal range.  If it is viewed as a horizontal range, we’ve just seen a breakout from the range and the next stop is at 1.50. If we see this as a rising channel, the break higher from the 1.4750-level has less dramatic implications, but still provides roughly the same target at 1.50.

Daily GBPUSD chart shows the 2015 range and the rising channel-interpretation:
GBPUSD daily
Create your own charts with Saxo Trader click here to learn more.
Source: Saxo Bank

I would prefer the rising channel-interpretation. The dip in June close to 1.40 could be seen as a false breakout because of the temporary shift in the opinion polls in favor of Leave.

The five-minute chart shows the possible zigzag pattern for the night:
Source: Saxo Bank

European bank stocks have rebounded convincingly after a visit to last February’s lows – it looks like the break lower from the 2016 triangle, while scary-looking, didn’t have much power behind it.
Eurostoxx banks
Source: Saxo Bank
— Edited by Michael McKenna

Juhani Huopainen is a blogger and a macro analyst at More Liver’s Daily.
23 June
Juhani Huopainen Juhani Huopainen
Zerohedge just came out with the same notion:

That didn't take long:
23 June
Juhani Huopainen Juhani Huopainen
An update.
23 June
Juhani Huopainen Juhani Huopainen
The channel that just keeps giving. Another update.
23 June
Juhani Huopainen Juhani Huopainen
And here we go!
24 June
Juhani Huopainen Juhani Huopainen
All in all, we did see the bump lower, providing a good entry point for a long trade, followed by a move to the 1.5000-level, providing a good exit point.


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