No idea how to trade Brexit, and simply following the momentum-driven crowd which in turn is trading on hopes of central bank intervention? Don’t worry, you are not alone. As Citi admits “No one knows how to price the Brexit scenario going forward.”
Here is Citi’s William Lee “clarifying” the prevailing market cluelessness:
The UK vote to leave the EU surprised almost everyone, especially market participants. It left unprecedented uncertainty about future economic and political relations between the UK and the EU.
From the US perspective, the market selloff has been large but orderly. Indeed, global markets began to stabilize today, after two days of probing for equilibrium prices and their implied trajectories going forward.
Whereas spot prices have stabilized, there appears to be little conviction among traders and other financial market participants about the course of exchange rates and asset prices going forward.
- Market sentiment remains tentative; small catalysts can be very disruptive.
- A common trading floor comment is: “No one knows how to price the Brexit scenario going forward.”
Our past research has shown that uncertainty is pernicious: it can induce a significant drag on economic growth. The Brexit vote amplifies uncertainty with unprecedented economic and political considerations whose impact on global economic activity is difficult to discern. Fed policy remains sensitive to market sentiment, and the FOMC likely would not do anything that could be disruptive.
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