June 27th 2016: Political Uncertainty Sparks Follow On Selling

• After a historic day on Friday, world markets are bracing themselves for a fresh round of volatility. Following the Brexit result, world markets are having to content with a Tory leadership contest, the prospect of Scotland leaving the UK and a Labour party in complete disarray. This alone would be enough for the pound to wobble, but we still have the small task of sorting the UK’s divorce settlement from the EU. The Chancellor George Osborne made a statement for the media at 07.15 this morning, but his words are likely to have limited impact given the apocalyptic warnings he gave about Brexit before the referendum. His words appear to have had some impact though as the pound rallied slightly after gapping down on Monday’s open. He needs to provide greater reassurances if the pound is to recover the yawning gaps lower seen on the GBP/USD and GBP/JPY as well as the EUR/GBP’s opening jump.

• Elsewhere, the global risk-off selling seen on Friday is continuing, but all major risk barometers are still yet to breach Friday’s extremes. The US dollar index is on the rise again this morning, but still below Friday’s high, while the USD/JPY is lower, but still well above the extreme point from last week.

• Elsewhere, the euro is out-performing the pound but has not avoided the contagion, with follow-on selling for the EUR/USD.

• Elsewhere, the AUD/USD is slipping lower, reflecting the global shockwaves experienced by Brexit.

Coming up today: 

• Any planned economic items will play second fiddle to breaking Brexit news today, but the main item to notice is ECB president Draghi speaking at 18.30.

Trade Idea: 

• Gold is performing well as expected, though the retreat from the highs is notable. The coming months and years are going to have numerous twists and turns, but for now, it may be enough for markets that we have not seen a ‘Lehman’ moment with bank runs and extreme flights to quality. The Brexit reaction has been extreme, but we have not been pushed to the brink as we were in 2008.

• This may be enough for gold to ease from the highs in the short term and a good way to play this is a LOWER trade predicting that gold will close below $1300 in 10 days for a potential return of 143%.

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