Brexit Bloodbath Has Markets Betting on Lasting Volatility Risk

2016-06-24 09:26:00 Ilya Spivak

Talking Points

Financial markets come undone as UK opts for “Brexit”
Record-setting volatility recorded across asset classes
Markets envision drastic volatility risk in months ahead

Financial markets were caught wrong-footed as the UK opted for “Brexit”, with voters deciding by a 51.9 to 48.1 percent margin to take the UK out of the European Union. FX options suggested traders priced in a mere 19.6 percent probability of what has now transpired on the eve of the momentous referendum.

Short-term projections hinted at what may transpire in a Brexit scenario last week as polling data narrowly favored a victory for the Leave campaign, with one-week GBP/USD implied volatility readings surging to the highest level on record. Qualitatively speaking, this foreshadowed what occurred today.

The British Pound traded down nearly 8 percent against the US Dollar ahead of the opening bell in Europe, the largest one-day drop on record. Aggressive volatility would not be limited to Sterling however: the anti-risk US Dollar and Japanese Yen saw their largest moves since the 2008-09 financial crisis.

The carnage would not be contained within the FX space. Gold prices also saw their largest daily gain since the Great Recession as shocked investors scrambled for refuge. Benchmark measures of market mood also came unhinged. On the pro-risk side, S&P 500 futures dropped by the most in 10 months. On the opposite end of the spectrum, haven flows drove bonds up so sharply that the 10-year US Treasury yield fell by the most in over seven years.

The blood-letting is almost certainly just beginning. Indeed, an index of implied 3-month volatility readings for the world’s most-traded currencies jumped by more than 20 percent in the referendum's aftermath, marking the largest daily gain since at least 1998. That sends a clear message: investors beware.