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FTSE 100: Rallying Sharply as ‘Brexit’ Fears Subside

FTSE 100: Rallying Sharply as ‘Brexit’ Fears Subside

2016-06-20 09:15:00
Paul Robinson, Strategist

What’s inside:

  • Markets obviously not operating in a “normal” time
  • This week adds a layer of complexity to trading than usual, and must be respected
  • Risk appears skewed to the down-side in terms of the magnitude of rise or fall on outcome

As we stated on Friday, and obviously so, but the upcoming vote creates a big wrinkle in the overall picture and game-plan for trading the FTSE. Heading into the vote and results on Thursday/Friday, UK markets and its currency are likely to continue to exhibit erratic price behavior as headlines flow (as we are seeing today with fears of a ‘Brexit’ receding after another round of weekend polls) and market participants position themselves accordingly.

A reduction in liquidity will add to risks of exasperating short-term gyrations, which all-in-all may make our generally trustworthy charts less reliable. This will have a ripple effect on other financial markets as well.

We’re already starting the week off with some pretty powerful price swings to the upside in the FTSE and the pound (both higher by over 2% at this time), which as a result is causing some sizable moves elsewhere.

If we were dealing with “normal” times, then we would center our attention on the bearish head-and-shoulders formation and go from there, but we will have to put that on the back burner until after the vote. The H&S formation, by the way, is now coming under fire as the FTSE is trading well above the neckline.

What will happen? Obviously, that depends on whether the UK will stay or go. The risk appears skewed to the down-side at this time, with a bigger drop anticipated on a ‘leave’ vote than a large rise on a ‘stay’ vote. It wouldn’t be unsurprising to see a 5% decline, but it would be surprising to see investors react so happily to snatch up stocks to the tune of 5%. Generally, fear breeds larger moves than does euphoria.

Adding to that: The positioning of the market will also matter and then the subsequent outcome. For example, if the FTSE were to continue the recent strength or maintain a solid bid into the vote ('Bremain' confidence rising), then a ‘stay’ outcome would likely have less impact than a ‘leave’ simply because the market has effectively priced the former in, no real element of surprise. Conversely, if the market were to suddenly fall apart into the vote ('Brexit' gaining traction), or have not bounced at all recently, and sell off to make fresh multi-month lows, then a ‘leave’ outcome would have a diminished impact, while ‘stay’ would be the surprising outcome and the market would react accordingly.

With all this said, we will reserve making firm judgments until after we have seen the initial reaction to the outcome of the vote.

FTSE (UK100) Daily

FTSE 100: Rallying Sharply as ‘Brexit’ Fears Subside

You can follow Paul on Twitter at @PaulRobinsonFX, and/or email him directly at instructor@dailyfx.com.

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