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Strategy Video: Market Is Making Dangerous Brexit Bets

Strategy Video: Market Is Making Dangerous Brexit Bets

2016-06-23 02:22:00
John Kicklighter, Chief Strategist

Talking Points:

  • The Brexit opinion polls have oscillated from day-to-day but they have held generally close to 50-50
  • Between the two scenarios for this imposing event risk, a 'Leave' outcome would carry far more severe consequences
  • Despite the polls and scenario imbalance; investors have position heavily in 'Remain', long Pound and long risk

See how retail traders are positioning in the majors using SSI readings on DailyFX's sentiment page.

There is always a balance in markets to decide whether the imposition of risk or the potential for returns demands greater focus. Heading into an event like the Brexit, there should be no question that the equilibrium is skewed sharply towards risk. And yet, positioning shows little of the caution we would expect given the growing threat of this coming session's critical vote. Such a speculative stretch threatens to throw fuel on the fire should the UK decide to withdrawal from the European Union when the Referendum ballot are counted.

Looking at the probabilities from the perspective of the multiple opinion polls that have been run on a daily basis, the outcome between 'Remain' and 'Leave' are neck and neck. In contrast, the markets are far from this concerning balance. Whether backing out Sterling options or referring to betting stats, we see that market participants are heavily favoring an outcome where the UK keeps the status quo with its EU membership. That is troubling because now the surprise of a disruptive 'Leave' will generate even more panic and market volatility.

If we were to remove the weights speculation assign to the Referendum outcome, the 'Remain' outcome would certainly generate considerable market movement as risk premium evaporates. In contrast, the Brexit scenario would be explosive for the UK, European and global markets. The already on-edge speculative rank, trouble with the world's reserve currency options and the definitive protectionist move would shake the foundations of the financial system. The scale of risks and presumption of outcome create not just a dangerous complacency, they present a ready accelerant for serious market problems. We weigh these scenario risks in today's Strategy Video.

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