The unwinding of what has turned out to be the biggest head fake in history has sparked huge swings in world markets overnight. Traders who ignored the polls calling for a very close vote and committed to a Remain victory found the rug ripped out from under them as results came in which ended up in a Leave victory 52% to 48% in a historic day for democracy.
Stocks around the world plunged overnight on the results but many markets have already bounced strongly off overnight lows. The FTSE for example, dove down to 5800 but has already regained the 6000 level. While a 4.6% drop in the FTSE sounds like a lot, it's a lot less than today's 7.3% drop for the Dax, 8.3% drop in the CAC and an 11.1% plunge in the IBEX ahead of Sunday's election in Spain, the EU's next big electoral challenge.
Dow futures are looking toward a 500 point decline this morning but this is less than earlier in the morning and on a percentage basis a 3.1% drop is moderate compared to action overseas. Crude oil has been hit hard overnight with WTI and Brent falling about 4.5% taking Texas back under $48.00 but above the lows set earlier in the week. This could drag on energy stocks today although in Canada this could be partly off set by the positive impact or a spike in gold on miners.
Currency markets have been at the epicentre of the trading action overnight, particularly GBP. While we are waking up to talk of a big plunge for cable it's important for traders to put the action in perspective. Just over a week ago, cable was trading near $1.4000 pricing in Brexit anticipation. It rose to near $1.5000 on specutaltion Remain would win which turned out to be wrong. Most of last night's selloff was unwinding the street's mistake. It overshot $1.3500 bottoming near $1.3230. Current trading near $1.3600 is not that far below the $1.3850 level it was at when the campaign started.
There was a clear knee-jerk flight flight back to defensive havens, but this appears to be subsiding. USD/JPY fell to 100.00 but has bounced back toward $102.00. EUR/USD was smashed down to near $1.0900 but has bounced back above $1.1000. The loonie has dropped along with the oil price sending USD/CAD back up above $1.3000.
As in the aftermath of an earthquake, we may see significant aftershocks rock the markets in the coming days but it appears the worst has passed for now. we could see another round of volatility when US exchanges open as stock and ETF traders finally get their chance to weigh in. Central banks did not intervene overnight but this morning the ECB and Bank of Japan indicated they are ready to step in if needed. Apparently the G-7 is meeting soon to discuss co-ordinated efforts.
Most importantly, Bank of England Governor Carney indicated that it has contingency plans in place to stabilize the market including £250B in financial firepower. Perhaps if he had announced this earlier some of the volatility would have been reduced. The last thing other central banks want to see is a big devaluation in the pound upsetting their own stimulus efforts, particularly since the exit process will likely take a while. Speaking on behalf of the Leave camp this morning in a move to calm uncertainty, Boris Johnson indicated that they are not looking to invoke Article 50 and start negotiations to leave immediately, giving time for planning. He also indicated on an exit the UK is not turning its back on Europe, it will still be a significant European power interacting with the other nations. He also indicated that the EU project was the right thing for a different era but times have changed and it is no longer right for the UK now.
Moving forward, there is still the potential for some volatility, uncertainty and opportunities in the markets as the UK vote signals disillusionment in the global system that has dominated the last quarter-century and a strong desire for change. We appear to be moving into a transition phase. UK PM Cameron has indicated plans to resign with Chancellor Osborne likely to follow when a new leader comes in. There also have been calls for Labour Leader Corbyn to step down, while Scottish National Party leader Sturgeon has renewed calls for a second Scottish referendum. EU leaders will be meeting in the coming days to discuss what to do next amid calls for referendums from opposition parties in other countries. And of course the US campaign is just getting started.
Breaking news, US durable goods orders fell 2.2% in May after rising 3.3% in April. So far this news is being ignored by the street in the wake of bigger developments but does give the Fed another excuse to delay raising interest rates until after the US election. The next nonfarm payrolls report may be particularly telling.