With just 10 days left till the citizens of the United Kingdom go to the polls and vote whether or not they will remain part of the European Union, tension throughout the Markets is at extreme levels.
Asian Markets opened the week with heavy losses, as Investors went into full risk-off mode and flocked to safe haven assets like the yen, Swiss franc and gold, leaving the markets bleeding while trying to assess the risks in the upcoming week.
A vote to leave in the upcoming referendum will be devastating for the entire Euro zone, and will reshape the entire geo-political eco system, while setting a dangerous precedent for the rest of the European nations.
The current state of uncertainty is the Market’s worst enemy and is the main catalyst in the volatility we are witnessing right now. Taking all this into mind, I still think there are some great opportunities to take advantage of this turmoil in order to collect on some huge movement leading up and after the vote.
It is our job right now as Traders, to block out all the background noise and really think about the most likely outcome, and how it will affect the assets we will be focusing on.
The bottom line is this, I still think that it will be very unlikely to see the UK vote to leave the EU, for a number of reasons:
1) No better alternative- I have not heard the “leave” side come up with a plan to what happens after.
2) Global Leaders- there is not one of the major heads of state that is for this move.
3) Financial Interest- In the event of a “Brexit”, hundreds of millions will be lost by international conglomerate’s, they will not just let it happen.
4) Scare tactics- As the day approaches more and more campaigns will be launched highlighting the hazardous implication of a “Brexit”
5) Polls- although the current polls are extremely close, with even a small lead for the “Leave” campaign, it has been shown that polls conducted in the final weeks are not very accurate, as we saw last year during the Scottish referendum.
Once you take all these factors into consideration, I think you can come to no other conclusion except the UK finally remaining in the Euro Zone and the markets breathing a huge sigh of relief to close the month. These are the two trades I feel have the highest potential.
The pound has fallen to three year lows against the yen, and was trading under 150 briefly this morning, while I still think we might experience some further downside, these sharp losses will be reversed in a hurry, once market sentiment shifts a little and off course the UK decides to stay as part of the EU.
Germany has a huge stake in the UK remaining in the EU, and the recent uncertainty has driven the DAX down close to 600 points in the last 10 days. The only thing holding the DAX back is the outcome of the referendum, so you can expect it to reach yearly highs in the days after the vote.
