Despite the Brexit referendum being a non-binding agreement that won with 52% of the vote, the entire world is on the verge of hysteria. If you believe everything you see in the media you truly would believe the world is ending which brings me to this point:
And yet we see as a direct result of this vote what the weakest links in the global economy are – European banks and Japan. Spanish and Italian banks sold off by more than 20%. USDJPY went from 106 – 100 in a matter of hours which chopped off another 6% from the Nikkei. Now these trends were obvious before the Brexit vote even took place.
“Similar to the predictable no freeze deal at the OPEC meeting in Doha, BREMAIN is the most likely outcome, but the oil market still rallied because it was already headed in that direction regardless of a meaningless gesture. Although a BREXIT would certainly be a disaster for EU banks, I would argue that a BREMAIN would offer no real support to EU banks.”
So now that the unthinkable has happened, what happens next? From a political standpoint I haven’t a clue, and neither does anyone else it seems. The Brexit camp made the potentially fatal mistake of not having a plan. It appears they didn’t even expect to win. Looking back at history, it was the Federalists who had a plan that was written out that allowed them to push forward and “defeat” the anti-federalists.
This political uncertainty is abhorrent to markets which hate vacuums and will look to fill the void any way it can which could potentially force the politicians’ hands. I look at Brexit as a catalyst that accelerates the trends that were already in place. In my previous now somewhat prescient post subtitled “Something Big Is Coming” I pointed out that a lot of scary indicators were flashing red:
“Global bond yields continue to make record lows at a seemingly record pace. Bitcoin rockets through the clouds hitting 2.5 year highs. European banks plumbing new post crisis lows. The Chinese Yuan hits new multi year lows reinforcing this massive deflationary push. Gold rises above 1300 again. USDJPY plunges into 103 territory. The Nikkei plunges 3% for the second time in a week. And now the Fed has balked at hiking rates (again) and the market is starting to lose confidence in the most powerful central bank.”
Now all those indicators have gone from red to “plaid”.
As I mentioned above the Yen ripped higher and European banks sold off. But perhaps what is most troubling is that gold and the dollar rose together, with gold breaking to a new 2 year high. Sovereign bond yields continue to plummet with the whole Japanese curve crashing with its rising currency, this sort of move scares the shit out of me but perhaps its even scarier to the BOJ who will most likely be forced into action before USDJPY touches 100. As of writing this article, US 10 yr now yields 1.488% a new multi year low.
On top of all this madness, China, who has never needed global stability more than it does now as it “transitions” its economy, has been steadily devaluing the Yuan. China’s Premier Li Keqiang has gone so far as to warn of a “butterfly effect” that would arise from the Brexit vote.
The post crisis global economy was already a fragile creature, giving it an unexpected Brexit shock will reverberate through it, weakening and destabilizing it even further so when the next shock comes, and I do believe there will be another, that it will be much bigger than a non binding vote for a nation to leave a poorly run supranational union.