Last week the market was firmly betting on the victory of “Remain”. A cynical bet triggered by the tragic assassination, last Thursday, of the British parliamentarian and leader of the pro-EU front, Jo Cox. A fact that many thought could push the electorate to vote for the status quo. From the assassination day to when the British public voted, the pound gained around the 6% on the US Dollar. Unfortunately, who made this bet, now has to deal with a colossal loss. With the victory of the “Leave”, the GBP/USD exchange rate this morning has collapsed with a decline of over the 10%. Its lowest level in 31 years.
From “Risk On” To “Risk Off.”
Last month the markets were driven alternatively by periods of greater risk appetite (such as the previous week) and periods with a maximum aversion to it, strictly following the latest available exit polls. When the orientation was favourable to the “Remain”, all riskier asset classes had benefited and on the opposite, due to their inverse correlation, lost the safe havens. With the victory of Brexit, this script is dramatically reversed.
The Rush For Haven Assets
The more predictable consequence on the markets of the Brexit is a race to the safe havens. Those asset classes considered more robust and therefore highly popular when the volatility of the stock exchanges is at the maximum. For example, gold, which this morning reported a violent blaze upward or also of the 10yr German government bond. In recent weeks, the yield on the 10yr Bund has fallen below zero for the first time, and it is highly predictable that it will return below this threshold (today the old minimum of -0.2% was attained). The most secure, and therefore most safe currencies this morning and the next few days, will be the US dollar and the Japanese yen, hence, on the day of the announcement, were clearly flying. A remarkable point is how the investors, even in the day of Brexit, have firmly focused on Gilt, most likely due to the rising expectations of an intervention by the Bank of England, which could result in a new quantitative easing plan.
The Escape From Risky Assets
Despite the quantitative easing of the ECB, the Leave’s victory exposes the government bonds of the Eurozone’s peripheral countries to heavy shocks. Although Great Britain is not part of the Eurozone, its exit represents a powerful fuel for the fears about possible centrifugal forces. In other words, it can be perceived how the spectre of the Europe’s “Balkanisation”, a notion that prevents investors from sleeping each night peacefully, is stronger than ever.
Italian Banks Exposed To Speculation
Even if exposed to the fire of speculation, the BoT and the BTp can still count on the shield provided by the quantitative easing of the ECB. A guard that the Italian banks do not have and that has pushed them, in recent months, to become the preferred target of those who want to speculate against Italy. Last week, with the confidence of the markets about the upkeep of the status quo, the banking sector index (FTSE Italia Banche) gained 20%. But it is logical to expect that this rally will soon just be a memory. The markets at this point are waiting for expansionary measures by central banks, interventions that will bring new liquidity, resulting in a further reduction in yields and interest rates. A scenario that is likely to put a strain on the balance sheets of banks, which are already suffering this period of very low, if not negative, rates.