I tweeted earlier and advised that now might be a good time to reduce exposure to riskier assets such as stocks and seek haven elsewhere.

The looming EU referendum that is expected to take place next Thursday 23 June in the UK has already contributed to some steep falls in European shares and the British pound. It now looks like that volatility could spill over into US markets.

(If you don’t already know, Britain is voting to either remain or stay part of the European Union. Many economists have suggested that a leave vote could have serious economic consequences for the UK and abroad.)

Janet Yellen Remarks

Until now I was not too concerned about the BREXIT vote as I did not think it would have too much of an effect on US shares. However, I feel there are a number of factors at play which could cause some volatility going into next week:

First of all, US stocks are still near their highs and the VIX is still at lowish levels which means there is plenty of scope for an increase in volatility.

Second, recent poll results from the UK suggest that the leave campaign is getting the upper hand. Bookmakers have slashed their odds on the event making it almost a 50/50 chance. As this continues the scope for volatility increases.

Third, the remarks from Janet Yellen in yesterday’s FOMC meeting suggest that there are real dangers ahead to the global economy if the UK chooses to leave the EU. Yellen’s remarks may be interpreted by investors as reason for caution.

Fourth, by keeping rates on hold and by acting in a dovish manner, the Federal Reserve has indicated that the US economy is not as strong as the market may believe it is. This suggests that the recent upward move in stocks may be premature.

Fifth, in my mind most important, price action in the S&P turned extremely bearish after Janet Yellen’s comments last night. The market sold off heavily into the close overturning the day’s previous gains and today futures are continuing to fall.

s&p 500 brexit fears

Stocks sold off into the close yesterday

Overall, stock markets hate uncertainty and the EU referendum is an event which no-one is certain of yet. The reaction after yesterday’s FOMC meeting suggests that the market is quite fearful of this event and that could lead to a flight into safety running into next week.

Investors looking for safety may wish to look at $VXX, gold, bonds, options, safe haven currencies or just move to cash. There is no need to panic yet, but markets can move quickly when investors are spooked.

VXX hedge volatility

Ultimately this could all blow over but it seems sensible to take some precautions at this stage and there is little downside to doing so.

There are many options available but my preference is to own some $VXX at this time as a hedge. I have bought some and may add more depending on future price action.

 


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2 opinions

    • David

    • June 19, 2016

    • 7:35 pm

    • Reply

    Markets have been moving in lock-step. Odds of Brexit increases and volatility increases. Gold looks overbought imo

    • Agreed. A lot will depend on the campaigning next week but I just can’t see stocks going anywhere with this event on the horizon.

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