Market In-Review: Markets Go Into Risk-Averse Trauma On Brexit Vote

■ U.K. voting to leave the E.U. spurs flight-to-safety

■ Stock markets dip more than 10% on the news

■ GBP/EUR down more than 8% in Friday’s intraday session

■ GBP/USD hits 30 year low

■ Central banks announce willingness to provide liquidity, aiding to sooth concerns

■ Central bank backing aids bring some stability to markets, but Monday is another day

One interpretation of the efficient market hypothesis argues that a capital market can be considered efficient if all public information available is priced into that market. According to this interpretation, trading the market on information that’s publicly available, for example, cannot lead to gains.

Reaction to the forming referendum results, however, engulfed of an overwhelming amount of new info for for markets to cope with. Investor reaction, instead, consisted mainly of an all-out flight to safety, which opened many new opportunities. It began with East Asia’s stock markets, still not fully assessing the consequences of the referendum, and the Hang Seng tumbling through the first half of its daily session, hitting as much as -5.8% intraday loss. Declines with somewhat heavier in Japan, with the Nikkei 225 seeing -8.3% during the day, though that’s somewhat hedged by a concurrent strengthening of the JPY. EUR/JPY, namely, decreased by a similar extent to that of the Nikkei’s. Waking up to Friday’s pro-Brexit outcome, the DAX started the daily session at more than a 10% decline. The FTSE opened at -8.6%. This is augmented by the GBP depreciating by more than 8% vs the EUR and over 11% vs. the USD. This behemoth move for the GBP also led it to its weakest level vs. the USD in 30 years. The reaction in commodities was also fairly uncontained, with oil dipping as low as USD 46.7 per barrel, on the one hand, and, alternatively, risk-off pushing gold to surge to USD 1358.84 per oz.

Keep calm and monetary aid

Easing the situation somewhat was BoE governor Carney, who said that the bank will infuse billions of GBP into the financial system to counter the negative impact of the Brexit. Carney further noted that the U.K.’s banking system is resilient as “capital requirements of our largest banks are now ten times higher than before the crisis.” BoJ governor Kuroda, similarly, noted of willingness to provide currency swap lines, by central banks, if needed. The European central bank and the Fed also released statements, by which they are closely monitoring financial markets and is willing to provide additional liquidity.

The remarks aided sooth the markets somewhat. The FTSE100 ended the daily session with a smaller 3.1% loss and GBP/USD recovered to end the day at -8%. U.S. indices, kicking off a few hours after their European counterparties, opened the day at a containable 3%-4%ish decline, though they gradually slid down from there.

As for the aftermath, at this point, a lot of market participants, from all shades and sizes, have now had a fairly long weened behind them. One’s portfolio may not only be affected by fast moving asset prices, but looming counterparty risk is also quite abundant. Other until-recently-black-swans such as spurring independence aspirations of Scotland and N. Ireland are more grayish and also poised to stay with us for a while. In this sense, even a containment of the situation going forward is prone to see more declines in equity markets, dead-cat-bounces, corrections and the likes.