Why did UK leaving European Union hit your Retirement Account so Hard?
By Andre Spicer | (The Conversation) | – –
Despite reassurances that we shouldn’t listen to the experts, the financial markets have gone and behaved almost exactly
as the experts predicted. Following the news that the UK will be leaving the EU, the pound has dropped to a level
not seen since 1985. The FSTE has had the biggest
one day drop ever.
On top of this, the yields of UK government bonds has hit an
all time low. The price of commodities such as oil
dropped 6% on the Brexit vote.
House builders have been particularly hard hit, suggesting massive
declines in the property sector. Alternatives assets like gold and
bitcoin
have rallied as people look for safe places to stash their money.
This very British crisis has quickly cascaded across national borders. The German share market
fell 10% and the French market
fell 8%. Outside of Europe there have been big falls on
Japanese and Australian share markets too. Futures suggest that the American S&P 500 and the Nasdaq indexes
will both open down 5% as well.
So what started out as a vote by some angry people in England has
rapidly become a global economic event. It has spread across continents
and asset classes. It has unleashed a kind of contagion which was last
seen during the financial crisis of 2008.
Complex web
This contagion happens as falls in one asset class start to make
another look more vulnerable. For instance as shares in banks go down,
other funds which hold shares in these banks are likely to look
increasingly shaky. Given the complex web of interlocking assets in the
global financial system, it is often difficult to say when the contagion
might stop. It could mean that assets which are not fundamentally
affected by Brexit take a price hit – at least in the short term.
Another common dynamic which kicks off when there are large scale and complex economic events such as Brexit is
herd-like behaviour.
The surprise of the referendum outcome led to usual assumptions being
thrown out the window. In these situations traders increasingly look to
each other for a sense of what an asset is actually worth.
As a result, they can start to ignore the fundamentals and start to
follow what the crowd is doing. Social proof is relied on by traders,
rather than actual proof. In some cases this leads to the creation of
asset bubbles. In other cases, like Brexit, it can create negative
feedback loops which lead to massive falls in assets.
As falls in markets around the world pick up steam, they could easily
start to connect up with wider global economic issues which have been
simmering away in the background. These include the slow burning
debt crisis in China, problems
with the Brazilian economy
in recent months, or over-inflated housing markets in some parts of the
world. And, given that most trading strategies today are automated,
there could be some nasty and unpredictable surprises hiding deep within
a company’s algorithms.
When economic news sours, investors tend to start being more
vigilant. They look more closely at their portfolios and are more likely
to dispose of assets which they are a bit concerned with. As a result
they get rid of good assets in an attempt to put their mind at rest.
This can then create falls in asset prices.
Stopping the rout?
Central banks usually have the ability to step in to calm things down
– mainly by lowering interest rates to encourage additional economic
activity. The problem is that with interest rates at close to zero,
central bankers don’t have a lot of room for manoeuvre. This only leaves
the option of quantitative easing – a solution that can simply kick the
can down the road. It is uncertain whether slick communication from
central bankers – as the Bank of England governor Mark Carney was swift
to do on the heels of Brexit – is enough at moments like this.
Contagion, herding and misplaced vigilance are only likely to create
more uncertainty about when financial markets will settle. It may be
some time before we actually know how they will settle down after their
Brexit shock. After all, we have no idea what Brexit will actually look
like and it will
likely be two years before we do.
In the meantime, HSBC predicts the pound will continue to fall to as low as US$1.20
by the end of the year.
And market volatility is likely to continue for some time as the news
triggers off all sorts of contagion, via the complex networks that
financial markets run on.
Andre Spicer, Professor of Organizational Behavior, Cass Business School,
City University London
This article was originally published on
The Conversation. Read the
original article.
My plan is open my last and final short position should SPX closes below 2000.
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SPX: S&P 500 Index D-SMA: Daily - Simple Moving Average
DJI: Dow Jones Industrial Index D-EMA: Daily - Exponential Moving Average
DJT: Dow Jones Transportation Index PDL: Primary Downtrend Line
NAZ: NASDAQ Composite Index PUL: Primary Uptrend Line
RUT: Russell 2000 Index ADL: Active Downtrend Line
OEX: S&P 100 Index AUL: Active Uptrend Line
NDX: Nasdaq 100 Index DTL: Dynamic Trend Line
TUL: Tentative Uptrend Line TDL: Tentative Downtrend Line
Disclaimer:
The
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informational
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and
should
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be
construed in
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investment
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Furthermore,
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expressed
may
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