Tuesday, June 28, 2016

Brexit and markets

The S&P is down about 5% from it's high. Dramatic, but no big deal compared to the 50% drop in 2008. The broad selloff is being attributable to Brexit, specifically, the poorer growth prospects for the UK, the EU, and general economic uncertainty.

I don't this market prices reflect any of those things, I think they reflect bad bets, margin calls, and homogeneity across hedge funds.

I'm sure many hedge funds were long sterling, or betting one way or another that Brexit would not happen (basically, a merger-arb play at the transnational political level). When the merger didn't happen, or more specifically, when the divestment did happen, they lost money and thus needed to make margin calls.

To make margin calls, they sold what they had, which was basically everything else. Selling stuff drives the price down. Since they are all making the same bets (and charging 2% and 20% for it) they all sell the same stuff and prices move together.

Note that all of this has no connection to the UK and EU. Individual countries, particularly those as large as the UK, can survive perfectly well whether they are part of a broader agreement or not. Canada and the US trade is a good model for the UK and the EU.

The economic prospects for the UK depends on how well it can stimulate it's economy, through deficit spending, and return to something closer to full employment. That will probably help make the national mood there more generous as well.


Blogger Unknown said...

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10:53 PM  

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