How to Trade the Brexit Contagion

With financial markets moving and shaking, you might have forgotten. The Aussie election is this weekend.

I can hear the ‘cheer’ from here…

If it were the US election, I’d be sad.

We have Donald Trump’s hilarious comments to watch. Meanwhile, Hillary Clinton hasn’t had a corruption scandal to avoid.

It sure makes for interesting viewing.

Over the other side of the Atlantic, the Brexit has caused havoc across continental Europe. Financial markets are shocked.

But this isn’t a time to panic. It’s a time to think strategically to tackle the tough times ahead.

I’ll explain…

The volatility won’t last

The Brexit vote has kept punters on the edge of their seats. Bloomberg reported yesterday,

The victory for Brexit tore through world markets on Friday, pummelling the pound and high-yielding assets as more than US$2.5 trillion was wiped from global equity values.

The mayhem continues…

After crashing more than 4% on Friday, the pound extended its sell off to a near 31-year low yesterday. The British pound is buying US$1.32, down from its high of US$1.50 last Friday. The Aussie dollar is buying 55.5 British pence, up from 50.7 pence last Friday. That’s good news, if you plan to travel to the UK soon.

The Aussie market wasn’t sure which way to go yesterday. After being thumped last week, the ASX 200 jumped 17 points to close at 5,085 points.

Gold remained one of the only assets in favour. The safe haven asset surged sharply, hitting a high of US$1,335.33 per ounce. It’s trading slightly lower at US$1,324 today.

With uncertainty growing, volatility has skyrocketed around the world. You can see this on the chart below.


Source: Bloomberg
Click to enlarge

The instability shouldn’t be a shock.

A countless number of global elites, business figureheads, celebrities, and billionaires warned that the outcome would devastate the world economy. The New York Post wrote (with my emphasis added):

In April, US President Barack Obama travelled to the UK in part to advocate that it remain in the EU. He even threatened the UK directly, saying it would have to go to the “back of the queue” in trade negotiations with the United States because the EU is so much bigger.

Frankly, Obama’s comments were out of line. His reckless scaremongering, combined with that of others, has caused the volatility. But, like I said before, there’s no need to panic. Like any other financial shock in history, the uncertainty should pass with time.

Central bankers are trying to restore confidence now, promising financial markets support. The political elites, backtracking from their gloom and doom forecasts, are trying their best to calm markets.

 

Ignore the political drama

Eating a bit of humble pie, Obama issued the following statement on Friday:

The people of the United Kingdom have spoken, and we respect their decision. The special relationship between the United States and the United Kingdom is enduring, and the United Kingdom’s membership in NATO remains a vital cornerstone of U.S. foreign, security, and economic policy.

The United Kingdom and the European Union will remain indispensable partners of the United States even as they begin negotiating their ongoing relationship to ensure continued stability, security, and prosperity for Europe, Great Britain and Northern Ireland, and the world.’

With his earlier multiple misleading comments, Obama’s credibility took a strong hit. The UK was always going to remain a strong economic partner.

Fortunately, there were a few good men (and women) on our side. Boris Johnson, the former mayor of London, and a lead Brexit complainer, told the Telegraph yesterday (again, with my emphasis):

 ‘I cannot stress too much that Britain is part of Europe, and always will be. There will still be intense and intensifying European cooperation and partnership in a huge number of fields: the arts, the sciences, the universities, and on improving the environment. EU citizens living in this country will have their rights fully protected, and the same goes for British citizens living in the EU. 

The only change — and it will not come in any great rush — is that the UK will extricate itself from the EU’s extraordinary and opaque system of legislation: the vast and growing corpus of law enacted by a European Court of Justice from which there can be no appeal. This will bring not threats, but golden opportunities for this country — to pass laws and set taxes according to the needs of the UK.

In my view, history should show that the United Kingdom got it right. Despite the British pound hitting three decade level lows, its economy won’t collapse. In the near term, punters should realise it is business as usual. And financial markets should calm down.

The contagion event is coming

Unfortunately, this would be the calm before the storm. A major contagion event is nearing. Billionaire investor George Soros wrote about it on the Project Syndicate website,

Now the catastrophic scenario that many feared has materialized, making the disintegration of the EU practically irreversible.

That process is sure to be fraught with further uncertainty and political risk, because what is at stake was never only some real or imaginary advantage for Britain, but the very survival of the European project. Brexit will open the floodgates for other anti-European forces within the Union. Indeed, no sooner was the referendum’s outcome announced than France’s National Front issued a call for “Frexit,” while Dutch populist Geert Wilders promoted “Nexit.”

The European Commission (EC), believing it’s an elitist hierarchy, has over stepped the line. The undemocratic and unelected bureaucracy has tried to federalise Europe by sheer political agenda. Boris Johnson summed it up nicely: ‘The vast and growing corpus of law enacted by a European Court of Justice from which there can be no appeal.’

Indeed, the EU has neglected the will of the European people for far too long. It’s why the majority of Europeans are now anti-Brussels.

By voting out of the European Union, Britain has regained its sovereignty. Now eight more countries — who have also had enough — want to hold referendums to exit the EU. France, Holland, Italy, Austria, Finland, Hungary, Portugal, and Slovakia could all leave. This spells a disaster for the European Union.

Of course, this won’t play out overnight…

First, anti-EU governments must be elected throughout Europe. We should see this play out over the months ahead, heading into next year. When this happens, smart capital should move quickly into the US dollar — the world reserve currency and global safe haven.

When the US dollar takes off, the stock market, commodities, bonds, and property should take a hit. No industry or sector will be safe. Therefore, it will come down to your investing experience and skills to survive and prosper.

This isn’t a time to start panicking — it’s a time to think strategically.

In my view, there’s no better place to make big gains than in resource stocks this year. Both in quick speculations, and after the crash with longer term investments. That’s why I wrote the free report, ‘Three ‘Bounce-Back Mining Belters’ to Buy NOW’, which was published Saturday.

Implementing my top-down approach, I’ve found three resource stocks that could make you massive profits in the months ahead. This is despite the market conditions.

To get your FREE report today, click here.

Regards,

Jason Stevenson,
Resources Analyst, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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