NYSE trader: Brexit? What Brexit?
What we are witnessing right now is the quintessence of risk markets: true price discovery based on facts known at the moment.
By Keith Bliss of Cuttone & Co.
If you fell asleep Thursday night and did not wake up until this morning, you would assume that the UK voters elected to stay in the EU. Certainly as we look at the behavior and complexion of the market today, it’s as if nothing happened. As the S&P 500 (^GSPC) is only 2-3% below last Thursday’s close, the market has voted that Brexit is not that big a deal ... so far.
Sell the rumor, buy the news
The ability of global markets to shrug off what many considered to be a disaster reinforces an important axiom that “news traders” live by: Sell the rumor, buy the news (the converse is true depending upon the situation).
In this case, the rumor was that the Brexit is the first very large crack in the global order that will lead to pestilence, destruction, and economic chaos. The news is that we really still don’t know the ultimate effects and outcome from the decision, and we won’t know for many months. On that news, investors re-engaged the risk markets and picked up massively oversold bargains.
The other important lesson is that hysterical hype rarely drives markets longer term. Even in the most stomach churning market episodes of the recent past — 9/11, Iraq Invasion, financial crisis of 2008, and now Brexit — the equity markets have always shown their resilience. Once calmer minds have a chance to contemplate and game out situations with rational thought, the situations are never as dire as the initial knee-jerk reaction suggests they are. What we are witnessing right now is the quintessence of risk markets: true price discovery based on facts at the moment—not hype or hysteria.
Don't dismiss the Brexit, though
Now, I am not suggesting that the UK’s pending exit from the EU is a sideshow to be dismissed to the historical dustbin. Quite the contrary is true. This is a monumental event which cuts against the grain of global political and economic thought of the last 60 years. This will spawn many questions about the future economic direction not only for the UK and Europe, but also for the US, China, and the rest of the globe.
Undoubtedly, at some point, it will lead to economic disruption and distortion — even if the breakup is handled with intelligence and thoughtfulness. Heightened market volatility and low rates will be with us for an extended period of time. And, it may lead to a dramatically different global security map than what we currently know.
All of these things will happen … just not now … and that’s what the market cares about.
