Global sentiment was dealt a devastating blow during trading on Friday following the shocking Brexit victory that renewed a wave of uncertainty and soured investor appetite.
With the Brexit now a reality, financial markets have entered a state of shock as concerns heightened over the impact a Brexit could have on the global economy.
It should be kept in mind that the Brexit anxieties go far beyond the borders of the United Kingdom and fears are already growing that a knock-on effect could cause other countries to the leave the European Union, consequently crumbling the Euro project. With uncertainty set to intensify as investors ponder on the likely impacts of a Brexit to the UK and global economy, risk aversion could be the central theme moving forward.
Stock markets were left vulnerable, with most major equities stumbling as concerns over the immeasurable impacts of a Brexit to the global economy encouraged investors to scatter away from riskier assets to safe-haven investments. Fears of a Brexit fueled recession have hit unimaginable levels and could ensure that most stocks remain depressed for an extended period. In Asia, stocks headed for their steepest decline in five years as an awful combination of Brexit jitters and Yen’s resurgence provided a foundation for sellers to attack prices. The bearish contagion and negativity from Asia has already punished European equities and should seep into Wall Street when the American markets open. Global stocks may be set for extended declines in the medium term as concerns over slowing global growth, risk aversion and renewed Brexit anxieties haunt investor attraction towards riskier assets.
The FTSE100 entered a freefall with the index declining over 7% – its biggest fall in history as elevated concerns over the untold impacts of a Brexit to the UK economy encouraged investors to depart from riskier assets. With the rating agency S&P suggesting that the UK may relinquish its AAA rating following the Brexit victory, further declines in the FTSE100 could be realized moving forward. From a technical standpoint, the index is heavily bearish and the breach below 6000 could re-open a path back towards 5900.
Brexit sends Sterling to 30 year low
The Sterling/Dollar plunged to 30 year lows at 1.3230 during trading on Friday following the unexpected Brexit victory which renewed concerns over the future of the United Kingdom. With expectations mounting that the Bank of England may slash UK rates amid a potential Brexit fueled recession, Sterling bears have received enough encouragement to install another round of selling. Sentiment remains bearish towards the pound and the post-Brexit anxiety should haunt investor attraction towards the currency further. From a technical standpoint, in the space of 24 hours the GBPUSD has hit a 2016 high at 1.5015 and low at 1.3230. This pair is immensely bearish and previous support around 1.3850 could become a dynamic resistance that encourages sellers to send price towards 1.3200.
Brexit threatens Eurozone stability
The Eurozone was placed under pressure post Brexit victory and could be in store for more pain as concerns heighten over a domino effect causing other European countries to leave the E.U. For an extended period faltering inflation levels and declining commodity prices have punished the Eurozone while the ongoing global instability exposed the nation to downside risks. This Brexit development could leave the European Central Bank under more pressure to take action in an effort to bolster economic growth and renew some stability. Sentiment remains bearish towards the EUR and the currency could be poised for further decline as the Brexit contagion bolsters speculations over other countries leaving the E.U.
The EURUSD experienced a very sharp decline during trading on Friday following the combination of Euro weakness and Dollar strength that offered an opportunity for sellers to send prices lower. Although the pair experienced a sharp correction higher towards the 1.1200 support, prices could be set to trade lower when bears reload their shorts. From a technical standpoint, the candlesticks are below the daily 20 SMA while the MACD trades to the downside. Previous support around 1.1200 could transform into a dynamic resistance that encourages another decline to 1.1000.
Dollar Index surges higher
Dollar bulls were offered inspiration following the Brexit victory which created a risk-off environment and this consequently encouraged investors to seek safety such as the Dollar and Yen. Although short term Dollar gains may be expected in the future as investors seek safety, it should be kept in mind that the Brexit could sabotage all efforts by the Federal Reserve to raising US rates. With expectations diminishing over the Fed taking any action in Q2, the Dollar could be vulnerable to losses and such could offer an opportunity for bearish investors to attack.
Gold prices clips near 2 year highs
Gold surged ferociously with prices conquering near two year highs at $1358 following the shocking Brexit victory which triggered a wave of risk aversion and soured investor risk appetite. With concerns elevated that a Brexit fueled recession may be pending, coupled with the ongoing fears over faltering global growth, Gold bulls have been provided a foundation to install another heavy round of buying. Expectations continue to fade over the Federal Reserve raising US rates amid the Brexit concerns and this should bolster Gold despite the Dollar rally. From a technical standpoint, Gold is heavily bullish and could be destined to trade back towards $1350 as anxiety encourages investors to seek safe-have safety.
. Otunuga is a research analyst at FXTM