With Fed chair Janet Yellen expected to make dovish remarks to Congress this week and a new poll showing more Britons favoring remaining in the EU, investors became optimistic Monday sending global stocks and the British pound higher.
By Vikram Rangala
Monday, June 20, 2016
The tragic murder of a pro-European member of Parliament was one of several recent events that appear to have solidified the views of British citizens ahead of the June 23 referendum on whether the UK should stay in the European Union. While the outcome is far from certain, the markets found reason to end a multi-day bearish streak and rally across the globe.
The one major exception was India's stock market, which dropped at the opening bell in reaction to the surprise decision of central bank Governor Raghuram Rajan to step down at the end of his current term in September. In keeping with the vocabulary of the moment, Rajan's departure is being called "Rexit." However, even that major event was overshadowed once news hit Mumbai that the likelihood of a Brexit had eased. Indian stocks joined the rest of the world and rallied with the S&P BSE Sensex closing up 0.9 percent.
The pound was one of the biggest winners, erasing a three-week slump. The pound strengthened against most major currencies, posting its biggest gain against the dollar since December 2008.
Investors have long made clear that they favor the UK remaining in the EU. While companies and funds have prepared for the possibility of a Brexit, they have also prepared for the process we may be seeing unfolding now. The possibility of the markets dragging downwards amid uncertainty over the Brexit vote and the Fed's interest rate decision was something they factored in long ago.
As that played out, the sagging markets made for some great buying opportunities. The old mantra of being "greedy when others are fearful" seems to have guided some investors and traders to see the long slide downwards from the S&P's June 8th high as a set up for more buying. As the markets continued to slide, it just meant more bargains for bulls with faith that eventually the Brexit wouldn't happen and the Fed would not disrupt the markets.
Last Wednesday, Fed Chair Yellen stated that the British vote was one of the things that Fed officials considered as they took their vote. They chose to keep interest rates where they have been since the raise in January, in part to avoid tying the hands of the European Central Bank, which may have to take extreme measures if the UK leaves.
So with confirmation that the Fed will be patient and helpful to the markets, investors only needed some sign that the Brexit odds were moving in their favor. Once they got that, the short-sellers lost much of their reasoning to be short and covered their positions.
It was most likely that short-covering which spurred the initial buying of these rallies in stock markets and the pound. That spark was enough to spur new buyers to come in. Once they did, all those who had been buying up the pessimism in the past few weeks saw a chance to take prices. They raised their asking prices and the short-covering traders and late-comers had no choice but to bid higher.
For those who like to follow and trade the news, the past few weeks have offered a lot of news to digest and act on. But in the end, it is buying and selling that moves price. Today's rallies were just a display of motivated buyers meeting sellers ready to demand higher prices.
That combination is what short term traders like Nadex traders look for. If you traded binary options on the GBPUSD or GBPEUR, you saw strong price moves that made for exciting and potentially profitable moves in just a few minutes. And if you were following the uptrend or even fading the rallies in the US, European, and Asian stock index binary options and spreads offered on Nadex, you had active, liquid markets to trade all day.
The difference, of course, is that Nadex lets you trade those news-making, news-driven markets with limited risk guaranteed. Nadex spreads can often be more forgiving if your entry timing is a little off. And binary options are a straightforward way to trade the overall direction of a trend without having to pick tops and bottoms.
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