Heavy trad­ing pre­dicted around Brexit vote

Pakistan Observer - - ECONOMY WATCH -

NEW YORK—US stock mar­kets could see heavy trad­ing and in­creased volatil­ity as in­vestors po­si­tion for next week’s ref­er­en­dum on whether Bri­tain re­mains in the Euro­pean Union. The June 23 vote could have big im­pli­ca­tions for the global econ­omy and U.S. stocks. Add to this the an­nual re­bal­anc­ing of the FTSE Rus­sell in­dexes, set to go into ef­fect a day af­ter the vote, and it makes for a busy trad­ing week. Fri­day could be the busiest trad­ing day of the year as fund man­agers ad­just their po­si­tions to that re­bal­anc­ing.

Should the Bri­tish vote to leave the EU, U.S. shares could fall sharply, but a “Re­main” vote won’t nec­es­sar­ily re­sult in a big rally, be­cause do­mes­tic eco­nomic wor­ries may be cap­ping U.S. stocks. “We are still stuck in the churn,” said Jeff Mor­ris, Head of U.S. Eq­ui­ties at Stan­dard Life In­vest­ments in Bos­ton. Re­cent polls show the ‘Leave’ cam­paign in the lead and this has weighed on stocks. Cam­paign­ing for the ref­er­en­dum was sus­pended af­ter the mur­der of law­maker Jo Cox, a sup­porter of Bri­tain stay­ing in the EU. From an eco­nomic stand­point, a move by Bri­tain to quit the EU might not have been as po­ten­tially trou­bling for U.S. stocks. But slow­ing eco­nomic growth is also lim­it­ing the up­side for those shares, said Eric Wie­gand, se­nior port­fo­lio man­ager at U.S. Bank’s Pri­vate Client Re­serve.

“In a low-growth en­vi­ron­ment, even smaller prob­lems be­come more pro­nounced,” he said. “We trimmed over­all in­ter­na­tional ex­po­sure in the RidgeWorth Al­lo­ca­tion Strate­gies as a means to re­duc­ing over­all port­fo­lio risk, un­til such time as the clouds be­gin to lift,” said Alan Gayle, direc­tor of as­set al­lo­ca­tion at RidgeWorth In­vest­ments in At­lanta, re­fer­ring to Brexit wor­ries. The CBOE Volatil­ity In­dex .VIX, the fa­vored gauge of in­vestor anx­i­ety, hit a 4-month high on Thurs­day. “There has been an in­crease in in­vestors look­ing for hedges,” said Ste­wart Warther, an equity de­riv­a­tives strate­gist at BNP Paribas.

Im­plied volatil­ity – an op­tions­based mea­sure of ex­pected swings in shares – gives a good sense of just how much the im­pend­ing vote is on in­vestors’ minds. Usu­ally, im­plied volatil­ity tends to grad­u­ally slope up the fur­ther out in time you go. In­vestors pay more to be pro­tected against un­known risks down the line. How­ever, op­tions on S&P 500 in­dex .SPX that ex­pire a day af­ter the vote sport a level of im­plied volatil­ity that is higher than for op­tions ex­pir­ing over the next two months, per BNP Paribas data. And while a lot of the re­cent sell­ing has been pegged to Brexit risk, there is lit­tle ex­pec­ta­tion for a big re­lief rally on Wall Street in case Bri­tain chooses to stay.

“It just doesn’t seem like there is much in­cen­tive to move out on the risk curve,” said Stan­dard Life’s Mor­ris, point­ing to re­cent eco­nomic data that sug­gests that re­cov­ery is still some­what ten­u­ous. Adding to any po­ten­tial volatil­ity next week will be the re­bal­anc­ing of Rus­sell in­dexes - an an­nual event that re­quires in­dex-fol­low­ing fund man­agers to re­bal­ance their own port­fo­lios. With this year’s re­bal­ance of the Rus­sell 2000 and the Rus­sell 1000 in­dexes set for a day af­ter the Brexit vote, there is added drama. Man­agers of in­dex-fol­low­ing funds are forced to buy or sell shares to mimic in­dex per­for­mance. Money man­agers who might have ad­justed po­si­tions in an­tic­i­pa­tion of the re­bal­ance will now pre­fer to wait un­til af­ter the vote, said Chad Dale, direc­tor of in­dex re­search at ITG in Toronto. “What that re­ally does is it com­presses the in­dexer trade into the fi­nal day.”—Reuters

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