Tahoe-Truckee Market Beat: The impacts of Britian’s vote on Brexit
June 21, 2016
Stock markets have been volatile in recent weeks. The VIX, also known as the "fear index," has spiked rapidly.
The VIX is a measure of implied volatility of options on the S&P 500 Index. Options, which are used as portfolio insurance become expensive when something spooks the market as investors rush to defend their portfolios by purchasing puts.
The news that has stirred the markets is referred to as Brexit. This week on Thursday, June 23, Great Britain will vote on Brexit.
Brexit means that Great Britain will leave the European Union if the referendum passes. If it fails they will stay in the European Union. Britain does not participate in the Euro, it has its own currency, the Pound Sterling.
Uncertainty tends to frighten market participants. No one is sure if the vote will pass or fail and if it passes, we can't be sure what the outcome will be.
There is worry that the value of the British Pound will fall and that corporations doing business in Britain could see their profits hurt. If the pound depreciates, multi-national corporations that get paid in pounds will lose revenue.
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The legendary investor Warren Buffet has been quoted as saying, "that it won't change anything that he does … but he hopes it doesn't pass."
Cocoa futures could increase in value if it passes. The main cocoa futures contracts are priced in pounds, so if the pound drops cocoa futures could go up.
I'm not suggesting that you speculate in futures trading, it's just interesting to forecast what the Brexit impacts could be.
If it does pass, it could lead to further breakup of the EU, which could possibly hamper their already sluggish economy, which has been growing barely more than 1 percent recently.
One step in sound financial planing is to learn to separate the things you can control from the things that you cannot control. You can control your investment portfolio, but obviously have no control over the Brexit vote.
It's also very difficult to determine how the British economy will perform if they do decide to exit, there are many more variables that will come into play.
We'll have to just wait and see how the vote turns out. Once the vote is over with and the news is on the table, look for the markets to stabilize, no matter what the outcome of the vote is.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.