Its Just a Flesh Wound!… Really?

As I have said time and time again, if there is one thing that markets hate, it is uncertainty.

So far this Summer has brought both warmer temperatures and, for the most part, a drop in uncertainty.  Oil prices have firmed, currency movements have consequently settled, and the US Federal Reserve has signaled that while interest rate increases will indeed come; they are not coming yet. Most astonishing of all seems to be willingness of the Greek government and its counterparties to quietly negotiate the latest set of compromises concerning that nation’s dire fiscal situation.

Sounds like a great time to hit the beach right?

Sorry, but the one BIG outlier is the June 23rd vote concerning the future of Britain within the European Economic Union (A.K.A. "Brexit"). Until recently poles indicated a strong support for the status quo or the “stay” camp.  However, that support has eroded, and it appears now that the Leave Camp is now enjoying a slight margin of victory.

Advocates for the Leave Camp argue that exiting the Euro block will allow Britain to better control its immigration policies (individuals within the block member nations enjoy unrestricted movement) and consequently provide for better protection of Britain’s labor markets and national security interests.  The pro-Euro groups, argue (quiet correctly, in my opinion) that leaving the European Economic Union will damage British trade with the block and jeopardize London’s status as the continent’s financial capitol.  Of course, the Leave Camp counters that trade agreements can be renegotiated and that any inconveniences would be merely a “flesh wound”. 

Watch this one closely.  Trade disruption between the United Kingdom and the world’s largest trading block will have significant consequences.  Trade deals are negotiated over many years; not weeks.  Further, London’s dominance as a financial center is not guaranteed; Paris, Frankfurt, and/or Berlin would happily step in to replace London’s functions within the block. The bottom line is that if our brethren across the pond are cavalier enough to vote to exit the Union, there will be a very significant amount of uncertainty injected into markets very quickly.

And remember, markets HATE uncertainty.