Volatility Volatility Volatility

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Summary

Brexit Vote Results Inflate Fears for Political Crisis.

The uncertainty is spreading from the UK to EU and US.

Banks still look overpriced given their exposure.

UK has voted in favor of Brexit last Thursday with 4% difference against Bremain. Despite the fact that the referendum results are already out since last Thursday and the market should have already priced the effects of a Brexit, we saw the markets recovering from the initial shock on Friday morning. To be specific, FTSE100 was trading up to 550points (-8.67%) but it closed at 6138.7 (-3.15%). In the same pattern, Sterling was trading up to 12% lower (1.32) on Friday morning but it managed recover to 1.37 (-8%) later that day. It seems that there has been some confidence restoration in the markets which in our view does not reflect the economic risks behind Brexit.

We see part of the optimism which was spread in the markets being driven by the European Leaders' reassurances that the Brexit will be gradual and hopes that a sustainable solution can be found in the "new-born" crisis.

We see detrimental effects for US Banks not being priced in the stock prices yet. Most of the US banks which operate in the country are down as little as 7%. JP Morgan and BAML are only two of the US banks with a huge exposure to the UK. JPM has already issued a warning that it may have to move to another European Country as UK will not be the European financial hub. The move to another country would constitute a substantial cost for US banks but even if this may not be necessary (talks about adopting EU regulation for the financial sector), the EU collapse or re-shaping fears will influence investment inflows which in turn can have a material impact on investment banking operations.

Ticker Name Return since Brexit 1 Week 1 Month YTD
JPM JPMorgan Chase & Co -6.9% -4.3% -9.0% -9.7%
C Citigroup Inc -9.4% -5.1% -14.1% -22.1%
BAC Bank of America Corp -7.4% -3.0% -12.9% -22.8%
GS Goldman Sachs Group Inc -7.1% -2.6% -12.0% -21.3%
MS Morgan Stanley -10.2% -3.1% -11.7% -22.9%
BNP BNP Paribas SA -17.4% -9.3% -19.5% -24.6%
NMR Nomura Holdings Inc -10.6% -3.9% -19.9% -43.7%
OTC:UNCFY Unicredit SpA -23.8% -13.9% -33.7% -59.6%
DB Deutsche Bank AG -17.5% -5.8% -18.2% -39.0%
UBS UBS Group AG -11.2% -2.6% -10.9% -30.3%
RBS Royal Bank of Scotland Group PLC -18.0% -7.6% -19.8% -32.0%
OTCPK:SCGLY Societe Generale SA -20.6% -12.4% -21.5% -32.3%
CS Credit Suisse Group AG -13.1% -4.7% -19.4% -47.9%
HSBC HSBC Holdings PLC -1.4% 3.9% 0.3% -16.5%
LYG Lloyds Banking Group PLC -21.0% -12.4% -22.7% -21.4%
BCS Barclays PLC -17.7% -7.1% -17.1% -29.7%
Click to enlarge

More factors adding uncertainty:

· Scotland's First Minister Nicola Sturgeon says MSPs at Holyrood could veto Brexit or force an independence referendum.

· The Spanish election results show that a new government cannot be created.

· Marine Le Pen (France's National Front leader) said the French must now also have the right to choose.

· Geert Wilders (Dutch anti-immigration politician) said the Netherlands deserved a "Nexit" vote.

· Italy's Northern League said: "Now it's our turn".

· More than a quarter of shadow cabinet resign.

Ticker Name Return since Brexit 1 Week 1 Month YTD
SPY SPDR S&P 500 ETF Trust -3.6% -1.6% -2.9% -0.4%
DIA SPDR Dow Jones Industrial Average ETF Trust -3.4% -1.6% -2.5% -0.1%
XLF Financial Select Sector SPDR Fund -5.4% -2.3% -7.2% -7.3%
XLU Utilities Select Sector SPDR Fund 0.6% 0.1% 5.0% 16.9%
VIX Volatility Index 49.3% 32.7% 85.3% 41.5%
V2TX EURO STOXX 50 VOLATILITY 7.0% 14.3% 86.2% 74.6%
GLD SPDR Gold Trust 4.9% 1.7% 7.7% 24.2%
UUP PowerShares DB US Dollar Index Bullish Fund 2.6% 1.6% 0.4% -3.4%
FEZ SPDR EURO STOXX 50 ETF -11.7% -5.2% -11.9% -13.3%
Click to enlarge

We believe that next week, market will face a great deal of volatility (NYSE: VXX) as they seek direction and EU leaders continue to pass contradicting messages for the way the Brexit is handled. We see downward trends to US equities due to both the fears that the European crisis will be spread overseas and the strong USD which makes US equities look expensive to foreign investors. For the week ahead, we expect the "clouds" around the next steps after Brexit to push gold price higher and utility stocks, as a defensive choice to outperform.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.