A few items to keep an eye to gauge the reaction to Brexit
I won't labour the point that we face many months of uncertainty now the vote is cast but even with that uncertainty, we can still identify the clues that will tell us how to trade it.
Yesterday I threw out three broad risk areas to watch;
- The battle with Europe over the leaving process and the damned article 50 (that will drag on)
- The Conservative leadership battle (could be quick, we'll know Thursday)
- Any potential fall out in the economy (have to take this month by month)
It's item 3 that I want to delve into in a bit more detail.
As you've just seen, I've highlighted the mortgage and lending data as one area we need to watch to gauge the sentiment of the UK people. If concern is high then a slowdown in mortgage, consumer and business borrowing will signal that. Branching off from the mortgage data further, house prices will show signs of slowing, not because the market is going to collapse but that if people 'go on hold' the amount of buyers will naturally drop and prices will naturally adjust to reflect that.
A drop in business borrowing will signal a lack of investment interest. That in turn could filter through to jobs growth and wages. Other consumer indicators probably won't signal too much. Things like retail sales shouldn't change an awful lot just on Brexit worries. People still need to shop, put petrol in their cars, food on the table and we still need to wear clothes.
Don't be expecting the UK economy to fall into a fiery pit anytime soon. If anything the country is just going to hold it's breath for a while rather than tear its hair out in panic. That breath holding will cause the economy to soften but I don't expect it to collapse.
Another area to look at is how foreign money views the UK. Alongside the mortgage and lending data we got the latest foreign Gilt purchase data for May. Purchases rose by 3.713bn from 214m in April. If foreign money is worried about Brexit, we'll see it flowing out of the UK pretty quickly. Again, that could hit the property market at the higher end of the scale.
The reason we need to monitor these types of indicators is because they will tell us how good, bad or moderate the Brexit effect will be on the UK. Considering the market is taking the most gloomiest view of the fallout (no surprise there), anything different means that the pound won't suffer as much as many expect. It means that there could be good cause to see it rise if the market is leaning too far the wrong way.
Trading the above day to day is very difficult but if you are willing to look at the longer term picture, these clues will help you decide which way the pound is likely to go over the coming months. My preferable way of trading is long-term so I'll be looking closely at what these signs tell me. As it is I'm inclined to play from the long side as I don't think the fallout will be as bad as many expect but I'm not going to gamble on it, I'll be led by the data.
Will Brexit be as bad as some say?