“Brexit” for Dummies and How it Will Impact Commodity Trading Advisors

“Brexit” is a nickname derived from the words “Britain” and “exit” that refers to Britain potentially exiting the European Union.  Should Britain exit the European Union? The question is straightforward with a “yes” or “no” answer, and whichever side gets more than fifty percent of the votes will be the winner.  Individuals older than 18 in England, who are either British, Irish or Commonwealth citizens are eligible to vote. Commonwealth migrants from 54 states – including ¬≠Australia, Canada, India, Pakistan and Nigeria – can join the electoral roll as long are they are residents in the UK.

Twenty eight countries are part of the European Union (EU), a group was organized soon after WWII in order to promote trade among the member nations.  Since then, the EU has changed dramatically; it now has its own parliament, and its own currency (Euro), though Britain still uses the pound.

Pro-Brexit Voters

The last time British voters had a say on their EU membership was back in 1975, but many things have changed since then.  People want to leave the EU because they are no longer in favor of EU policies and see them as an impediment to economic growth. Furthermore, the EU members allow its citizens to move freely amongst one another, which has raised security concerns due to the recent terrorist attacks. Lastly, it costs billions of dollars to be a member of the EU, a cost that pro-Brexit voters feel is warranted.

Voters Against Brexit

Individuals against Brexit are advocating to remain part of the European Union.  They warn that leaving the European Union could have more pitfalls than benefits. Britain’s Prime Minister, David Cameron, and President Barack Obama are both advocates of remaining part of the EU. They point to the advantages of free trade and the labor pool created by immigrants arriving to Britain. Large corporations are also in favor of remaining part of the European Union.

If voters opt to stay in the European Union, but the vote is close, Cameron will use that to squeeze more concessions out of the EU.  On the other hand, if voters opt to leave, the process may take as long as two to three years with Cameron vowing to step aside if voters choose to leave. In pre-voting polls, it appears the public is very much divided. 

How Will it Impact CTAs?

The United States is the single largest investor in Britain, and any changes to the British economy will likely create volatility in the US markets. For commodity trading advisors that trade foreign currencies, precious metals, European index futures, and U.S. index futures, they can expect volatility in those markets starting early morning Thursday, June 23rd.  It’s likely that CTAs that participate in these markets will choose to de-lever their portfolios or completely refrain from trading these markets on Thursday until the vote has been counted and final ramifications have been analyzed.