As of this writing, 11:30 or so Eastern time, it appears that the Leave vote out of the UK is winning by a percentage point or two. Global markets are going bonkers. Risk-off positions like US Treasurys, Japanese yen, the Vix and gold are ripping to the upside while the British pound hits a 31 year low and stock futures around the world sell-off. Dow futures, as of this post, are down over 500 points while British stock futures are slammed down 9%.
All week, it had become apparent that the market had begun to price in Remain. Investors and traders had become increasingly comfortable that the Leaves would lose and had probably priced in all the upside there was in advance. This produced the kind of asymmetric risk we talked about here, where a Remain vote would not mean nearly as much upside as a Leave vote would mean in downside. Markets are smart, after all, and so if they had the Remain right, most of the upside would already have been gained.
But the markets appear to have been too confident (smart, but never infallible, that’s why they play the game). The moves we are witnessing right now show just how vicious asymmetric risk can be. The downside on the prospect of the Leaves winning is clearly bigger than what Remain would have been to the upside. This was never going to be a binary event – the downside was obviously going to be worse than the upside would have been positive.
The Leave vote is a surprise, but not the immediate reaction in the markets as a result of it.
I’ll be off to bed shortly, we shall see who wins and how the world will react in the morning. Expect a wild one.