Okay, so the vote in the U.K. was a shock to many, not least the now “ex” British Prime Minister David Cameron. It was certainly a shock to the global financial markets, where a “remain” vote had been priced in. I have said many times here that when news is anticipated the positioning and attitude of the market has more influence on the reaction than the news itself. The big drops in the stock markets, and even in WTI, this morning seem to support that theory. With everybody long going in, bad news was bound to produce an oversized reaction. Whether that represents an opportunity or a warning, though, depends on how bad that news really is.
The economists seem united in their opinion that it is an economic disaster for the U.K., at least in the short term once the exit is completed. It should be born in mind though that it will probably take several years to negotiate the terms of that split. Who knows, by then there may have been another vote, this time to remain!
In all seriousness, though, the actual hard economic effect of a Brexit will not be as large as the early market reaction would suggest. Exports account for around 30 percent of U.S. GDP, and Europe, including the U.K. accounts for around 11 percent of that. Of course you have to factor in the cumulative effect of a slowdown in Europe on other economies and the negative impact on sentiment, but the actual drag on economic activity is not that large. In the light of that, a drop of over 4 percent in WTI makes little sense. That overreaction, though, is explained by one thing. Despite continued oversupply in the oil market traders had pinned their hopes on growth to resolve that issue. That growth is now in doubt.
In all honesty, though, this still looks like a classic overreaction in the oil market, and on balance this is more of an opportunity than anything. Yes, oil is a globally traded commodity so the prospect of weakness in the U.K. and Europe matters, but it is a fractured market. Different benchmarks represent supply and demand based pricing in different areas, and WTI’s big drop looks even more overdone in that light. That doesn’t mean, however, that I will be rushing in to buy today. Just because this drop is illogical doesn’t mean that it can’t continue for a while. Now could well be a good time to start averaging into some of that larger energy names, however. BP (BP) has been particularly hard hit, presumably because…