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High valuations + Brexit risk = Nervous Aussie markets

The Australia 200 has climbed off its lows this morning but markets remain on edge. In the current circumstances, the sort of selling pressure we saw yesterday could easily return over coming days.

In what is in many ways a logical response; global markets have left risk adjustment for Brexit to the final two weeks before the vote. It has been very difficult to get much visibility on what the outcome of the Brexit vote will be. This remains the case. Polls are currently favouring a leave vote but in a volatile situation, doubts remain. Given the two way risk involved in this situation, markets have chosen not to take defensive action until the polls have begun to swing towards a leave vote.

Recent stock market selling also reflects the fact that the market has gone into the Brexit vote with full valuations, increasing downside risk. However, the more markets move in a defensive direction prior to the vote, the greater the potential two way volatility surrounding the vote

Market reaction to the Brexit vote is also changing the dynamics of how traders will see the Fed meeting. Markets will be focussed on the Fed Governors’ Dot Plot rate expectations and on what Janet Yellen has to say at her press conference. However, the Fed is in the same boat as everybody else. Current thinking about the rest of the year may become irrelevant may become irrelevant IF Britain votes to leave the EU AND IF this does have a major impact on consumer confidence and markets.

Supermarket operator, Metcash went against the trend yesterday, rallying 5%. While Aldi is not listed on the Australian stock exchange it’s become a major influence over the stock prices of those supermarkets that are. Metcash had been sold heavily on the assumption that it would be a significant casualty when Aldi opened in South Australia. However, with Metcash due to report next week, it seems traders are beginning to think that IGA supermarkets are withstanding the completion better than expected. 

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