Major averages shot higher on higher volume ahead of the Brexit vote as polls leaned back toward the UK remaining in the EU. Technically, the NASDAQ Composite Index had a follow-through day, but this was meaningless within the context of the unique and significant event-risk posed by the Brexit vote.
When the votes were tabulated, the UK voting to leave the EU shocked markets worldwide. Prime Minister David Cameron resigned while odds greatly favor Boris Johnson as most likely to take his place.
UK and European markets crashed as much as 10% before finding floors while the pound collapsed to its lowest level in over 30 years, off as much as 11% at its worst levels. The UK FTSE stock market is trading down -4.4% and the German DAX is off -7.2% at the time of this writing.
Meanwhile over in Asia, Japan's Nikkei stock market triggered its circuit breakers at -8%, temporarily halting trade. Other Asian markets, however, recovered from their lows of the day to finish down just -1.3% in Shanghai, -2.92% in Hong Kong, and -2.09% in Singapore.
This suggests today's open could be a buying opportunity as such overreactions have been known to occur during such crisis events. But as always, it remains key to focus on what the leading stocks tell you to do.
Indeed, despite the shell-shocked markets, the vote isn't binding in itself as any deal will have to be approved by Britain's Parliament. This means that pro-remain MPs which are the majority of Parliament may try to block any deal they think doesn't give the country enough access to the European Union.
It does seem unlikely that British MPs would flagrantly go against the wishes of the electorate by totally blocking a Brexit, but they could well use their power to influence negotiations. One analyst noted, "Keep in mind the UK actually leaving the EU will take an act of Parliament. Rest assured that the EU will be motivated to prevent this from happening so there will be serious UK/EU negotiations. This should result in the UK being able to have more control over accepting decisions made by the 27 other EU member states who may not act in Britain's best interest. A lot of posturing is now underway."
The minimum period for the UK to leave the EU will be two years. In practice it may take longer, depending on negotiations around new trade relationships with the EU. During the ‘leaving’ period, the UK will continue to abide by EU treaties and laws, but not participate in any EU decision-making.
Ultimately, leaving is good for the UK as its membership in the faltering EU structure has only dragged down its economy.
Nevertheless, the result pushes us closer to the 40th day (read Ed Seykota's "Govopoly in the 39th Day") as it is indicative of a cleansing process that is occurring on a global scale as the lack of confidence in governments and central banks continues to quickly erode. As Martin Armstrong wrote, "The European Union peaked back in 2004. It is done – just stick a fork in it. The arrogance of Brussels and their anti-democratic approach to force their elitist views upon the people is coming back to haunt them."