Forex, Gold And Bond Futures Contracts Return to Pre-Brexit Levels

Futures trading in currencies, gold and stock indexes has returned to normal levels in the aftermath of Brexit as many retail investors are looking for a longer term hedge.
By Ellen Chang ,

Futures trading in currencies, gold and stock indexes has returned to normal levels in the aftermath of Brexit, as many retail investors are looking for a longer term hedge.

As the votes were being tallied from the U.K. on whether they would leave the European Union and after the announcement, futures traders were ramping up purchases of gold (GC), E-Mini S&P 500 (ES) and U.S. Treasury bonds (ZB).

"As you would expect, retail traders looking to hedge their portfolios or to reduce their potential risk in the market moved toward these three assets," said J.B. Mackenzie, director of futures and forex of TD Ameritrade, an Omaha-based online broker.

Retail traders purchased future contracts in order to hedge and provide risk management to their portfolios or to seek short-term and speculative opportunities after the outcome of the Brexit vote.

"The ability to trade futures virtually 24 hours a day and while the referendum returns were coming in, reinforced the value of having the ability to trade futures in your portfolio," he said.

While the markets did not anticipate that the U.K. would vote leave the EU, the trade volume spiked after the vote was announced and in the next two trading days before falling back to pre-Brexit ranges, said Mackenzie. One exception was gold, which has remained slightly above its pre-Brexit norms.

Investors who sought to make short-term profits because of the extreme volatility from the election results purchased contracts of the British pound (6B).The number of contracts of the British pound more than doubled and was slightly above 150,000 on June 23 and spiked to over 500,000 on June 24, the day after the referendum. The current volumes have fallen back to their normal levels before Brexit.

The futures traders who sought short-term gains moved out of crude oil contracts and into the British pound while investors who follow a longer-term approach and wanted to protect their portfolios increased their trades in gold, bonds and stock index product such as the E-Mini S&P 500.

"This behavior mimics what was seen on the equity side with many of our customers being aggressive in the immediate post Brexit market moves," Mackenzie said.

After the referendum results came in, trading stock indices became more attractive for futures traders, said Peter Borish, chief strategist with Quad Group, a New York-based financial firm.

"It led people to the conclusion that monetary policy is becoming easier and the yield curve for the U.S. has flattened even more," he said.

The recent rally in the stock market is not a signal that the S&P 500 or the Dow will continue to rise since earnings season could yield some surprises.

"I don't believe the market will continue to go up at the same rate of speed," Borish said.

The volatility for currencies has declined as the futures prices for currencies such as the U.S. dollar, euro and Canadian dollar have flattened out.

"We need a better fiscal and monetary policy, since we have seen record low 30-year bond rates," he said. "The seesaw is way out of whack. We need to put some more monetary bullets back in the holster because the Fed needs to raise rates a little bit. Futures traders should always be looking for potential warning signs."

While some experts believed that crude oil (CL) contracts could rise, the volume for the commodity did not spike like other investments did during Brexit. Since the election, the volume for crude oil contracts has risen, but has not fallen back to its pre-Brexit volumes.

"As TD Ameritrade and the Chicago Mercantile Exchange have mentioned, this is a very popular retail product and is the second most traded behind the E-Mini S&P 500, however, during Brexit, customers did not increase their trading of crude," he said. "They moved to other products like the British pound."

Investors should anticipate more information and political announcements to affect the futures market as Britain determines how it will proceed leaving the EU.

"While there may not be another movement in the market as significant as the actual Brexit vote, there will be times of volatility that retails traders need to be prepared for," Mackenzie said. "Having the ability to trade futures as this information and how the markets react will allow the retail trader to hedge their portfolios."

Loading ...