Flash Crash – British Pound Collapses

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Flash Crash

The Pound Sterling plunged to a 30 year low by rumours surrounding the UK exit of the European Union. During the Asian trading session, we saw the pound fall to 1.18 on the charts crashing through technical support; this triggered panic in the currency markets around the world. There have been many reasons given for the sharp sell-off, from fat fingers that accidently released a large selling order during a time of little liquidity, to algorithms pouring into the market triggering stop losses and driving the pound to such a significant low. To make things worse, we also had President Francois Hollande expressing his thoughts that the EU should take a firm negotiating stance when dealing with the UK and its exit plans.

The Pound Sterling has reacted unfavourably to the release of recent news from President Hollande and UK’S own Prime Minister Theresa May announcing on Sunday the formal separation from the EU would begin by the end of next March. This has created a lot of uncertainty at a time when the Pound was still digesting the implications of Britain’s exit from the European Union.

FTS 100 RALLIES ABOVE 7,000

The global economy remains staggered as the result of the weaker Pound and the FTS 100 rally back above the 7,000. It would appear that the low-interest rate environment will remain intact for some time, with slowing world growth and expanding budget deficits that most developed countries are experiencing. With this in mind, I cannot foresee the share market rally end anytime soon. With most funds managers struggling to find high yielding investments there is only one option remaining, keep investing in the world’s Equity Markets as share dividends are far more attractive than cash deposit rates.

The big question is at what stage will Central Banks stop with the monetary easing and begin to push back at Governments to do more of the heavy lifting. Governments need more fiscal spending and create more infrastructure projects, rather than expect monetary easing to generate growth. The side effects of low-interest rates are increases in the value of housing and Bond prices. The real question is how will this all end and will we have to face a banking credit crisis with collapsing bond prices fuelling a major correction of our over inflated asset classes. The cause and timing of these events are very difficult to predict, but one thing is certain do not underestimate the ability of Central Banks to keep the cash markets in full supply of liquidity.

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