Predict The Unpredictable: Brexit, GBP Crash, Deutsche Bank…Next?

Written by Nour Eldeen Al-Hammoury from Orbex

Since the beginning of the year, most political and economic events have been far from expectations. We can consider this year a year of surprises. With the US election a few hours away, should we be expecting another surprise? The short answer is yes. This is what we learned from this year’s events.

Who Imagined Brexit?

When the majority of the British voted in favour of leaving the European Union, we were left with the most surprising event of the year. The decision was a shock for many reasons, the first being, who would vote against unity? You would think that no one would, but the majority of the British People did. Was it against European expectations? Yes. Will it change? No. However, it will take some time, not months, but years until the UK has fully left the EU. The second reason is, who would vote in favour of an economic recession or slowdown? No one, but the British people did. This is not a definite result of the Brexit, but it is highly possible. Is it possible to avoid such slowdown? Yes. How? The Bank of England has already intervened and is likely to intervene even further to avoid sliding back into a recession. Yet, a slowdown is already in place.

The second reason is, who would vote in favour of an economic recession or slowdown? No one, but the British people did. This is not a definite result of the Brexit, but it is highly possible. Is it possible to avoid such slowdown? Yes. How? The Bank of England has already intervened and is likely to intervene even further to avoid sliding back into a recession. Yet, a slowdown is already in place.

GBP Flash Crash

The British Pound began the year around 1.49 and is trading around 1.23 today. The surprising event was the reaction of the British Pound after the Brexit announcement. We can say that it was catastrophic. It is obvious to say that the pound should weaken on the event of Brexit. However, the sharp decline was something that no one anticipated. In addition to that, the Flash Crash on October 7th was another shocking event across the board, leading the Bank of England to open an investigation. In total, the British Pound lost more than 20% in 10 months, but the biggest decline was right after the Brexit announcement, losing more than 4.7% in one week.

The Fed

The Federal Reserve has been promising the markets for years that it will “soon” raise the interest rates. Yet, it ended up raising it once in December of last year. Moreover and most importantly, the Fed promised the world to raise the rates four times this year. However, it is November, and the Fed has not raised the rates yet, not even once. Will this continue? Probably yes, but we don’t know for how long. We need to watch economic statistics and the US elections, which will be one of the key factors for the Fed.

Deutsche Bank

Suddenly, after almost a decade from the global financial crisis, the US Department of Justice demanded a fine of up to $14 billion for mis-selling mortgage-backed securities. The threat of such a large fine has pushed Deutsche shares to record lows, and a cut-price settlement is urgently needed to help restore confidence in Germany’s largest lender. What’s surprising was that the German government refused to bailout the bank. Such decision would put the global system at risk. Deutsche is much smaller than Wall Street rivals such as JPMorgan and Citigroup. Yet, it has significant trading relationships with all of the world’s largest finance houses and the International Monetary Fund identified it as a bigger potential risk to the wider financial system than any other global bank.

What’s Next

The US election is around the corner. It is a few hours away, and the odds are very tight. In all cases, history will be made in this election. If Hillary Clinton becomes the next president, she would be the first female president of the US, and if Trump wins, he would be the first publicly racist president in the history of the US. But since this year has been unpredictable, the current expectations suggest that Hillary Clinton will be the next president. However, I will not be too surprised if Donald J Trump wins.