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How they got it so wrong: Complacent traders stunned by Brexit

Simon Quijano-Evans has made a career of assessing the potential for instability in far-flung corners of the globe. On Friday, the chief emerging-markets strategist at Commerzbank AG in London woke to find some of the deepest financial peril he’d ever seen on the streets just outside his office.

“As an emerging-markets analyst I have been listening to all this talk of risk in emerging markets, but the incalculable risk was right here at the EU’s door,” said Quijano-Evans, who was one of the few analysts to downgrade bonds of the bloc’s eastern members in April on concern over the vote. “Everyone is in shock; the market was very wrong.”

Like traders and investors worldwide, Quijano-Evans spent Friday morning pondering just exactly how wrong the markets were on Britain’s vote to quit the European Union. On Thursday, the pound crept above $1.50 — its highest level this year — just before midnight in London as opinion polls foresaw a win for the “Remain” camp.

By the time the first rays of sun hit London’s City financial district on Friday, official results showed a clear victory for Brexit. Sterling was headed for its deepest plunge on record, reaching its lowest level since 1985. No asset class was left untouched as stocks plummeted, U.S. Treasuries surged, and gold rallied to the highest level in more than two years.

Nervous Trip

“I had a very nervous trip to the office as I was checking the news and seeing the markets falling sharply in Asia and the pound-dollar falling like a stone,” said Piotr Matys, an emerging-markets currency strategist with Dutch lender Rabobank in London.

Poland’s zloty and Mexico’s peso, both emerging-market bellwethers because of their high liquidity, tumbled. In Warsaw, 19 of the 20 companies in the stock exchange’s main index didn’t start changing hands for about five minutes after the official start of trading at 8 a.m. because there wasn’t sufficient liquidity to absorb all the orders that had been placed.

“It’s impossible to describe this bloodbath,” said Andrzej Knigawka, head of equity research in ING Securities in Warsaw.

Less than two weeks ago, five polls in 24 hours put the “Leave” campaign ahead, but later surveys indicated momentum for Brexit was waning. A YouGov poll taken on Thursday and published as voting ended showed 52 percent of Britons choosing to stay in the EU.

“Polls were oscillating a lot,” said Bilal Hafeez, global head of foreign-exchange research at Nomura Holdings Inc. in London. “But people jumped on to price action during the voting period.”

And the markets were led astray by betting odds that put the chance of remaining in the 28-member bloc at 90 percent as counting of votes started. After opinion polls called the May 2015 general election wrong, more people were looking to the bookmakers for guidance. Ladbrokes Plc said there was no evidence that the betting market was manipulated.

“Markets get it wrong sometimes; it’s as simple as that,” said Vasileios Gkionakis, head of currency strategy at UniCredit SpA in London. “What drives them in the wrong direction is momentum. A few start and then the rest follow.”

Mark Dowding, a London-based partner at Royal Bank of Canada’s BlueBay Asset Management LLP, closed a position betting on the pound’s decline last week when the “Remain” side was seen prevailing. He said investors are now anticipating intervention from central banks.

“Markets have been ill-prepared for this event,” Dowding said. “If policy makers fail to stabilize markets, confidence could be sorely tested.”

Bargain Hunting

Bank of England Governor Mark Carney said he won’t hesitate to take additional measures to secure monetary and financial stability, and that the central bank is ready to provide 250 billion pounds ($342 billion) in extra funds. The Swiss National Bank said it had already intervened in currency markets to stabilize the franc after the vote.

Some traders spent Friday hunting for bargains among assets cast aside in panic selling.

“Everything is being sold off indiscriminately,” said Angelo Rossetto, a trader at GMSA Investments Ltd. in London.

Others chose to sit out the turbulence. Lutz Roehmeyer, director of fund management at Landesbank Berlin Investment, said he would spend the day visiting clients rather than trading. Before the vote, though expecting “Remain” to win, he had taken an underweight position on the U.K. and had boosted exposure to “flight currencies,” such as the Japanese yen and the Swiss franc.

“The wisest strategy is to be prepared before the event, not to act in hectic ways after,” Roehmeyer said. “Prepare for the worst, hope for the best.”