Sixteen observations, many of which are serious

1) When Mystic Meg said a large blond man would take England out of Europe, she wasn't kidding.

2) That BoJo was a no-show for the Prime Minister's speech (and questions afterwards) doesn't exactly augur well for a speedy resolution to the governmental interregnum, the implications of which the market has started to realize.

3) Macro Man can neither confirm nor deny the rumour that Roy Hodgson resigned so swiftly so that he could immediately be appointed to the negotiating team with the EU.  After all, who else could manage to take England out of Europe so quietly?

4) Mr. Hodgson was the highest paid manager in the tournament.  The Icelandic manager is a part-time dentist.  (Readers can supply their own jokes here about why this may have confounded the English.)

5)  Ironically, Iceland has almost exactly the same population as the city of Leicester.

6) While the downgrade to the UK's sovereign rating is clearly a blow to national pride, it needn't have any particularly nefarious implications.  After all, Treasuries have done just fine after the US downgrade, and 10y Gilts are trading at a record low yield:


7) That being said, the capital gains earned from owning Gilts must be small comfort to FX reserve managers who've seen the USD value of those bonds tumble.

8)  On the face of it, the FTSE 100 actually hasn't done too badly since the Brexit vote.  However, a decent slug of FTSE market cap is tied up in miners and resource companies with USD receivables- who thus benefit from the shellacking endured by sterling.  Looking at the domestically-focused midcap FTSE 250 tells rather a different story, however.   Macro Man plotted the relative performance of the FTSE 250 vs the FTSE 100, and compared it with the performance of the Russell 2000 vs the SPX as a "control" measure.

As you can see, the FTSE 250 was a star performer last year, an in-line performer for most of this year...and been absolutely crushed over the last couple of days.  That is the equity market impact of the Brexit (and associated uncertainty) manifesting itself.

9) Despite another 180 bp downdraft in the SPX, taking it to its lowest level since mid-March, the VIX fell sharply yesterday, dropping nearly 2 vols.

10) Macro Man isn't sure why this was, but the observation encouraged him to cover a portion of his longstanding short SPX position near the lows yesterday.  At some point soon, he expects a bounce that he'll be able to sell back into.

11)  While the DXY is looking very perky, gold is also trading well.   This of course is symptomatic of risk aversion flows, which can also be observed in the ongoing outperformance of the yen.  It's looking increasingly like the DXY is forming a base from which to strengthen  further.  A few weeks ago one might have thought it would be Fed rate hikes that would spur this; now, of course, it looks like risk aversion.

12) GDX, meanwhile, continues to trade like a rock star, outperforming bullion on the way up (much as it fell further than bullion on the way down.)  That being said, it should likely pause for a bit as previous highs from a couple of years come into play.   In the bigger picture, however, it is difficult to argue against continued strong performance, given the proliferation of negative yielding financial "assets" at the moment.

13) Remember this post about GDX and VRX?  Guess it wasn't time to buy the latter when their prices crossed.   How bad has Valeant been?   Its share price is even down in sterling terms this month.  In SAT logic terms, Valeant : Herbalife:: England team : EU.

14) We're coming close to a single-digit death watch for Deutsche Bank, aren't we, of the type we haven't seen for nearly eight years.  perhaps they can enter a race to the bottom with Valeant, though only one of them would have systemic consequences. 

15) Did you ever think you'd hear so little about USD/CNH pushing towards the highs, or the uptick in the USD/CNY fixing (up 114 bps in two days)?  The PBOC must be loving this Brexit stuff, as they can execute their game plan (the CFETS basket nudged very very slightly lower last night) with no scrutiny (other than that from slightly-obsessed bloggers, apparently.)

16)  Finally, this brief clip of former England manager Steve McClaren is amusing even with the sound off; his facial expressions apply to watching either an England match or the post-Brexit fallout.




Previous
Next Post »

38 comments

Click here for comments
Anonymous
admin
June 28, 2016 at 7:25 AM ×

@MM re: point 14, what are the systematic consequences of Valeant?

Reply
avatar
henner
admin
June 28, 2016 at 7:37 AM ×

i think he is more referring to the systematic consequences of a Deutsche Bank collapse

Reply
avatar
Justabeancounter
admin
June 28, 2016 at 8:31 AM ×

As far as I'm concerned there is zero probability that the German govt lets DB go under. That's my 2 cents....

Reply
avatar
Anonymous
admin
June 28, 2016 at 8:38 AM ×

It's "turnaround tuesday" folks. Did you all buy the dip last night?
What? You thought markets would crash for real this time? HAHAHAHAHAHAHA

Reply
avatar
henner
admin
June 28, 2016 at 8:49 AM ×

@justbeancounter: never clever to assign zero probability to something... but I agree DB is certainly too big to fail for Germany and they would bail them out almost for certain. as a shareholder however that won't help you much. check out the Commerzbank chart from ~2007 on. they were tbtf as well and got rescued by the state. no fun if you bought around 200 and the stock is trading at ~6 now

Reply
avatar
Polemic
admin
June 28, 2016 at 9:01 AM ×

observation 17 - last night marked Peak Bollocks in media noise.

all my fave indicators have lit up for a turn in emotions. or at least a big sigh.

kubler-ross the best model to follow for trying UK.

all my thoughts in the usual place

Reply
avatar
Anonymous
admin
June 28, 2016 at 9:08 AM ×

Made some money on leave bet (10:3 odds at my local bookmaker), made some more money yesterday on Iceland (5:1 odds). Seems like betting against English is a good system these days ;)

Reply
avatar
Phil
admin
June 28, 2016 at 10:30 AM ×

high chance we never leave - but how to sell that to the great unwashed is another matter entirely, and how we save face I have no idea......or how to combat and stop European federalism.

The EU is a simple split.

The PIGS & France want to suck on the teet of fiscal transfers and are largely socialists. They won't reform and are in a mess, and will always be in a mess inside the single ccy. And they want ever closer union (the elite do anyway)

Germany loves the lower FX rate, is mercantilist, runs a massive CA surplus and loves the share of trade and mkt place it has. However they are utterly scared of closer union and fiscal transfers cos they're the ones on the hook for it. So will resist further union as we have seen with the deposit guarantee scheme for banks - German's resist.

So square that !

Reply
avatar
Anonymous
admin
June 28, 2016 at 10:44 AM ×

i think given the uncertainty a higher vol regime is here for a while- plans to buy dips , sell rips with a short bias for spoos- earnings not going to be too pleasant and usd looks set to go higher...spx one set class which just looks 200 points too high...but rallies are going to be big as well
eventually we get a election or a referendum on a new new eu deal which which be approved bu 80-20 i think as will be much more nuanced as opposed to a binary in out. for all events and purposes uk aint really leaving eu!

that should unleash a much higher move in risk sets but will be a while away but thats the playbook my side

Reply
avatar
Bruce in Tennessee
admin
June 28, 2016 at 12:34 PM ×

The element of farce this week had nothing to do with England, either in economics or sports...the farcical element was Greenspan's call for return to the gold standard...

Reply
avatar
June 28, 2016 at 12:49 PM ×

What a turn over 5 days, first the surprise vote, and then Iceland. Incredible point re the dentist.

The impact on financial markets is likely to linger, at least in terms of volatility and the dampening effect on stocks and risk assets. The primary concern will center around the exchange rate shifts back to USD strength - a big problem for S&P earnings and thus volatility enhancing.

On Brexit

Reply
avatar
Anonymous
admin
June 28, 2016 at 1:32 PM ×

Eurostoxx up over 3% this morning because its a bear market...

Reply
avatar
Anonymous
admin
June 28, 2016 at 1:52 PM ×

Italy's banks are saved. FTSE MIB is up +4.5%. EU Banking index up over 5%.

US GDP beats expectations...S&P up 24 handles before the markets open...

Once again, dip buyers win.
Bears are scattered, their corpses lying in the dust...

Reply
avatar
washedup
admin
June 28, 2016 at 1:54 PM ×

@bint haha yes - greenspan being wheeled out to suggest gold as an antidote to the current state of affairs, is akin to a chief perpetrator and serial arsonist respectfully being queried about his opinion on the latest conflagration, and the best brand of dry ice to fight it - one day I fully expect to see bernanke being interviewed in an actual helicopter.
Whats your POA here? You in your favorite SDS yet or still watching and waiting?

Reply
avatar
Anonymous
admin
June 28, 2016 at 2:08 PM ×

LOL @Anon 1:54 & 1:32

FESX down 1000 ticks from 3760 area April last year. I do recall Nico adding a trade on Thurs short in the 3000 area. It might be gold dust he's lying in!

3% rallies in current eequity markets are known as "bear market rallies".

Almost as good a laugh as watching Engerland get knocked out yest.

Thanks.

Reply
avatar
Bruce in Tennessee
admin
June 28, 2016 at 2:24 PM ×

Well, Washed, I do so want to go in guns blazing with SDS, but after January, I have been making small moves in AU and TLT,and a couple of others, and this has turned out ok so far...but I fully expect the equity markets to turn, but since 2008 I am a much more patient lad than before. I have become Gundlach and Lefty...playing more maturely, but I truly hate this kind of investing. It means I have to pay too much attention to the markets,and on a daily basis.

The short answer is...I will be in SDS when my fickle lover convinces me she's ready...

Reply
avatar
Booger
admin
June 28, 2016 at 2:24 PM ×

The more I think about the long gbp.usd and gbp.jpy trades the more I like it. I am adding here. The actual economics about it I don't have any idea about the more I read. The attractive point is extreme positioning. I think we can safely assume that anyone long before brexit has been stopped out. Anyone who got in early on the day after Brexit has also been stopped out. Only fresh longs from yesterday would still be live. The other side is the massive spec short interest. So many people are thinking "when should I cash in my gbp.usd short". Um, well, lets see, you were lucky enough to be holding that short when there was a 10-20 sigma event in terms of downside move in one day, followed up by a bit more puking up the next day and you are expecting more downside move ? I figure gbp.usd could eventually go to 1.2 but not until a lot of a the short interest gets taken out and that will be a significant tailwind. I have a target of 1.4 in the next 2 weeks.

Everyone fantasises about being on the right side of a Brexit or CHF (SNB peg-break) but the higher probability move and potentially much more profitable is the movement the other way after such a one day move. Hard to have size pre-brexit, but post-brexit, size and scaling are much easier. It is not so much buying the dip, but buying when there is maximum short term fear and post large scale liquidation.

Reply
avatar
Leftback
admin
June 28, 2016 at 2:56 PM ×

Many saw the bounce coming yesterday, and we took off some of our short positions. 12 year old punters should take a look at the performance record of those buying some of the 3% rallies in 2008. We agree with MM that this is now a market where you sell the rips. We will spend the day in the hammock, inspecting charts, doing Fibonacci calculations, looking at Bollinger bands and so on. Yesterday didn't have those aspects of a screaming bottom in risk assets (lumpy trading in illiquid instruments, gap and crap, flash crashes in individual stocks due to lack of liquidity) that have accompanied other major fear spikes in the past. Our supposition is that such an event may lie ahead later this summer.

Reply
avatar
Anonymous
admin
June 28, 2016 at 3:49 PM ×

Will any of these new longs hold their positions through the upcoming 3-day 4th of July holiday weekend? Next Tuesday could hold a surprise or two ...

Reply
avatar
Polemic
admin
June 28, 2016 at 3:51 PM ×

Cor blimey .. Independence day .. forgot all about Independence Day what with Independence Day keeping us all busy


Reply
avatar
Anonymous
admin
June 28, 2016 at 4:22 PM ×

It is more likely that shorts would get out of their positions before the long holidays. But next week is another story.

Reply
avatar
June 28, 2016 at 4:34 PM ×

Unicredit is winning the race versus DBK!!
Meanwhile BTPs and Bonos are higher than preBrexit... Central banks will never learn??

CNH devaluation is deep, em assets too much optimistic now, Fed or not Fed...

rates worldwide are cratering..this is a HUGE mess..

Reply
avatar
washedup
admin
June 28, 2016 at 4:47 PM ×

@anon 3:49 - vix is a bit too painfully high to be able to withstand 4 day theta, surprise or no surprise, so further vol selling through the week is likely - that said, its correlation with spoos has been interestingly low recently, so who knows.

Reply
avatar
Leftback
admin
June 28, 2016 at 6:59 PM ×

Likely we don't see too much selling action W and Th, b/c: 1) end of month, end of quarter window dressing will bring in a few punters and 2) Q3 fund flows begin Friday, nobody wants to be in the way of that.

What happens after the holiday weekend is a completely different story. Be interesting to see whether vol is crushed this week, spot VIX maybe but the medium term vol? I suspect not.

Reply
avatar
Anonymous
admin
June 28, 2016 at 7:46 PM ×

Going to need a proper China deval to crash this market, LB. And the Brexit ain't it as best case it will take years to exit, and worst case they decide to remain anyway. So Brexit isn't exactly a catalyst; if anything, it's a short seller's worst nightmare as it presents yet another "wall of worry" for restless sideline cash to climb against the backdrop of perpetual zirp/nirp.

Reply
avatar
Anonymous
admin
June 28, 2016 at 7:59 PM ×

As I type this, equity indexes everywhere are getting ramped, and bears are being punched in the face. This is what happens when you resist the Central Bank overlords. Now get back into line and buy stocks, or face margin calls by nightfall tomorrow.

Reply
avatar
washedup
admin
June 28, 2016 at 8:16 PM ×

@anon 7:59 - the reason indexes are getting ramped (not to be confused with raped, which was yesterday), is for the reasons left outlined above, plus the fact that other punters like him are also off doing fibonacci calculations - that stuff is hard - have you ever multiplied anything with 0.618? I thought not.

Reply
avatar
Macro Man
admin
June 28, 2016 at 8:18 PM ×

For the record, I am generally pretty low frequency. If even I can see a bounce coming and trade on it, it has absolutely nothing to do with BS reasons concocted by annoying trolls re CBs, and everything to do with oversold technicals and sentimenmt.

Reply
avatar
Anonymous
admin
June 28, 2016 at 8:52 PM ×

I'm actually quite surprised by todays moves. wasn't Kolanovic talking of 300bn of equity selling due to risk parity funds and CTAs. who`s buying? shorts taking profits or being scared by Draghis call for global alignment in monetary policy? fundamental buyers because of low valuations? doesn`t make much sense to me. EU deadlock, NIRP and banking mess. all reasons for me to be cautious

Reply
avatar
Anonymous
admin
June 28, 2016 at 9:08 PM ×

Markets don't crash in July. Overzealous shorts citing "fundamentals" this and "Soros" that are about to get creamed. Again.

Reply
avatar
Anonymous
admin
June 28, 2016 at 9:13 PM ×

Anon @8:52

We've had the fat tail event on Friday, followed by systemic selling in Europe & US on Monday. Europe Sold off from 30 mins after cash open to 30 mins before. A relentless grind. The banks bounced and then flounced today into the cash close. The strong bid inthe Emini has been met with big, chunky resting offers all the way up.

We likely enter a period of wait and see now. As mentioned before,end of month, Q and the beginning are ahead. When the dust settles, and we know more about who is in what cabinet, moves will be made. The longer uncertainy remains, the worse it is for Europe.

Also, note Italian's slipping in a movefrom4bln fund to 40bln bailout request on the bad news.

Selling exhausted short term, short covering and bottom pickers.

Reply
avatar
Anonymous
admin
June 28, 2016 at 9:14 PM ×

add some content and insight. comments like these are useless. I'm certainly not gonna because you come up with this sh**

Reply
avatar
abee crombie
admin
June 28, 2016 at 9:14 PM ×

JPM's gandolf on risk parity is usually pretty good but who know exactly how long all those risk parity funds take to impliment. I suspect many are and were running lower notionals bc of aniticipated brexit vol anyways.

Either way, the classic tell for a bounce in US Equties has been a 90% down day (check) followed by "2" 90/80 up days. Lots of times you get oversold bounces, not always do you get 2 in a row.

Reply
avatar
abee crombie
admin
June 28, 2016 at 9:25 PM ×

besides I'd hardly call the action in rates and DXY as confirming a massive reversal, nor that of EU banks, which ideally what you want to see... but I'll take it.

Reply
avatar
Anonymous
admin
June 28, 2016 at 9:37 PM ×

true. for a proper reversal i would want to see sx7e recovering more. but vol is coming off quite significantly. in the Aug24 sell-off last year vol (futures) moved up for days. this time we had a jump but now we're dropping heavily again already. doesn't give me confidence that this is long lasting ...

Reply
avatar
Anonymous
admin
June 28, 2016 at 9:41 PM ×

The vol jumped due to size of the overnight gaps on a shock news event. As opposed to a build up.

Reply
avatar
Anonymous
admin
June 28, 2016 at 9:49 PM ×

anyway, VIX is back at pre Brexit levels. central banks have it under control (i hate these CB comments too, but in this case it seems to be the case). risk on.

Reply
avatar
Polemic
admin
June 29, 2016 at 4:16 PM ×

Long Gilt the best performer in FI land today.

Market recovery and stability is the first part of debunking the circularity of Brexidisaster. We should settle down now as we wait , as MM said for real impact rather than assumed impact.

USDJPY back to 106 in the meantime anyone?

Oh and LB .. you should try these new carbon nanotube gloves I've got. Much better than those old Kevlar ones.

Reply
avatar