Tilting the balance of risk

With the confluence of the impending Brexit referendum and the ongoing European football championships, the temptation to make the odd analogy (or at least the odd joke) is nearly irresistible.  After the latest 90 minutes of dross served up by the England football team against Slovakia yesterday, it occurred to your author that the fantasists who think that "this will be England's year" in the run-up to every major tournament were reminiscent of blithe belief in some quarters that the UK will simply waltz their way into new free trade agreements should they leave the EU: the triumph of hope over expectation.

Th irony, of course, is that a primary goal of any Premiership football team (usually packed to the gills with European imports) is to...wait for it....get into Europe, even as many (most?) of the fans chanting "we're all going on a European tour" support a Brexit.   Of course, a UEFA-sanctioned competition is a far cry from the European Union, so it's important to realize that this is just a jokey analogy.   Still, the backward step that English clubs took after being banned from European competition in the wake of the Heysel disaster in the mid-80's offers at least a modest reminder that going it alone is not all sweetness and light.


In any event, the swing in the polls and bookies towards "Remain", for whatever the reason, produced the predictable knee-jerk rally in sterling and risk assets.  Macro Man was gratified to see that the swing in cable was almost exactly what his simple model, presented here last week, suggested given the shift in interest rates and, more importantly, the decline in the Brexit odds from the bookies.

You have to say, however, that the price action in US equities at least was less than inspiring.   Sure, they closed higher on the day, but given the big gap opening higher for SPX cash to close up only 12 points was a bit of a disappointment.   For sure, the candle is not one that inspires a lot of confidence.  

With the bookies now making Remain three times more likely than Brexit, at this point you'd have to say that the balance of risk has tilted quite a bit in the last 72 trading hours.  At this juncture, a ten point swing in expectation is much more likely to have an outsized effect if it tilts towards Leave than towards Remain; after all, the latter is asymptotic at 100%, and there is the most "expectations gamma" around 50%, so any shift in that direction should have a bigger impact.     It was perhaps this realization that calmed the enthusiasm for equities as the yesterday's US session progressed.

Of course, there's also the small matter of Yellen's testimony today.  In normal circumstances, this would clearly be the dominant market-moving event of the next few days.   However, given that we had the FOMC press conference less than a week ago,  it seems a bit dubious that Yellen would drop any earth-shattering tape bombs, particularly ahead of the referendum.  Of course, you can't legislate (boom-boom) for the types of questions that she'll get from Congress, so it is of course still worth watching.

Perhaps one of the more perspicacious Senators can ask her how she's managed to be so effective for China....


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June 21, 2016 at 8:02 AM ×

How's this for a risk/reward Brexit trade? Does anyone expect GBP Libor not to move in the event of a "Leave" result? If you look at the GBP FRA switch over the 24th (i.e. Friday's fixing), it was last trading around flat. You've got to sell that spread, no? Details here - https://www.clarusft.com/brexit-fx-option-and-fra-analysis/

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Anonymous
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June 21, 2016 at 11:14 AM ×

re chris 8:02
could very well be but sitting in front of my ib screen and now a independent trader, not the easiest !
one interesting trade though_ USDJPY have bought some upside calls here- has lagged this bounce in risk and esp the back up in rates. if we vote in this could very well tag 110-112. in addition futures position has increased yen longs
i think ....long around 104ish

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henner
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June 21, 2016 at 12:07 PM ×

I'm also thinking of trading from home via IB at some point in the future... just wondering. where do you get all your information from? I would be lost without my Bloomberg, the chat to my colleagues and all the reports my company has subscribed to. I heard money.net is some cheap alternative to Bloomberg. anyone using that?

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Error404
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June 21, 2016 at 12:31 PM ×

"Th irony, of course, is that a primary goal of any Premiership football team (usually packed to the gills with European imports) is to...wait for it....get into Europe, even as many (most?) of the fans chanting "we're all going on a European tour" support a Brexit."

Not sure there's any logical disconnect between fans wanting their team to be in the Champions' League and at the same time not wanting their country to be in an undemocratic, decaying, dysfunctional quasi-superstate designed entirely for the furtherance of elite interests. If I'm wrong about this, of course, perhaps we should assume that the enthusiasm of CSKA Moscow fans for their forthcoming European campaign (no pun intended) presages a budding Russian desire for EU membership.

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June 21, 2016 at 2:59 PM ×

Re: 11:14...granted, not the easiest trade to put on! I'd like to suggest buying LIFFE July Short Sterling instead, but I just checked and the serials have zero Open Interest. Buying Sep Short Sterling looks like the only "easy" option, all be it more risky....shame.

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fcp
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June 21, 2016 at 3:28 PM ×

Anyone else thinking it's time for a small short on GDXJ?

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Anonymous
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June 21, 2016 at 3:52 PM ×

@Error404 - V well said sir.

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Anonymous
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June 21, 2016 at 5:08 PM ×

re henner 1207- i use IB for trading and data. money.net is good if you just doing US single stocks- i many trade index futures and options , with some fx and bonds. there are extra fees for eurex etc for both money.net and iB ...on the whole IB connectivity excellent
hope it helps(anon 1114)

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cowboy
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June 21, 2016 at 5:38 PM ×

Get a few friends (pref w diff skillsets) together share a small office and a bbg? If u can't cover bbg u gotta ask urself if u shud be doin something else I suppose. Haven't yet grown the balls to up and do it myself tho =p

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Anonymous
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June 22, 2016 at 12:32 AM ×

You say "perspicacious senators" as though there is such a thing. Was it Corker who was confused about the reinvestment?

- Whammer

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Macro Man
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June 22, 2016 at 12:33 AM ×

Yes. That was brutal.

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washedup
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June 22, 2016 at 12:53 AM ×

@whammer the funniest thing was that I half expected some word parsing algo to go crazy with that exchange - after all, the phrase QE4 was mentioned a few times.

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June 22, 2016 at 9:06 AM ×

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