Confronting uncertainy

The weekend has brought little by way of clarity, and as such markets look set to trade on the back foot again as investors come to grips with what may be a lengthy period of uncertainty.  As noted on Friday, Article 50 is going to be a center of contention for politicians of every stripe; it is perhaps telling that Boris Johnson, noted 'Leave' supporter and putative front run-runner to replace David Cameron, did not mention it once in his Telegraph piece setting out his views on a post-referendum world.  (He also promised continued free trade and outward UK travel freedoms while restricting inward freedom of movement; he stopped just short, however, of offering rainbows, pony rides, and lemonade for everyone free of charge.)  In any event, the Tory Party leadership (and presumably, the decision on whether to tender Article 50 notification) will not be decided until October.

At the same time, legal scholars are pondering whether the devolved parliaments of Scotland and/or other regions could possess an effective veto of withdrawal from the EU via some legal arcana; meanwhile, the Labour Party is crumbling down to its foundations with many MPs deserting the S.S. Corbyn.  And to top it all off, it's worth remembering that this referendum was an "advisory" referendum; in other words, there is no legal requirement whatsoever for Parliament or the Government to act upon it in the slightest.

As we know, markets hate uncertainty above all else, and we seem set for little but that for a number of months until some of the issues noted above are ironed out.  As one Internet wag put it over the weekend, "at least Baldrick had a [bleeding] plan."

The news was slightly better for the establishment in Spain, where politics remain an utter muddle but Podemos, the the left-wing protest party, lost considerable ground to the old guard PP and PSOE over the weekend.  There's still no prospect of forming a government unless  Podemos hops into bed with the old school center-left PSOE and some of the nationalist parties, which they refused to do last December.  It's the first election in recent memory where the populist parties did worse than expected (and worse than previously.)  Whether this is an aberration in the general populist trend or a sign that Brexit was its apotheosis remains to be seen; to date, betting against the populist tide has not been a wise decision.

Meanwhile, spare a thought for the Japanese, caught up in the global tide of risk aversion through no real fault of their own.   While Abe has authorized the MOF to take steps to ensure FX stability, it's not clear how much the Japanese can do without triggering a reaction elsewhere.  Still, the waterfall price action observed Thursday night was more than a little scary.   From Macro Man's perch, USD/JPY has done about as much as could have reasonably been expected to the downside; for choice, he'd look to be an eventual buyer of further weakness.

Finally, China has, as expected, ratcheted up the fix dramatically in response to the post-Brexit FX volatility.   Macro Man noted on Friday via Twitter that the Chinese would need to raise the fix by a whopping 606 pips to maintain a stable CFETs basket (which has steadily declined, of course); in point of fact, they raised it by 599 pips.  What do you know....the basket stayed flat, virtually to the basis point, following the game plan identified the other week.

Clearly, renewed upside pressure on USD/RMB is not what the global risk complex needs, particularly on top of everything else.  Keep a weather eye on the 6.68 region in USD/CNH, where the authorities were offering near the height of the panic early this year.   If that goes...watch out.   The temperature's gotten quite hot recently, but the torrid times may only just be beginning.