Well, it's 11 pm NY (4 am UK time) and you probably don't need Macro Man to tell you what's going on. Given the voting percentages and turnout figures, it's looking very much like Leave will win, contrary to all expectations 24 hours ago. As the market's conviction on the outcome increases, pricing is generally reflecting the moves predicted by the regression model presented here a couple of days ago. At the time of writing cable is at 1.36, reflecting a 65% probability of Brexit.
The knock-on effects onto the risk complex generally have been as violent as they have been unsurprising. Over the last 6 hours GBP/JPY has put in a cheeky 25 big figure range...
The almost inevitable outcome once Brexit is confirmed (assuming it is) will be an overshoot, at least in sterling. Indeed, you could argue we're already there, given that cable has already put in a loss that's more than twice as large as its previous decline in the post Bretton Woods era (-4.13%.)
That being said, the chart of the DXY has quickly morphed from soggy to super-sexy, looking like a big breakout is in the process of forming.
That would of course be consistent with a risk aversion episode, which you could argue is probably overdue anyways. Also consider what that DXY move will do to the CNY fixing, particularly considering the ongoing trend in the RMB basket.
One view that seems obvious is to fade the rally in EUR/GBP. If the Brexit really is a disaster, then it should impact the Eurozone deeply. If it isn't, then sterling has been unfairly battered. You always have to be wary of "heads I win/tails you lose" trades, but this one really stands out as a nice set up once the dust settles....particularly if other marginally-attached countries start eyeing the exits from the EU.
Enjoy the rest of the night/morning, and consider today as Exhibit A that high volatility does not mean expensive volatility.
The knock-on effects onto the risk complex generally have been as violent as they have been unsurprising. Over the last 6 hours GBP/JPY has put in a cheeky 25 big figure range...
That being said, the chart of the DXY has quickly morphed from soggy to super-sexy, looking like a big breakout is in the process of forming.
One view that seems obvious is to fade the rally in EUR/GBP. If the Brexit really is a disaster, then it should impact the Eurozone deeply. If it isn't, then sterling has been unfairly battered. You always have to be wary of "heads I win/tails you lose" trades, but this one really stands out as a nice set up once the dust settles....particularly if other marginally-attached countries start eyeing the exits from the EU.
Enjoy the rest of the night/morning, and consider today as Exhibit A that high volatility does not mean expensive volatility.
62 comments
Click here for commentsWill European markets open? Can see Eurex going "down".
ReplyAnother fade trade is going long FTSE futs. Since they are quoted in GBP they lost the GBP amount plus 7.5%. With big part consisting of global companies this is my first punt on the long side after a profitable night awake. I also sold my gold and some of my VIX. Am short EU banks, XLE and WTI time spreads.
ReplyGeorge Soros warned that Britain’s leaving the European Union “would have at least one very clear and immediate effect that will touch every household: the value of the pound would decline precipitously.” He predicts that the currency would decline “steeply and quickly” in the event of an exit from the European Union, a fall that would be “bigger and more disruptive than the 15 percent devaluation that occurred in September 1992." In addition, "It would also have an immediate and dramatic impact on financial markets, investment, prices and jobs."
ReplyThis could get pretty exciting ...
"Sterling has tumbled 10 percent, the euro has slid by the most since it was introduced in 1999 and the yen had its biggest surge since 1998. South Africa’s rand led losses among the currencies of commodity-exporting nations, sliding more than 6 percent as oil sank to about $47 a barrel and industrial metals slumped. Gold soared with U.S. Treasuries as investors piled into haven assets. Futures on the FTSE 100 Index plunged with S&P 500 Index contracts as Asian stocks dropped by the most in five years."
ReplyAre we having fun yet?
I wonder if LB has fallen outa his hammock yet?! :)
If Brexit goes, reading now that Scotland might have a second run for independence to stay in the EU ? What say the more Euro centric readers here ? Is that realistic ?
ReplyMore fireworks for sure
One market observer: “Investors are just trying to get out. You sell first and ask questions later. There was a massive miscalculation of risk and now you’re seeing all that unwind.”
ReplyRisk aversion is soaring: the 10-year US Treasury yield has fallen towards 1.50% (the lowest level since 2012) while US stock-index futures have fallen >3.5%.
Replynow I can't see the top of the 2 hour bar on my chart, thats a first
ReplyFrom a market viewpoint I didn't have a dog in this fight having been cashed up long enough for the paper to revert to timber.
ReplyFrom a behavioural perspective I don't think I was ever more wrong. Just didn't credit that many people in this country still had the 'bite' still in them. Was sure the status quo ,safety first would carry the day reasonably comfortably.
Aftermath ,messy. Can the UK remain intact when the vote was so differentiated? A worry for sterling. On the otherhand does the future for Europe look assured now ,or is this just the first dominoe to fall ? I think that brings us to MM call on Eur/GBP and the potential for a dramatic snapback when cooler heads start to think this one through.
Japan’s Nikkei index has slumped by 7%, a loss of over 1,100 points. That is its worst one-day fall since March 2011, when Fukushima was hit by a devastating earthquake that trigged a tsunami and a nuclear disaster.
ReplyThis is one dip I have no interest in buying. This is not discretionary selling imho.
ReplyI still don't think UK actually leaves.
ReplyEU has history of self preservation.
BBC: Brexit.
Replyhttp://www.bbc.com/news/uk-politics-36615028
Pol - how will that work ? will there be "concerns" and "recount" of the vote ? or a second referendum after some market down move that scares the populace ?
Replyi have no dog in this fight but i am very curious about how you see the mechanics of this would work
EU later..
Reply@ Anon 5.42 The argument is that it would involve a renegotiation of certain objectionable EU provisions re immigration, etc, that would allow the UK to remain in. Hard to see it happening though if the UK invokes Article 50
ReplyBBC are saying Cameron will go. The Parliamentarians wanted to stay, populace said no...
ReplyHow will Risk Parity Funds handle this? Try and hold out for the weekend? Panic first?
Replytaken from the BBC
Reply'Mr Cameron has previously said he would trigger Article 50 as soon as possible after a leave vote but Boris Johnson and Michael Gove who led the campaign to get Britain out of the EU have said he should not rush into it.
But they also said they want to make immediate changes before the UK actually leaves the EU, such as curbing the power of EU judges and limiting the free movement of workers, potentially in breach the UK's treaty obligations.'
Why dont they want to invoke Art. 50? How can they make juridical changes whilst technically still being in the EU?
Was the referendum a the fight for leadership of the Tory party with Leave ramifications not being fully considered?
Invoking Article 50 starts a 2 year clock, at the end of which the Uk is out regardless of whether any new treaties have been negotiated. Basically, the Leave guys want to have their cake and eat it too.
ReplyHoly Crap.... didn't expect this.... Just literally did fall out of the bloody hammock as well, we really just did not see this happening! Those crazy Brits, eh, MM. Anyway.... let's see, despite being mainly in the hammock nursing a pile of cash, we do have some instruments that we had purchased a while ago for a different set of circumstances:
ReplyA sh*tload of WTI puts. Check.
A boatload of OTM and deep OTM IWM puts. Check. [Thought that was dead money for sure]
A metric ton of UUP calls. Check.
A modest amount of short CADUSD. Check.
So that lot should have a nice day, even if this wasn't the event we bought them for. Better to be lucky than good. Naked longs, well, it's just going to be pain. As for leveraged longs in stuff like oil and GBPUSD, better sell the house, Mr Margin is going to be calling before 4pm Eastern tomorrow.
Cheers guys...
Reply"This is not discretionary selling imho"
ReplyFrom above, that's probably the understatement of the day. Given the closeness of the poles prior to the vote and the very skewed probabilities assigned to stay I think it is safe to say that there was a massive amount of complacency in play which will more than likely be reflected in positioning ....so forced selling back of a whole load of sheds to take your pick from.
By the time the dust settles on this I would say the next long leg down in deleveraging will be in place. The concept of getting punished in overleveraged markets will have be found to be has true has it ever was. A swiss watch timing tool, no. An allocation tool to always keep in mind, definitely.
Just thinking that there might not be a ton of liquidity around in the morning... FX must be a complete shit show.
ReplyDX up 3.5%, cable down about 10%. Holy sh*t. I had forgotten that this stuff actually happens....
Volatility hurts, leverage kills. Someone who is caught leaning the wrong way may be going out of business next week.
GOOD ON THE PLEBS OF ENGLAND....GOOD ON YA PLEBS!
ReplyThe plebs have seen how Brussels ...and yes it all comes from the unelected and self entitled elite of the EU how they have treated Greece , how they have treated refugees, how they have treated selected company multinationals, how they have treated and segregated within certain countries their own populace to the ninth degree, how they have Obama dictating to them where in the queue they will be within the global economy after fighting side by side in all their wars...total F##kwit!, how they too are now a target by doing so...total F##kwit again.
GOOD ON YA PLEBS!......show them you don't their economy or their tab for the four seasons.
THIS VOTE SHOWS HOW MUCH THE AVERAGE PERSON HATES THE FASCIST EU !!!!!!!!!!!!!!!!!!
ReplyR U L E B R I T A N I A !!!!!!!!!!!
Watch every other country in Europe now follow and vote to leave the EU. It will cause some short term pain followed by MASSIVE PROSPERITY !
@MM
Replythats what I am thinking - also, we could see Boris and Farage become a little softer in their Leave rhetoric in the next few days (do they really want to manage the mess of leaving?)
if true, how will Mr Market react?
Has Nico's "Ugly Summer" begun yet?!
ReplyWell one thing is for sure - rate hike totally off the table now
Reply"This is not discretionary selling imho", A quality piece of understatement there. Nice one, Mr T.
ReplyUSDJPY broke below 100 earlier, down 4.5¥ right now, that translates to about a 100-200 point down day in Spoos, just guessing that we are likely to see equities drop between 5-10% tomorrow. WTI is also off >6%, despite all those important Nigerian incidents that were going to push crude above $50, remember? I wonder if we start hearing about weak demand now?
Some of our dip buying friends may be relatively quiet for a few days.
WORST PRESIDENT OF ALL TIME....can't even back a winner in a two horse race and leave himself an out.
ReplyNO NOUS WHAT SO EVER...NONE.
PS...what comes first Mr President...a bear market in the dollar or push higher through 100. I don't care if I never back a winner again...I know how feels to pull off winners , I've done it over and over again with all my friends on...you nor mates can ever take that feeling away from me. Chow!
Leaving too quickly will be fudged via Article 50 BUT the main thing here is there are many other countries, or rather a large enough portion of their populations demanding a say as well. UK being a net contributor is a major blow to EU, if other net contributors go, it's just completely game over. Though EU is known to be very good in self preservation so we shall see. At the very minimum it will put an immediate stop to imperialist EU expansion dreams towards the Balkans and Central Asia since they realistically can no longer afford it without choking.
ReplyWonder if Brexit just skipped the relief rally to the part which would've eventually come anyway. I.e. sell in may held would've held true again.
Regarding the potential of a shortage of liquidity, Andy Maack, head of foreign-exchange trading at Vanguard: “For the first time I can remember, we’ve actually gotten notices from all our counterparties saying that they might not be able to provide pricing, that their prices might turn into indicative pricing during a period of time, that they might suspend algorithmic trading.”
ReplyNow I guess we have a week or two of media noise that can't make up their mind whether the UK splitting asunder comes before or after the EU does so. Almost certain ramping up of noise from the countries in the EU who themselves have been seeing a large anti EU swing in sentiment.
ReplyI note Surgeon et al already making noises about Scotland wanting to stay in the EU and yet with typical political arrogance doesn't stop to think if the EU will successfully ride out this storm. Not if you believe Soros that this is not the end for the UK and the EU ,but the beginning of the end for the EU.
That's probably the days negative news for the day. Now we get the stabilisers ... regulators, FX rebalancers and calls for unity and market defence
ReplyListen, you Maggots, with the SWAP LINES at my disposal, I can handle all of this from the comfort of the Eccles building, you just watch, we can have the Spooz back in the green by lunchtime.
ReplyBREXIT IS A RESOUNDING SUCCESS - IT HAS DEVALUED STERLING MORE THAN THE ENTIRE BOE QE PROGRAM. THE BOE IS CONSIDERING ANOTHER BREXIT NEXT WEEK IN ORDER TO ACHIEVE THEIR PRICE STABILITY TARGETS. EUROPE WILL ALSO LEAVE EUROPE TO FULFILL THE EU'S MANDATE OF DEVALUING THE EURO, AND THE FED HAVE JUST COMMENTED THAT THEY TO INTEND TO LEAVE THE EU TO DEVALUE THE USD.
Reply...and other countries will follow
Replyon Stoxx i was bidding the low 2800s and got 2699.95 at auction
this is the biggest/fastest trade i have done in 20 years- kept me up all night but hey i had never seen 10% down on Stoxx
i will shut up because bears are not popular on such days of pain -hope noone is getting hurt out there
but this day should teach some about investing based on UK bookies - so easily manipulated - and the proverbial 'central banks have my back'
the problem with dip buying and vol selling is that on a day like this, you lose 2 or 3 years of profit - this is what ive been warning about all along
but if you still have ammo and still have faith, this is a good day to buy southern European banks at liquidation price - if you can wait a few years that is
avoid DasBank
I'm sure you will get some dip buyers as we get closer to us open, especially if eu is still down double digits...that said we broke some big levels and hard to say how many quant funds are positioned if spoos need to go lower . I'll look to see how high yield trades.
ReplyMight be a good day for stink bids in single names and etfs.
I'll say it again, nico u are my hero. Well done.
Well done, Nico!
ReplyNico man... I wished I had your balls and bankroll lol
ReplyEuropean bourses down MUCH more than London.
ReplyUK IS NOT THE WEAK LINK. THE EU IS THE WEAK ONE.
Folks, prepare for an implosion of the EU. This un-elected dictatorship is going down...
yep, cheers Nico. and I like your theory about big smart players buying remain at the bookies and selling the futures... sounds like a very clever way to play it
Reply@anon 8.27 based on your logic japan is the strongest link of them all looking at JPY brilliant
ReplyGood to see Cameron go. Hopefully Ssbourne will be booted next, then Corbyn also shoved out of Labour. We need to get rid of these delusional politicians asap. Same thing needs to happen in Europe, then the US.
ReplyThis is the start of a massive trend change people. Massive and growing economic inequality has social or political consequences... the elite are going to be voted out, then they are going to face the consequences of having destroyed society. Will be good to see many of these rich people in prison in a few years time.
For holders of Sterling assets the fun is just beginning.
Reply1) Having resigned Cameron will use his remaining time as caretaker PM on driving the funding bill for the Trident nuclear deterrent through parliament in order to try to restore a degree of party unity and wrong foot Corbyn.
2) It'll be September before the Tories elect a new leader. This will give an extended period of uncertainty which is great/bad for volatility depending on your book.
3) Boris J will probably be impossible to block as next PM- he's too popular with the rank and file although half of the sitting MP's loathe him.
4) The new PM will start off with bluster but then run into problems with EU negotiations. There will be no major concessions particularly over immigration and free movement.
5) With the economy still reeling from the shock exit vote and a new agreement unlikely to keep anti-immigration voters happy the Tories will force through a vote of no-confidence in themselves to trigger a breech in the Fixed Term Parliament Act.
6) An early 2017 election which the Tories will win but without a convincing majority.
Great trading environment ?
From Raoul Pal:
Reply"...you have seen the EU banks, right? Implosion. Entire sector down 13% with many down 20% today. This is what I feared -EU not UK..."
The Arab Spring of the Westernworld is upon is.
ReplyFade of the century. Everybody are wrong.
ReplyTechnicians will probably be able to look back on this day and discern one or more charts with a trend change..... ;-)
ReplyTmrw Spanish vote is key for global risk assets!
ReplyANON @11:21 - you mean everyone who bought the market up since last Thurs thinking that Brexit wouldn't happen? Yes, they were very wrong. Especially the ones buying into the close lastnight.
ReplyDoesn't seem so delusional to claim Wales will win Euro2016 now, does it?
Replya quick commercial break in the brexit soap opera - renminbi would also like to get some lovin'
ReplyAny idea what happened to BTPs between 11:35am and 2:00pm CEDT? Looks like trading was suspended...
ReplyWell, I suppose people like Carl Icahn get where they are because they make more right bets than wrong bets...
ReplyI wonder less about the event of the vote than other things now present in the global economy...
What is the future of NIRP/ZIRP? If NIRP continues as it has, and with the momentum it has had, will this hasten, (or change the odds), of a breakup of the EU?
Will this in time aid British manufacturing?
Will the Germans see themselves as now having 1 less on the "responsible" EU team? Will their attitude toward the southern tier become more hardened?
Does this aid Trump, either through his stand, or a worsening US economy as election time nears? Or will it hurt him if this occurs, with Obama and Clinton saying, "I told you so"...
1) That donut Kocherlakota is calling for Fed to cut 25 bps next month because of the rally in treasuries. Eggheads going to rely on stupid models no matter what.
Reply2) It should help via the currency of course, though perhaps not if customs unions cannot be agreed to retain tariffless borders. Still, if you want a BMW, you're not going to buy a Vauxhall (Brit made GM car).
3) It's more the Dutch and people like them, who saw the UK as a counterweight to France. UK wasn't really involved in the PIIGS negotiations very much because they aren't in the EZ.
4) I think it aids all outsider candidates. In fact, this is just another episode in a broad movement to control borders/blame outsiders/make XXX country great again that has characterized the post crisis political environment...much as it did in the 1930's.
From GaveKal - Everything just changed
Reply"There are moments in history when the impossible becomes inevitable without ever passing through improbable. The period after the Lehman Brothers bankruptcy was such a time. Last night’s unexpected repudiation by British voters of 40 years of European Union membership is another. The outcome of the referendum is a shock fully comparable to the Lehman collapse."
For such a massive move in pound and bank shares, UKX pretty contained. Looks like Spain is taking it instead. SX7E only down 18% in one day...holey macaroni
They don't want to start the clock until an agreement/outline agreement is in place....or the eu will ruthlessly use the fixed time limit as a negotiating lever. That is why Juncke is pleading with to make the mistake of invoking article 50 as soon as possible. We know their game.
ReplyI wonder who will start the next referendum first? Another european Union member (beginning of the end of EU) - or Gibraltar, Scotland and Northern irland (the end of GB)?
ReplyThis does not bode well for Renzi's constitutional referendum in October. Could we be looking at a new, Eurosceptic government in Italy this winter?
ReplyHotair this maybe a stupid question, but I assume that means negotiations are now zero sum (And hostile?) Then ?
Reply