Brexit Is A Go And Markets Make Some Unprecedented Moves by @
Where do we even begin on a day like today? Unprecedented moves in the currency markets this morning are stunning in the case of the Pound (having its worst day on record) and the Euro and baffling in the case of some of the other currencies worldwide. A surge in the US dollar index is pretty standard on any global market dislocation, so we will attribute the moves to that. Barry Ritholz provides some charts, for those who want the story in pictures.
The fear, of course is not the economic impact but the domino effect that is possible – as an example Scotland is already mulling another referendum to leave the UK – and presumably remain in the Euro given the way that Scottish sectors voted.
Euro markets are trading much lower than UK’s FTSE, until you consider the extent of the Pound/Euro losses. A Canadian’s FTSE holdings will be worse off than their DAX holdings when measured in CAD$, for example. Either way, the market sees both Europe and the UK as big economic losers as a result of this vote.
Carl Richards authors the Behavior Gap podcast, books and blogs. His latest short podcast “Be Happy, Limit Options” discusses how making fewer decisions can simplify your life. Just like President Obama only owns blue or gray suits (via Michael Lewis’ Vanity Fair article), particularly if you make a lot of decisions… try to simplify.
Time for a little perspective time. Yes, equity markets in Europe are being devastated today, they have unraveled almost a week of gains. The FTSE is down just 4% but is still higher than it was on June 16th. The DAX is down 6.7%, and down again to levels seen on the 16th. Right about where they were before the horrible murder of British MP Jo Cox. At that moment, the remain camp gained momentum, bookies odds swung in favour of ‘Bremain’. My, how they got that wrong. Today, anyone a fan of pounds and leverage, is having a very bad day.
So what now? Up to two years of bitter talks, Bloomberg lays out a road map of what’s to come. And you thought the divorce of Prince Charles and Princess Diana was messy.
Damn, June is getting a lot hotter today. We skipped past the OPEC meeting, the Fed, ECB, BOJ and BOE central bank meetings….then whammo Brexit vote goes the other way. There will be a lot of big movers today including markets closer to home. The S&P 500 went out yesterday at 2,113, 22 points shy of its all-time high. It is lining up to open down 70 points. If trading does devolve, the 1st circuit breaker is at 1965 which is a 15 minute break. Going to be an interesting one, off to trade and start penning a market ethos.
Diversion: It’s not Thursday, but here is a throwback. Back in the 90’s AOL had a book to try and explain the internet. Here are some highlights.
Adjustable rig allows companies to shoot car commercials without a physical car.
Canadian companies with the highest proportion of U.K. revenue are Concordia Healthcare 40%, Brookfield Property 23% and Great West Life with 20%, according to RBC. Norgold, the Russian miner came out this morning saying that they are now looking at listing in Toronto instead of London because of the Brexit. Chevron has seen their drilling costs fall 20% this year in Argentina, the country with second largest oil reserves in the world. This is bringing them close to making in an investment in the region. Their goal is to be able to drill wells for less than $10mm.
Gold prices have surged this morning following the Brexit vote. Futures are up over 5% as of writing but with the volatility that could be different by the time you read this. Gold is at the highest level in two years. From peak to trough the prices has moved more than $100 in the past 12 hours. Potash prices caught a bid yesterday after new came out that India made an agreement to buy 700,000 tons of potash from Belarus and that price negotiations are taking place over the next few weeks. There could also be accord between Belarus and Russia on curtailing supply.
Fixed Income And Economics
In the wake of U.K. PM David Cameron announcing his resignation in October this morning, one of the most important figures in the British government now becomes BoE Governor Mark Carney. The financial fallout aside, Carney will need to be viewed as a pillar of stability as the nation seeks to calm themselves amidst the surprise result. He’s already come out and acknowledged that “market and economic volatility can be expected as this process unfolds” and that the MPC were “well prepared for this” and had already “engaged in extensive contingency planning”. Carney reiterated that the BoE would not “hesitate to take additional measures as required” and are “ready to provide more than £250bn of additional funds through its normal facilities” in addition to “provide substantial liquidity in foreign currency” as necessary. He’s saying all the right things to be sure but you can bet there are lingering concerns in the back of his mind. Beyond the immediate market reactions there are longer-term policy issues. Recent signs have pointed to an economic slowdown, and the possible consequences of Brexit may include accelerating consumer prices, a rise in unemployment and even a recession. The point on CPI is notable as many had already expected inflation to accelerate this year well beyond the current +0.3% pace — a weaker British pound will only exacerbate this. Carney has also cited the U.K.’s record current-account deficit as a potential vulnerability, saying “an abrupt decline in capital inflows could pose a major financing difficulty”. For now, hawkish overtones have all but dissipated with the likelihood of a rate cut picking up steam to cushion the expected economic fallout of the result.
Fixed income market reaction is what you might expect given the “surprise” outcome (we noted in our comments on Tuesday that oddsmakers had conducted an early poll of just 1,001 people in determining their “remain” outcome; suffice to say using such a small pool was never a good idea). Bond benchmark yields are all gapping lower from yesterday’s close with 10 year Treasuries (-21 basis points), Gilts (-30.3 bps), Bunds (-17.5 bps), and Swiss (-14.1 bps) debt all tighter. Past and present nations of the British monarchy are not exempt either with similar term Canada’s (-13.2 bps), Aussie (-24.5 bps) and New Zealand (-22.5 bps) government bonds also trading higher. Buying of the aforementioned is in turn resulting in selling of riskier European sovereigns with the PIIGS nations leading the declines as Portuguese (+28.4 bps), Italy (+17.3 bps), Ireland (+4.5 bps), Greece (+82.0 bps) and Spain (+16.0 bps) all seeing their yield curves shift higher. If we can ignore some of the noise from the other side of the Atlantic market (perhaps when they close at 11:30AM EST), there is some data stateside worth mentioning. Headline capitals goods orders fell by -2.2% in the U.S. last month, worse than the -0.5% expectation and marking the worst print since March. This is a regularly far-flung measure due to the propensity of a single transportation order to skew the overall result, and subtracting said component has the core figure down just -0.3% in June. Reaction to the release is nonchalant of course with the Brexit outcome likely to dominate market direction for the next several days.
Chart Of The Day
Quote Of The Day
You can’t trust people who cook as badly as that. After Finland, it’s the country with the worst food.” – Jacques Chirac