In the aftermath of the UK’s June 23 referendum on EU membership, markets around the world sold off, fearing the worst.

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A month on and you can be forgiven for thinking that Brexit never happened. The S&P 500 printed an all-time high last week, and markets seem surprisingly optimistic about the future. So, what happened to the Brexit sell-off?

What happened to the post-Brexit sell-off?

The Brexit sell-off or lack of it is the topic of an equity strategy research note published by Bank of America last week.

The report, a copy of which has been reviewed by ValueWalk, draws some interesting conclusions, notably that markets seem to have brushed off Brexit doomed after a wave of positive economic data from the US and Europe. Data out of China has also been sufficiently robust to offer encouragement to investors.

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Bloomberg’s US Economic Surprise Index hit a high not seen since the beginning of 2015 this month, which has helped restore confidence in the US economic recovery story. Meanwhile, Chinese GDP data has improved sufficiently, rising from 1.2% quarter-on-quarter for Q1 to 1.8% in Q2. Central banks are also working to calm any fears there may be about the global economy. Bank of England, Bank of Japan and the European Central Bank have a tilted back to dovish stances away from the more hawkish position they held in the run-up to the referendum.

What happened to the post-Brexit sell-off?
What happened to the post-Brexit sell-off?

But according to Bank of America’s research, neither accommodative central banks nor improving economic data are the key drivers of the post-Brexit rally. Bank of America’s analysts believes that perhaps the most significant contributor to the recent rally is invested positioning.

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Indeed, in the run-up to the June 23, referendum investors abandoned European equities with funds recording 19 consecutive weeks of outflows. Investors have continued to dump European stocks and according to Bank of America, it’s this defensive positioning that’s driving the rally:

“First in the run up to Brexit investors had voted with their feet and exited European equities. Then it was 19 weeks of consecutive outflows, now it is 23 weeks with the last week we have data for showing a record $5.8bn of outflows. That is reflected in our fund manager survey showing investors underweight Europe for the first time in 3 years. The BofAML bull bear indicator went into buy territory two weeks ago care of these flows and the US has now started to see inflows. Interestingly investors in the FMS have now gone overweight the US for the first time in 17 months. We had talked in terms of Europe underperforming the US by 10% but with both markets falling. In fact it has underperformed by 6% but with the US rising to new all time highs.

The positioning point is also shown in cash holdings which are the highest since November 2001, investors buying protection at a record high and finally the first equity underweight in 4 years.

In contrast our calculation of the net adjusted delta from derivatives data suggests that while investors are still short to the tune of €39.6 bn as of last Friday that is well off the peak short position of around €125bn immediately after Brexit.”

A contrarian indicator indeed.