Thursday, 30 June 2016

Market gasps a breath.

Well that didn’t take long. Tuesday's post was about reaching the point of maximum fear and, voila, since then the markets have gone ballistic. The old favourites that is, not the likes of USD/JPY.

Today is probably the first time that many, me included, have looked up from the brexibollocks to take note of what's going on in the rest of the world, as the rebound in markets has allowed us to surface and gasp air. How long it will be before we can grab another breath is mote. So what caused the bounce? From what I hear the markets have bounced because -

Brexit is now unlikely - Err No. But an EEA solution is possible and more to the point there is some sense being spoken.
Central banks had said they agreed to stabilise markets and so are obviously buying everything - Big definite ERR NO.
Algos chasing it higher. - Indeed they could be but that isn’t a reason in itself so Errr No.
Stop losses. - Markets always blame stop losses when they haven’t a clue
Month end - It’s like a 'stop loss’ excuse but bigger and can only be played once a month. If it was so obvious what month end flows would be or even are, thee price would have adjusted for them long before. But hey it’s month end, quarter and half year end and a few peoples fiscal year end too.

To those I would like to add my favourite, which is that people are now realising that a Brexit will not mean such a global disaster that even cake shops in Argentina have to close. Basically, a touch of rationality has returned. This means we are at a saner point in the market where we now have to wait for the actual effects of Brexit and political leadership change to occur, seen through data, rather than react to assumed effects. As I cannot repeat enough, assumption is the mother of all fk ups and there was plenty of assumption around two days ago.

Theresa May has a 68.5% being the next Conservative leader and Dianne Abbott has 1.8% chance of being the next Labour leader. How do I know the actual probabilities on these outcomes? I don’t, I made them up, but as proven by every other forecasters running up to Brexit, you can’t be proven wrong by quoting a percentage outcome probability on a single event forecast. For example, if I’d said there was a 99% chance of Remain winning last week would I have been wrong? No. The loss fitted within my 1% forecast of them losing. And vice versa, if I'd said Leave had a 1% chance of winning am I hero for getting that right too? Err well. So from now on I can call any percentage I like and be right. I am amazed that market forecasters haven’t cottoned on to this yet. Give a probability curve of outcome rather than, say, a  digit precise EUR/USD forecast. YOU CANNOT BE WRONG even if you can be way off with your mean.

The rest of the world. It looks pretty calm and is in fact getting a lift as global interest rate policy is being effected by Brexit (more dovish), though the economic effects globally have not been felt. The one thing that does stand out to me is USD/JPY. It dumped on the Brexit global shock wave but really hasn’t bounced that far on yesterday’s rally in risk. Attention may well turn back that way. The UK, for example..cough cough.. has become exceedingly more competitive against Japan with GBP/JPY nose diving 10%. Gosh, all those car factories they have in the UK are suddenly looking even more like a good investment! There was of course a double dig there. One at the population of Sunderland who decided to vote for Turkey Brexit Christmas with regards to their local Nissan plant, but also the other way at those thinking that it’s a sure fire slam dunk that the Japanese would pick up sticks and leg it to Czechoslopolungaria. Which I assume is what the unelected Eurocrat civil servants will be proposing for the name for Europe(East) as "NeuEast Germany" may still grate a little.

But I have gone long of USD/JPY AGAIN. I bought a bit as I bought US Stocks two days ago and though I expect I will probably lose I have come to think of buying USD/JPY as my sacrificial offering to the trading Gods. So just think of USD/JPY as Crastus’s sons in Game of Thrones. I'm sorry but I've been binge watching the first five series on DVD. As a cynical late starter I have been completely smitten by it.  As have the rest of the UK, who have taken it so to heart they are playing homage to it by acting out the whole plot in real life. The parallels  with our politicians, infighting, Westeros (UK) Essos (Europe), the wall dividing and the wild things threatening the south (Scotland) are at once terrifying and exciting. There is such scope to allocate characters that instead I will just leave it to you in the comments column.

I have little to add to sensible debate at these levels and will devote the next few days looking into what's been going on with other neglected global interests. The Russia/Turkey relationship for example and maybe commodities. Dr Copper has been surprisingly perky and oil is back testing highs, which isn a low GBP environment means I should look again at the oily explorer UK toxic waste I have in my portfolio. it should get a lift from 3 angles.

Good luck with Greece by the way. Now that Brexit is done I don't think it will be any more Mr Nice guy. By the way Tsipras is Theon Greyjoy -  which must make Scheuble Ramsay Snow.


Mike said...

LOL. Made the same mistake, started watching Season 1 a month or so ago, 3-5 episodes a night later and it feels like the world of Seven Kingdoms is more real than the one we live in. Be careful you don't get sucked in as it will take a toll on your sleep patterns. As for the whole Brexit, it did feel like a big fade due to all the talking heads spelling doom and gloom. I am not sure the risk on rally is warranted, but we do live in a 5 min. macro. I will be looking to short around 2100 level if this gets silly enough, I would think that there should be some risk premium priced into the market post Brexit. At the moment the market is trying hard to pretend Brexit did not happen.

Polemic said...

Mike. Your kind warning is too late but spot on. Slerp patterns shot and feels more real than reality. I also agree that the risk on rally is dubious as a core theme however will watch momentum rather than number targets for trade clues. Overnight wane in Asia first clue as to a roll over and of cpurse we have Independence day coming along. You know with all the chaos of Independence Day I'd completely forgotten about Independence Day.