Tuesday, 12 July 2016

Brexit bounce, nuclear CBs and new highs.

The Brexit trade is suffering a reversal. GBP is motoring higher, as is the FTSE 250. The FTSE250 is significant as once the FTSE100 stopped tanking and reversed to ‘not since the last time’ highs, it was rightly pointed out that the FTSE100 is loaded with non-UK producers of global stuff, that happen to be listed in the UK, so naturally any percentage fall in GBP fall should be matched by similar rallies in said companies when expressed in their listed currency of GBP. Thus the FTSE250 became the 'bearometer' of Brexit for many commentators.

With that in mind it really should be noted that the FTSE250 is back to pre-Brexit ranges. Asking what that is in USD terms should be discounted as the lack of currency effect was being cited as a reason why FTSE250 should be watched in the first place.

Now it’s at this point that I start 'umming and erring' as I have two opposing thought processes.

Whilst I am fully onboard for a Brexit squeeze as expectations are so extreme with respect to GBP, BoE and UK Corporate doom, I am concerned that the back fitting story of new Prime Minister May as a softer Brexiter than Leadsom troubling. Brexit is Brexit. The only debate I can see is if the UK takes the EEA route or goes out alone. The idea that Brexit won't occur under May is absurd and, as with the belief that a load of lawyers can upset the process, a part of Kubler-Ross model which sums up the Brexit circe

Denial and frustration are still rife. I, however, am trying to work up the recovery side of the curve and it would appear that I am not alone in the ‘let’s get on with it’ camp. I am impressed at the speed with which Osborne has started peddling UK Inc in the US and  Sajid Javid’s trip to India. However we do need a dose of reality over the likelihood of positive outcome from that India trip. The EU has been negotiating a trade deal since 2007. I was wondering if the UK could pip them to a deal from a standing start but I was educated last night by twitter friend 'Brahman @_Financeguy' whose tweets I aggregate here -

"India won't agree FTA without free movement of IT personnel. EU negotiations stalled on UK objections to that. India also seeking equivalence in recognition of professional qualifications - law, medicine under Mode 1 with rights of Indian qualified professionals to practice freely in the EU (for these purposes the UK) . U.K. resisting this too. India also seeking recognition of its data protection regime as equivalent to that if the EU for privacy etc. India also seeking recognition of its IPR (eg for pharma ethical drugs and generics) as equivalent to EU & lastly India seeks recognition of its whisky as equivalent. All these resisted by UK on its own or with one or two others. Point is that ex-UK India-EU deal more likely with India competing with UK to supply some services to EU market”

So don’t expect anything soon. That bit about the whisky equivalents really surprised me. I  wonder what would happen if India insisted their wine be ranked equivalent to France’s finest left bank Bordeaux.

Japan - The gloves are off and it’s blindingly obvious that Abe is about to throw the whole quiver of arrows at stimulating the economy. Nikkei has responded as expected but USDJPY is still not really that far off its lows. Though I have bought Nikkei, JPY hedged, I am a bit concerned that its SO obvious 5 minute macro have piled in and there is room for disappointment. Isn’t there always with Japan? So I am cautiously long the Abe trade.

The most obvious effect I am seeing in the market is that of central bank response. The reason that most market have taken off is due to a massive verbal response by central banks to the Brexit event. But there is a timing issue here. The verbal intervention is instant yet the effects it is meant to counter have not yet been seen. The effects may indeed never appear because of eh verbal intervention but there is a strong chance that the global economy drifts along as before and the market expectation for extreme CB accommodative policy will fade as data such as the NFPs continues to surprise.

Now here is a something. The Citi US surprise indicator is pretty much at zero. BUT some are surprised at no surprise being the highest surprise since the last time there was no surprise. Which is a surprise to me.

How am I trading this? I have cut my long FTSE250 this morning but I am still running long GBP and have actually shorted some FTSE100 ( stops above recent highs). If it rallied on GBP’s fall then it should suffer in reverse. Indeed it massively underperformed yesterday but I have a feeling that whilst positionally the currency part of the Brexit trade has further to unwind, the equity part has already to a great extent and so will be more susceptible to a first rollover should the May effect fade.

Meanwhile, in ‘Oooh I forgot all about that' land, oil has been drifting lower and just for fun I have put on some trades looking for $50 again. Oil hardly trades on fundamentals within a $10 range, the rest is speculative, so in a mood of new highs in so many asset classes oil may well do the same.

With bonds and equities all pushing highs we could summarise everything simply as long cash positions being stopped out.


Celeriac1972 said...

Good stuff. I agree that the currency ramifications of Brexit are far from played out, and I can't shake the feeling that we're in for an interesting summer. Major indices now have scope to give back a fair amount before the year becomes a bad one. Not sure that the lows are behind us. Puts at 5% or so below index levels look comparatively cheap to where they were just a short while ago. Maybe this is the way to play, or at least a chance to buy some cheapish insurance?

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