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How are markets reacting to the apparent Brexit event risk which will climax in less than 2 days? Well, massive hedging at the front end of the VIX, inverting the front end of the VIX curve to the most it has been since the global stock market flash crash in August 2015.

Months of complacency beginning in February (expressed by the steepening of the curve with ultra short-term vol trading below spot) has bred great fear and anxiousness when Brexit fears started to surface and everyone who wasn't hedged started to bid for short-term protection at ever higher premiums each day, leading to an inverted VIX curve at the front end and vol premiums to spike to crisis levels.

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With U.S. Economic Policy Uncertainty (EPU) at current highs (see bottom pane), in the case of Brexit the U.S. EPU may rise substantially higher, pulling the VIX higher as well.

Goldman Sachs has more on the UK-US macro discrepancy and how that might affect the VIX:

"The VIX may reach the high 20’s to low 30’s if US EPU spikes. After languishing in the low teens over the past several months, last week the VIX broke through 20 for the first time since March. Given that the spread between the US and UK EPU indices is near an all-time high, in the case of a leave decision, it stands to reason that US policy uncertainty could be pulled higher. A simple back-of-the envelope calculation suggests that the current level of the UK EPU Index is consistent with an increase of 80 or so points in US EPU. Tying this back to the VIX, we arrive at VIX levels in the high 20s to low 30s."

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Here's how analysts and banks see markets trade should Brexit be voted for, courtesy of Bloomberg:

Morgan Stanley

* Base-case index target for the FTSE 100 in case of ‘leave’ is range of 5000-5300; for the Euro Stoxx 50 is 2400-2550

BofAML

* Sees European stocks moving 10% either way after Brexit vote; “leave” result would be risk-off event not just in U.K. but also Europe and, to a lesser extent, globally

* Sell-off in Europe could translate into 6%-7% drop for S&P 500

* “Unquantifiable risk” whether other EU countries would then attempt to leave EU

* Long European low-risk dividend stocks, long SXDP index vs short SX3P index, long European index dividend futures, long MSCI EM

Goldman Sachs

* On average, the ERP (equity risk premium) has risen by ~150bps in past risk-off events. If Brexit were to result in similar scenario, rise in ERP of 150bps from end-May levels would push Stoxx 600 down to 280 and Euro Stoxx 50 to 2400

* Cleanest expression of Brexit risk is in U.K. domestic stocks (GSSTUKDE) and especially those with high sensitivity to investment spending

JPMorgan

* In ’leave’ scenario, euro-area equities would likely underperform U.K. ones, whose relative performance would be helped by GBP weakness

* Stays overweight on U.K. equities, which trade “outright cheap” on P/B metric

Citi

* Given recent equity weakness, likely policy reaction, new oil price regime, base-case Brexit downside risk is ~5%; at extreme end of the outcome spectrum, European stocks could fall 10-20%

* FX weakness, especially in U.K., is a key offset and should, in time, support positive U.K. returns, excluding return of full-blown systemic risk

Deutsche Bank

* Sees 10% downside for European equities

* Overweight FTSE, underweight DAX: if Brexit, U.K. equities would outperform European stocks, given likely GBP depreciation as well as U.K. market’s defensive sector structure

Jefferies

* Sees 5%-10% decline in FTSE banks, euro-zone banks falling by at least an equivalent, if not greater percentage

Like how #Microsoft announced the takeover of #LinkedIn a few weeks back, today #Tesla announced an offer to acquire the struggling (and almost bankrupt company #SolarCity for 0.123-0.133 #TSLA shares per share of #SCTY (effectively $26.50 to $28.50 for SCTY), a 26% premium over Tuesday's SCTY closing price prior to the announcement.

While we don't plan to go into the specifics of this deal, the markets are obviously not taking this positively, at least for Tesla as its stock has crashed after hours. This is another hit to Tesla's stock price after it announced a secondary stock issue to raise funds for Model 3 production and operations up scaling. Even assuming a 0.122x takeover price, Tesla would be paying a hefty premium for SolarCity, especially taking into account the company's absolutely draconian finances and the facts that it is on the verge of bankruptcy, is unprofitable, is burning through cash at a ungodly rate each month.

Is this proving to be another one of those cringe-worthy deals when an unprofitable but popular company (albeit with lots of private and public financing) acquires another even more unprofitable company? Find out soon.

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In the meantime, here's how #ElonMusk himself justifies the offer:

"If completed, we believe that a combination of Tesla and SolarCity would provide significant benefits to our shareholders, customers and employees.

We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid.

We would be able to expand our addressable market further than either company could do separately. Because of the shared ideals of the companies and our customers, those who are interested in buying Tesla vehicles or Powerwalls are naturally interested in going solar, and the reverse is true as well. When brought together by the high foot traffic that is drawn to Tesla’s stores, everyone should benefit.

We would be able to maximize and build on the core competencies of each company. Tesla’s experience in design, engineering, and manufacturing should help continue to advance solar panel technology, including by making solar panels add to the look of your home. Similarly, SolarCity’s wide network of sales and distribution channels and expertise in offering customer-friendly financing products would significantly benefit Tesla and its customers.

We would be able to provide the best possible installation service for all of our clean energy products. SolarCity is the best at installing solar panel systems, and that expertise translates seamlessly to the installation of Powerwalls and charging systems for Tesla vehicles.

Culturally, this is a great fit. Both companies are driven by a mission of sustainability, innovation, and overcoming any challenges that stand in the way of progress.

Today’s offer to acquire SolarCity is only the first step toward a successful combination of Tesla and SolarCity. We will provide a further update if and when an agreement is reached."

Today's API inventory report for last week saw huge draws across the board, beating estimates for all 4 fields. This sent crude oil (WTI) above $50 and also north of last week's post-"dead Cox bounce". The slight retracement seen mid-Tuesday was in the heels of a truce in Nigeria, whose oil output has seen big disruptions since April.

Full details are provided in the charts. Absolutely massive draw in total crude inventories; all draws were above 1mn barrels.

A rather uneventful Tuesday, which is always a good thing for Brexit traders. Some news flow, not much new, Brexit odds gained slightly at the latter part of the day after falling, pressuring GBP lower. Pound crosses traded in a relatively tighter range with ups and downs. End of Tuesday saw stocks diverge higher from GBP weakness. Pretty clear that GBP has become a risk driver du jour; so for stocks to rally, pound has to be bid.

NEW Brexit Updates on our Website, CLICK BELOW:

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With less than two days until the outcome of the Brexit referendum, traders around the world know two things:

• In a scene reminiscent of Lehman Sunday, everyone will be ready to trade the nanosecond the first results are released resulting in a supernova of volatility and an unprecedented burst in volume

• Markets will simply grind to a halt as banks refuse to take risk positions and execute client orders, all bids and offers are withdrawn as the last trace of liquidity evaporates, and central banks are forced to start trading with each other in the open market

Whichever the case, expect brokers to start issuing their respective notices to clients which should consist of either higher margin requirements for GBP based securities, prohibit trading of GBP based securities altogether, or like UBS issue a warning to clients notifying them of possible illiquidity and indicative-only pricings.
In any case, we urge traders to take note of this and prepare accordingly.

4 words: Don't fight the Fed.

Need we say anymore? U.S. stocks (equities in general) have proven that they can't go any higher without more quantitative easing from the Fed. NIRP doesn't work, we need QE...

So get to work Yellen!

#Forex #Stocks #Trading #Investing #Money #Economy #Finance #FOMC #QE #NIRP

Just as we commented on earlier today, central banks are out of control and out of ammo. The ECB provides the best example of this meme...

2 rounds of QE (one still and has recently been boosted in size and scope), negative interest rates (being cut more than 3 times with extra dovish rhetoric), and European stocks are down with the macro economy.

Back in 2010-2013, central banking largess still worked their magic on asset relation as stocks would levitate based on how much a central bank eased. But now, fast forward 2 years or so, and that magic has more or less disappeared. No matter how one spins it, the facts are hard to deny. It might be a tragic tale that financial markets have lost either confidence and/or interest in front running whatever a central bank promises.

Negative rates are definitely still fueling the mega bull market (or should we say bubble) in developed market bonds via record low falling yields. However, stocks have just failed to catch on. And it's not just stocks. When we take a look at the real economy in Europe (can be applied to most of the world), macro economic data has diverged lower from central bank balance sheet size. There issued to be a positive and strong correlation between the two, but that has now been flipped on its head.

It would be entirely interesting to see how this relationship develops in the not too distant future...

#Forex #Stocks #Trading #Investing #Money #Economy #EU #ECB #Europe #QE #NIRP #Finance

Forget about Brexit. According to this think-tank, there's a bigger (tried and proven) elephant in the room — A China devaluation. But unlike 2015, this time said devaluation is happening under the table with deadly results...

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All about this from SocGen's Albert Edwards:

Thinking about this from the point of view of my Ice Age thesis, where interest rates cannot be normalised because of economic weakness and deflation pressures persisting throughout this recovery, I would have thought a 20% sterling devaluation is exactly the antidote needed in the current circumstances.

The UK referendum is neck and neck. Commentators think it so close that the deciding factor could be whether it rains on Thursday – with rain seen reducing the Remain vote. How mad is that? One year ago we wrote that the UK economy was a ticking time bomb. The ticking has got even louder. The UK economy is a mess and that has nothing to do with Brexit – it has everything to do with economic mismanagement. We studiously take no view on the outcome of the vote; we simply discuss the possible implications of a sharp decline in sterling in the event of Brexit. But there is an argument that global investors have overly focused on Brexit at the expense of other more important macro events. We believe China’s ongoing stealth devaluation of the renminbi is far more important for the global economy. The UK economy is a mess and a ticking time bomb. I think sterling will end up falling substantially whether the UK stays or leaves the EU - it is just a matter of timing.

Meanwhile, our attention has been diverted. China has embarked on a stealth devaluation of the renminbi. Its new trade-weighted currency basket has fallen 10% since just before its initial August 2015 devaluation (white line in chart below) and it has continued to decline since January even as the Rmb/dollar has stabilised. The Wall Street Journal has reported that this is a deliberate shift in policy. China is now exporting its deflation, and my goodness it has a lot of deflation to export. In the Ice Age world, countries need to devalue to avoid deflation. So if sterling slumps in the aftermath of a Brexit vote there may be at least one silver lining outside the EU if the UK economy manages to avoid the quagmire of outright deflation.

#Forex #Stocks #Trading #Investing #Money #Economy #Finance #Business #GBPUSD #GBP #JoCox #Brexit #UK #Europe #Euro #UK #EUref #China #Asia

After yesterday's API report of last week's massive draw in inventories across the board, leading to a spike in crude prices above $50 on WTI, the DoE report published today disappointed across the board with all inventories missing expectations.

Total stock saw a less than expected draw, while gasoline actually saw a build instead of the expected draw (biggest miss of the group).

As we mentioned las week, what we call the NEP (New Energy Paradigm) seems still to be developing after crude production continued to decline for the last 2 weeks after a single outlier week which saw a marginal increase in production (3 weeks ago). U.S. crude production has now declined for 20 of the last 22 weeks!

Stepping back and looking at price action, crude prices se to be back in a chop. Whether this is another balancing area setting up for another upside breakout or a distribution structure remains to be seen.

#Forex #Stocks #Trading #Investing #Money #Economy #Finance #Oil #OPEC

A funny twist to the Brexit scene less than 24 hours from D-Day. GBP now trades based on how the weather over England is forecasted to be on Thursday. You got that right, the market now moves on the weather. Things have gotten so desperate that both human and algo traders are trigger happy on any and every remotely related new flash.

Wednesday actually started out rather docile with GBP in a strays ascend during the Asian hours. Volatility and trading volume spiked as Europe opened and GBPUSD peaked at its intraday highs (also the weekly highs thus far) before rolling sharply lower as the U.S. session started. As depicted, the weather apparently made all the difference (sarcasm).

More seriously, the latest Opinium polls show Brexit leading only by 1% at 45% vs. Bremain at 44%; the former gaining a percentage point since last poll.

#Forex #Stocks #Trading #Investing #Money #Economy #Finance #Business #GBPUSD #GBP #JoCox #Brexit #UK #Europe #Euro #UK #EUref

The poll that seals the Brexit fate? The latest and final YouGov poll released late Wednesday shows Bremain in the lead with 51% of the votes while Brexit has 49%. There were no undecided voters in this poll. The results were in the favor of Bremain and was a huge jump (42% to 51% since 19 June). That's all the markets were caring about, and it was definitely convincing enough to seal the deal that Brexit was not going to be voted for in the actual deal. This latest YouGov release updated the FT poll tracker results in Bremain's favor — 47% vs. 45% (was 44% vs. 45% previously).

The reason why so much emphasis is being placed on this poll is because, as Reuters reports, like in 2014 and unlike in the UK national elections, British broadcasters will not conduct exit polls in Thursday — in which people are asked as they leave polling stations how they voted — once polling closes at 10pm local time because the margin of error for an event which has little precedent is too large.

However, that same logic apparently does not prevent the very same YouGov pollster cited above, to publish a poll showing how people have voted in the European Union referendum shortly after polling stations close on Thursday. Reuters reports that "the poll will be based on responses from a pre-selected group of people seen as representative of the wider electorate on how they actually voted in the referendum. Its findings are due to be announced by Sky News soon after polling stations close at 10 p.m. (2100 GMT)."

GBP crosses are ripping across the board, risk is rallying and safety has been hit hard as it seems the market is now looking at a Bremain situation less than 8 hours before the polls open at 12pm local time Thursday.

#Forex #Stocks #Trading #Investing #Money #Economy #Finance #Business #GBPUSD #GBP #JoCox #Brexit #UK #Europe #Euro #UK #EUref

With so much uncertainty and concerns in 2016, it's no surprise that gold and the precious metals in general have been stellar performers in the first half of this year so far. Ironically when the Fed made its first rate hike in 9 years last December, prices found a bottom a little south of $1050 and rallied higher.

The rally has finally caught a fever pitch with gold and silver being very popular subjects of "investments" both amongst professionals and retail. This has led to near record high net long speculative positioning in gold and silver futures (i.e. traders are the most net long since the 2009 financial crisis).

Besides positioning, options skew in gold has turned very negative. Negative options skew means that call prices are much higher than put prices, implying much more demand for calls (positive upside exposure) than demand for puts (downside protection). In January this year, gold puts became cheaper than calls in general, the first time this has happened since 2010... And this trend shoes little sign of exhaustion.

Also, when we plot the size of the Fed's balance sheet, we can see when the tight positive correlation between both ended and parted in late-2012. In fact, during the whole of QE3, gold prices declined while the Fed's balance sheet expanded to record larges.

The question we really which an answer to, is what exactly happened in the black rectangle which caused one of the greatest divergences to date in the financial markets.

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Voting day has started with the pound sterling exploding to fresh 2016 highs as the market is now firmly in the belief that Brexit will never happen. However markets have come to the conclusion that a 'remain' vote will prevail at the end of Thursday (final referendum results should be out Friday morning BST), it definitely has to do with the most recent opinion polls which show Bremain leading across most pollsters. The story is even more towards Bremain at the bookies with odds for a Brexit slumping to 17% lows just this morning...

The explosion in GBP has lifted all boats. Risk assets have rallied dramatically from their "Dead Cox bounce" last week. As GBP vol premium decays, the re-risking trade seems to be roaring ahead. But frankly, no one will know for sure what the final results will be until they're announced.

As more and more turnout data and post-voting poll data by pollster YouGov surfaces, expect crazy volatility and the market to get even more unidirectional (as if it isn't already).

Britons woke up to some nasty weather this Thursday morning as they head out to vote on the EU referendum. Up to 300 "999" calls were made in the prior night reporting on lightning and flooding. As can be seen in the montage of pictures, the floods are indeed quite bad and might lower turnout rates slightly as people become discouraged as they have to get wet (literally) to vote...

Another Thursday and another week goes by where the U.S. jobs market gets more divergent. Initial claims totaled 259,000 last week, beating expectations of a 270,000 print. Conversely, the Fed's very own Labor Market Conditions Index (inverse on the chart) slumped to lows now seen since 2009, highlighting the worsening state of the jobs market.

Apart from jobs, the Chicago Fed National Activity Index (NAI) has once again declined in June, making this the 14th out of 18 months that the index has posted monthly declines...

No wonder the Fed is confused.

As reported earlier, GBP vol premiums have collapsed following the ramp higher in GBP crosses since the start of this week. 1-week implied volatility for GBP futures have fallen from 47 at the start of the weak to 31 currently. Interesting to note that even though GBPUSD was already rallying hard since late Thursday last week, corresponding vol only peaked on Monday; maybe hedges only started to cover later on.

It remains to be seen if this unwinding of protective puts was premature. We'll find out in a few hours when vote results start to surface.

To put Brexit into perspective, the only 2 comparable events where volatility had been higher was during Black Monday in 1992 (where the BoE withdrew the pound from a European exchange rate system) and during the Great Recession and global financial crisis of 2008 (as shown in the extreme left of this chart).

In our previous post, we stated that GBP vol has decline substantially going into the Brexit referendum. However, we questioned if the unending of downside hedges was premature since the results of the referendum are still not yet known.

Broadening our view, FX volatility in general has been elevated for the entirety of 2016 thanks to the potent combination of central bank (monetary policy) activity, macro economic events, and of course Brexit, which we are currently contending with.

It will be a long, nail biting, and most definitely sleepless night for FX traders. Surely worthy of historic mention.

These few key points have more or less sealed the fate of the most eventful and monumental public referendum in the UK's history:

• 90% odds for Brexit, according to most bookkeepers
• Major broadcasters including ITV & BBC project Brexit win
• GBPUSD crashes to 1985 lows, largest single day drop ever, down 1,500 pips from day's highs
• More than 2/3 of votes counted, Brexit leading with ~800,000 votes; this lead has been widening over the last hour

In about an hour's time, the world shall know FOR SURE if Brexit is UK's answer to the EU...