More than 1/3 of voting areas have been declared and Brexit currently has an approximately 2% lead. Bookie 'leave' odds surge past 70%, while 'stay' odds plunge to 0% at some hosts.
SPX is crashing (not reflecting on this chart) to 2060 as are GBP crosses as we start to near half of the counts. In about 2 hours time, we should have 80-85% of the total count declared and markets should have either crashed even more, or exploded out of the hole.
Technical levels on the charts make little sense. The news flow is dominating as we speak.
This is the new #BlackFriday. Nothing to add. Everything is crashing. Gold is soaring but bu not much. GBP crosses plunging more than 1,200 pips easily from day's highs. Brexit is leading as more than half of voting areas have been reported.
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...
By now everyone should have caught up to the titanic events that have transpired overnight. The UK will officially leave the EU as its people have voted for. PM David Cameron will step down as leader of the Conservative Party. The entire English political construct should likely be restructured, spelling chaos for England. The world will wait and see if the UK's economy does indeed slip into a year-long recession as its leaders have warned incase of a Brexit (which has now happened). The pound sterling has crashed to a 30-year low against the dollar, posting its largest single day loss ever... So and and so forth.
As a result of this once unfathomable scenario, global markets (especially European ones) are in deep turmoil and a state of frenzied panic. For instance, the EuroStoxx 50 equity index gapped lower 9% at the European open, the largest single day loss ever (intraday). German bund yields have collapsed to record lows, with the 10-year yield hitting -0.17%, down -26bp from the day's open; this is an insane decline by any measure, and is especially large for zero or negative yielding bonds.
Flight to safety is the dominant theme currently. Capital is flowing out fast and furious from UK assets (stocks, bonds, cash) as British stocks, bonds (including government gilts), and the pound have crashed. Said capital has been rotating into the 'super safe' core European assets of Germany, Austria, and Switzerland. Capital has also been rotating into safe haven currencies and financial assets such as JPY, CHF, USD (to a much smaller extent), gold (precious metals in general), Bitcoin (yes, even digital virtual currencies), Japanese government bonds and the like.
Risk aversion will likely persist until some semblance of stability is achieved in the UK, we feel. Already, many analysts are putting our outrageous numbers and forecasts for the UK (macro economic, financial, financial assets ect...), and also the EU in general. 1.2-1.3 seems to be the consensus for GBPUSD on the conservative side. The scariest thing to all this is how the market totally misread reality leading up to the actually referendum, choosing to buy into opinion polls and bookkeepers' odds which both suggest that a 'remain' vote will win with some good margin.
In fact, the markets continued to discount for this assumption (which we know is totally wrong in hindsight) right up to the release of the first vote counts after the ballots closed at 2pm EST on Thursday. It was only until a few key municipals reported counts which were significantly in favor for 'leave' and hugely off consensus forecasts, that the financial markets really started to reverse their wrong course of action and actually trade in the logically right direction.
Such is our notion in brief — markets likely have much more to go on their current anti-UK trends. The fact that these moves were so huge but at the same time so young is evidence that many large players got the initial direction wrong. Just thinking about the consequences of a Brexit is mind boggling. It will be some time before everyone is digested and the markets start to discount for the future, on top of what has already happened.
Even after almost 3 days since the biggest event to hit the global financial markets since Lehman (and some would argue the biggest ever, because the action was concentrated into less than a day), it's still hard for many to wrap their heads around the sheer magnitude the moves we got on Friday.
Over the weekends, CNBC and Reuters reported that global financial markets (stocks, bonds, forex, futures...) collectively saw $2.1 trillion wiped out in under 24 hours. This makes Brexit the single largest disruption in mor seen day history. As almost everyone is exposed to leverage these days, we can only imagine the carnage as large portfolios scramble to rebalance after the most shocking event we will see in a very long time.
We shall let the charts to the story telling here. But in short, cable (GBPUSD) fell -11% on Friday (at the close). The intraday range on cable was was some 1,800 pips (post YouGov farce at 1.5 to pre Tokyo halt at 1.32ish), the largest ever by a far, far shot. Cable rarely moves 100 pips a day. So this shock was about 15x the average daily range... That puts this move at around 14.2 sigmas, which statistically speaking, has less than 0.000001% chance of happening... But it did.
GBPUSD is now at 31-year lows (1985), implied and realized vol on GBP derivatives underpriced this move even hours before the crash and have yet to catch up to the massive delta.
We might be seeing the uber scary crashes on the surface of the financial markets (GBP, stocks, risk, short duration, ect...) but the real demon rests beneath. The money markets in Europe are literally frozen after Brexit. Hardly anyone wants to borrow in euros or pounds anymore. Even if banks did, they would be paying much higher spreads to counterparties and dealers.
As shown, EUR-USD basis has crashed to the lowers ever at -70bp, surpassing the lows of Lehman in 2008 and the European Sovereign Debt Crisis (where the euro was really treated like a cursed asset by borrowers and lenders) in 2012. This just goes to show how much banks really fear the ripple effects Brexit will effect in the coming days and weeks on European markets, and not just the English markets in isolation. USD is heavily in demand. The Fed and Yellen both know this very well, and have therefore issued their respective statements on Friday, assuaging markets that the world's biggest and best trolling central bank stands ready to offer USD liquidity to Europe and the UK via its existing FX swap lines out in place almost 4 years back.
Besides shunning euros and pounds, British banks are Alamo shunning each other! Libor-OIS spread on GBP has exploded to 2012 highs (European Sov Debt Crisis again) as banks are now charging much higher to borrow and deal in GBP for overnight or longer. In short, counterparty risk has surged dramatically. The markets might be starting to question if banks with large GBP and EUR books can stomach the volatile and MTM losses stemming from Brexit. We will know shortly...
European banks were hit the hardest ever, down -13%+ on Friday alone. Ironically, Brexit isn't entirely an issue which directly impacts European financials, yet the correlation-to-one phenomenon caused the worst selloffs amongst European stocks.
The ECB has not commented on Brexit yet, unlike its peers the BoE and Fed. However, the European Commission stated that it wanted the UK out of the EU as soon as readily possible. Such posture and rhetoric is very unlike what would usually be coming from head of the European Commission, Jean Junker. It can only mean one thing — the EU is VERY UPSET that the UK voted for to leave the union, and as part of a face-saving maneuver, it has flipped sides overnight to be pro Brexit, hastening the jettison of the un-United Kingdom!
Which countries were hit the hardest on Brexit Friday? The answer might surprise you and many others to be honest. One would logically be expected to assume that UK stocks were hit the hardest as it is Britain that is at the epicenter of this entire saga. Furthermore, the GBP is the hardest hit asset (beta adjusted basis), so it would only make sense if UK equities suffer the same consequence.
But no. As we show in this chart, the FTSE 100 (UK benchmark equity index) was actually the BEST PERFORMING equity market in the entire of Europe. While at the lows the FTSE 100 was about -9% lower, it staged an insane and almost unbelievable bounce from the lows to 'only' close down -2.7%, beating all other of its European peers. We couldn't believe our eyes either.
The rhetorical question of how can British stocks be the best performers after such a monolithic event as Brexit (which we have said time and again was unprecedented any way we looked at it). So welcome to the demented world we leave in, where a country most effected by a crisis I'd supernatural proportions turns out to be least damaged (at least in terms of its stock market performance).
Who were hit the hardest by Brexit? The rich, the uber rich to be precise. The Bloomberg British Billionaire Wealth Index slumped from $81.3bn on Thursday, to $75.3bn on Friday. We just got news that legendary billionaire investors George Soros was net long of the pound going into Brexit (based on a most recent Bloomberg article); recall how Soros was a very vocal antagonist on the UK leaving the EU, and was one of the biggest spreaders of the Brexit fear.
And it is true that the rich have the most vested interests that the UK remains a part of Europe. Any deviation from this status quo would spell large losses and both Europe and Britain will hurt — a loose-loose situation that benefits no one in the short to medium term.
Meanwhile, do not be blindsided by Brexit; the fundamentals and technicals still matter. USDCHN (offshore Chinese yuan) has been implying lower equity valuations for quite a while now, with stocks only ranging high above the key indicator of risk appetite. In the past 2 occasions where he S&P 500 diverged this widely from USDCHN (inverse), stocks always corrected much lower in a convergence trade. Will we see another one of those episodes again, now that risk aversion is the name of the game thanks to Brexit? We think so.
Brexit sparks market turmoil, which sparks global central banking panic. This means no more rate hike for the rest of 2016 by the Fed, as Fed Funds futures have discounted for last week. There is now a higher chance for a rate cut by the Fed than a rate hike. We believe that as risk aversion continues on (which we believe will be the case), we can expect the Fed to really contemplate ditching its tightening cycle and quickly flip to easing. Quite far fetched for now but once global stocks hit -10% in 3 trading days, this prospect becomes more believable.
Besides crashing Fed rate hike odds, big players are also betting that the FF rate will trade below zero in 2016 and 2017. Open interest in Eurodollar futures due in 2017 and beyond reached a record high last Friday, implying that the market is placing a lot of money on the possibility that the Fed cuts rates back towards the zero lower bound.
We guess we don't really have to explain to followers why this is happening. Brexit was never really taken seriously by the markets (that's why everything crashed so hard), but it has actually materialized. So expect a frenzy of central bank liquidity injections, put writing under financial asset prices, and lots of jaw boning as they try to calm shaken markets.
We wish them the best of luck, but aren't holding our breaths at all.
If this chart doesn't give you a headache then nothing will. There's little to explain here besides reveling in disbelief that central banks have still not learned from their mistakes committed over the past decade. On Friday after the unthinkable happened, we saw how CBs manipulated market prices by threatening to intervene with their best volition, offering unlimited liquidity via swap lines to the UK, buying up GBP and USD and selling JPY and CHF in an attempt to starve risk off flows of their fuel (good luck attempting this). Offering outright liquidity injections (BoE's ultimate weapon of choice).
As a result, we saw anywhere from a 50-70% retracement in many markets around 1am EST on Friday, right after Japanese stock futures were halted and U.S. equity futures went 'limit down' about an hour later. Whatever the case, we will be sellers of risk into any pullback, into any attempt of central banks to manipulate prices higher on the basis that they could do so in the past (but they shall be humiliated this time round)...
The British have spoken to leave the EU. Now the markets will be reflecting that fact by going much lower. If central banks are planning to prevent the markets from reacting the way they should, they'll need a much bigger gun!
On Friday we saw very predictable reactions from
central banks all across the world. The BoJ, BoE, Fed, SNB, ECB, and IMF all came out almost at once to placate a terrified lot of traders and investors with promises of liquidity injections, QE, currency swap lines, and "whatever it takes" to preserve financial market stability.
From this chart you can see exactly how this grip of CBs have tried to artificially alter the true picture of a post-Brexit storyboard. The fact that the UK stock market was able to close down a mere -2.7% when it was down some -8.7% at its lows on Friday, is proof that central banks and the powers that be will never in their lifetimes allow another Lehman moment to happen. Whatever it takes to maintain some semblance of organization and stability.
As we said, we are such bounces as good opportunities for fades. So trade accordingly!
Cable (GBPUSD) is now much under Friday's post Brexit lows of 1.32ish. Now trading with a 1.31 handle, all GBP crosses also pounded below their respective Friday lows. We illustrate the action in GBPUSD with our chart. Cable fell more than -8% on Friday, and is now down another 4.7% from Monday's open, more thane trading the farcical bounce which started mid-Friday after a coordinated effort by global central banks to halt the exodus of capital out of the UK and EU.
That apparently didn't work, and as we said in our previous posts, these central banking hamsters are going to need a much much bigger bazooka to even think of halting this tidal wave of frightened capital. Fear is starting to turn into panic as we see it. Price action is telling us to expect more downside. GBPUSD testing 1.3000 is not a question of if, but how quickly sterling clears the last few critical support levels before facing 1.25 and lower...
Also, UK government bonds are very bid (10Y yield at fresh record lows how ironic), rather surprisingly as we noted in the chart. Perhaps the flight to safety and anti-GBP flows are so intense that money doesn't mind parking in gilts go the time being until market liquidity allows a better alternative.
Now this chart should looks familiar to traders. Safe haven assets chiefly the Japanese yen, Swiss franc, gold (precious metals), DM government bonds, and to a slight extent IG and higher quality corporate credit, have been happy beneficiaries of a pounded pound (catch the pun?), tanking risk assets (stocks, carry, vol, commodities, sub credit, EM, ect...), and just the vacuum of certainty.
No one really knows that to expect next with so much noise as to what the UK and EU plans to do next. But as traders, we are betting on continued risk off flows. There's little reason not to in our opinion.
The S&P 500 just traded with a 1900 handle, breaking under the big figure and key psychological support of 2,000. Risk off flows clearly accelerated after the U.S. open with selling turning very impulsive very quickly. We expect more downside and are targeting the mid 1900s in the medium term. Question is how long do we take to get there.
Also, in this chart you can see how stocks traded since Thursday; from the initial false upside breakout courtesy of some very irresponsible reporting by YouGov that the 'remain' camp would win, to the sudden realization that Brexit had been lurking under the rug, and that risk assets had totally underpriced the risk of what was then thought of as almost a non-event. Friday's coordinated effort by global CBs managed to spark a ramp in risk and a strong bounce in GBP crosses, but as we closed in on the final hours for Friday, that ebullience faded quickly with stocks gapping lower at Monday's open (today), and heading lower ever since.
For those feeling lucky, please don't be a dip buyer here... We don't want to witness suicide.
With everything being sold in the heat of Brexit, it is financials (European & UK) that are really getting punished most badly. Traders are frantic this morning as George Osborne's calming words have done nothing to halt the carnage and bank stocks. EU financials are down -23% in the last 2 days (Friday & Monday)...
Italian banks are down over 25% since Thursday's close. Many British banks were halted for trading today (eg: RBS -13% and halted), and are also trading at record lows. Deutsche Bank (Europe's largest and most connected bank) is extending losses (-7.2% today alone) and seems to be following in the footsteps of Lehman towards oblivion to fresh all-time lows.
The contagion is spreading too, as UK default risk (measured by 5Y CDS) has spiked to 3-year highs and as we reported just now, USD liquidity demands are surging with funding markets seeing serious distress and inching closer to being frozen.
As one vet trader remarked, "it's a f**king bloodbath." We agree.
Since June 2015, DM bond yield have been slashed in half (massive rally in DM bond prices) as the world entered into the new age of monetary policy: The deep, dark, and very cold negative interest rate twilight zone. With the ECB easing like a mad horse (without any actual tangible possible effect on the European risk assets and the economy), and the BoJ messing with NIRP for the first time in its history and monetizing not just bonds and corporate bonds and stocks, global DM bond yields have never been lower.
The last 2 days (post Brexit) have seen a massive capital flight into safe havens which include DM bonds (bunds, gilts, SGBs, JGBs...), further suppressing yields. 10-year UK Gilts are now under 1% for the first time ever. German bund yields are crashing to record (negative) lows. 10Y USTs are back 1.5%, while JGBs are at a record chill of -0.22%!
On the other side of the coin, EU peripheral sovereign bond spreads (PIIGS) are spiking, and CDS default risk also surging. Watch for credit rating downgrades in the coming days and weeks. Also expect more and more EU member states, who are getting more fed up with the bloc's policies, start launching threats of their own referendum of independence... When that happens, the real chaos will start storing in Europe, and the bloc will then face its biggest existential threat yet.
***
More color from Bloomberg's Mark Cudmore:
"Ten-year U.K. yields fell 29 basis points to 1.086% on Friday, wiping off about 1/5 of their annual return in a day and taking the rate to its lowest level since at least 1989.
Not only are gilts perceived as a liquid haven asset, but there’s a strong belief that the Bank of England will be forced to cut interest rates to support the economy.
That logic might justify the move seen in the front-end –- 2-year gilts paid 27 basis points at the end of Friday, about half what they offered before counting in the referendum began -- but at the long-end, all the risks appear to be for yields to go higher from here.
These bonds attracted haven demand even as S&P, Moody’s and Fitch warned Friday that they’re likely to cut the U.K.’s credit rating. Such negative action is increasingly probable and imminent while domestic political turmoil persists.
Not only will this hit demand for gilts but, for as long as uncertainty around the U.K.’s future persists, money is likely to flow out of the country. On Friday, that money moved from riskier assets such as equities to sovereign bonds -– the next step will be taking that cash out of the country entirely. Hence, some of the gilt demand may just have been a temporary step on the way to the exit.
Bank of England rate cuts may seem the most likely monetary action -– but if the pound continues to weaken there’s a not- insignificant risk that rates will be raised to defend the currency. At the very least, a depreciating sterling may reduce the ability and/or need for lower borrowing costs.
And if a full Brexit becomes certain, then concern over the country’s large structural current account deficit will intensify, putting further upward pressure on rates.
Panicked markets cause price-distortions and provide opportunities. The risk-reward ratio of long-end gilts may now be skewed very far one way."
Because of the historic and quantitative significance of Brexit, its impact on the world's financial markets hitherto, and the scale of surprises, we thought it would be more than appropriate to piece together some illustrations to give you a sense of just how mega this event was. Like we said earlier last week, Brexit will be staying in the history books.
Courtesy of BofAML's cross asset research team, we have some telling facts of Brexit that will our things into perspective. Post Britain’s vote to Leave the EU, the EuroStoxx 50 experienced its largest ever 1-day loss in history. Cable (GBPUSD) was slammed to 31-year lows. On Friday various other markets markets saw volatile moves that put 2008 in the dust. The historic collapse in GBPUSD was not only far greater than any such move seen in history, but was an unprecedented 12 standard deviations in magnitude. Statically, this almost never happens on a normal distribution. But it did.
Other crosses such as EURJPY, EURUSD, bonds such as 10-year bunds experienced daily moves that were more significant than on any day in 2008 (Lehman).
As BofAML puts it pointy, "gaps in risk perception that were evident even as recently as last week (VSTOXX-VIX spread was as wide as 20pts), may narrow further as spillover risk to global assets remains high." The bank's Critical Stress Indicator (via GFSITM index) was triggered on 13 June, "suggesting cross asset stresses had risen by enough to lead to widespread contagion, absent policy intervention."
So in essence, some markets are fairly priced (most currencies) but will probably see more selling/buying going forward, but other assets are wrongly priced (volatility, stocks, and perhaps credit). Assets that are wrongly priced should begin reverting to where the gravity currently is: Risk and FX.
***
BofAML has more details:
"While derivatives markets like Sterling options clearly anticipated event risk around the referendum as early as April, there were record gaps in risk perception across regions and asset classes even days before the vote. Bank of America believes that gaps will further narrow as markets outside Europe realize the risks Brexit creates for global markets. For instance, at the time of writing the VSTOXX (V2X)-VIX spread, which traded as wide as 20 pts in the last week, decreased to ~13pts (EU close) as US equity volatility catches up with that in Europe.
Sterling had a 12 sigma move (vs history) on 24-Jun: GBPUSD, risk perception on which has been among the most stretched metrics across the GFSI leading up to EU referendum, reacted the most across the assets in Chart 2. This highlights just how important it is to pay attention to metrics close to the source of stress.
GBPUSD, EURJPY, EURUSD & 10yr Bunds were more shocked than even ‘08: Price action suggests FX & bond markets were more shocked by Brexit than they were at any time in 2008.
Scope of further contagion remains high: The GFSI’s Critical Stress Signal triggered on 13-Jun, as FX & equity stresses rose sharply. The markets’ reaction to Brexit has also witnessed a narrowing of some gaps in risk perception like the V2XVIX spread; indeed the VIX was >2x more surprised than the V2X today. Given the highly significant moves in cross asset stress and the relative underperformance of V2X (see later) versus EU equities, this metric will be a key barometer for monitoring contagion.
The V2X lagged in the largest 1-d SX5E drop; may rise to ~46 if sell-off persists
The V2X underperformed the (~8.5%) fall in the SX5E today – rising by ~3.5 pts, while a historical relationship would suggest an increase of ~10 pts (Chart 2). Our equity strategists called for a 16% fall in the STOXX 600 in the short term vs yesterday’s levels, which translates to a further 10% drop in the SX5E from 24-Jun. Based on a historical relationship of SX5E 1wk returns & V2X 1wk changes, a 10% drop in the SX5E implies a rise of ~11 vol pts in the V2X (on average), which would take it near its 2011 high of 46 (Chart 3). Chart 4 extends the analysis from Chart 3 & highlights potential reaction of V2X in the coming month under various SX5E return scenarios. For instance, if the SX5E was to fall further by 16% in the next month, the VSTOXX is likely to be ~ 55.
How to read the projections in Chart 4: “Twk” stands for “time in weeks” from now to the end of a given projection. For instance, the green projection line in 2wks corresponds to an SX5E return of -8.5% [=6% * sqrt(2)] and predicts a V2X level of ~45.
We use an exponential decay process that is ‘fitted’ to each of the V2X, VIX and VNKY according to historical vol spike (see source of Chart 6 for details). Importantly, the decay process is independent of the starting level of vol, so it may be used to track the normalisation of a range of vol shocks: from the largest spikes in 2008 to the midsized ones in 2010-11 as well as the most recent (smaller) spikes (Chart 6, Chart 7, Chart 8). Note that in recent years, vol spikes have faded faster than in previous periods given the strong hand of central bank intervention (particularly in the US).
The VIX outperformed the SPX decline; however, it remains low vs the V2X US equity vol, which lagged the broader rise in stress in the lead up to the EU referendum, has outperformed today’s decline in the SPX (as of the EU close). This has led to a narrowing of the gap between US vs EU equity vol. The trend is likely to continue if the sell-off continues."
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