Morning Briefing 8211 June 13th 2016

1044 BST

• Traders who feared they’d missed the best fireworks the market had offered for days got a second chance on Monday morning. Sterling was 1% lower as I finished this briefing. The market remains on tenterhooks after sterling’s severe Friday night thrashing which came on the back of another poll, what else?  The ORB survey was 55/45 in favour of Brexit. Leave’s 10-point advantage sent the pound almost 1 and a half percentage points lower against the dollar on the day, and the rate has extended losses this morning. It is worth mentioning here that ORB used quite distinct methodology. They seemed to have concentrated on voters who said they’d be certain to vote.
• Weekly data on large speculators’ positions—from the Commodity Futures Trading Commission (CFTC) backed up the sterling rout with the biggest increase in net shorts for five years. They doubled to 66,299 contracts; worth about $6bn.
• The wider risk-off move was quite ‘classical’ and had begun well before sterling’s follow-up sell-off very late in Friday’s business. Flattening yield curves, fresh record lows threatened in German benchmark bund yields and actual new record low Japanese government bond yields, together with stocks careering lower—with Europe harder hit than the UK—had been around all Friday. Again, these have carried over into Monday. The DAX was last down 1.4%, in keeping with our thesis that foresees a bigger equity hit for Europe than the UK; the FTSE was down 0.5%. To be fair the benchmark has been slipping all morning so could worsen.
• All the above perhaps inevitably accompanied by a huge spike in sterling volatility. From our point of view, it doesn’t appear that the wider markets take implied volatility in the pound very seriously until it makes its presence felt in the more ‘mainstream’ hedging markets: meaning the 3-month tenor At the Money trades. That’s exactly what we’ve got. Right now, it would cost you more to hedge a sterling/dollar position for three months than it would have cost you after 2010’s hung Parliament. The May 2010 levels were higher than prices seen during the surge in June 2009. In the crazier short-term options markets, 1-month hedging costs are at record highs.
• The world follows suit. Little surprise that the yen was leading at online time, having hit a three-month high against the euro and sterling and held on to most of the 1% gain against the dollar seen earlier in the global session, touching the 105 yen handle for the first time since early May. The next biggest volumes were going through on the Aussie with traders having an eye to the important employment data due for release this week, though trading was mixed. Against the yen Australia’s dollar found support as 0.78 yen loomed, but against the greenback the dollar hasn’t managed to hold on to a recent $0.7505 peak. The Aussie is currently rallying away from the late-May low of $0.7145, but it could be back. Euro hasn’t maintained the $1.14 handle, though its tone is positive right now. With its own implied volatility rallying, a cap could be near for EUR/GBP as well, ahead of £0.80; that rate was last at £0.797.
• The dollar complex is the final piece of this morning’s picture after the greenback, on aggregate managed to actually end stronger on Friday on a weekly basis, despite a not particularly promising fortnight for US economic news. The Dollar Index was a few basis points lower at the time of writing, but the damage to crude oil’s rally—down some 3% on Friday and still weak on Monday—has (finally) been done. The safety-bid did however leave spot gold with gains at the end of the week and prices are firm so far on Monday.
• Perhaps not the best atmosphere to release a raft of top-tier economic data, but that’s going to happen. Chinese Industrial Production was already released overnight, and the index deteriorated slightly on a monthly basis though was flat compared to the previous reading at a +6% clip on the year. Tomorrow, focus will shift to UK inflation with CPI and PPI. Whatever the readings are, expect them to be jumped on by the Brexiters and anti-Brexiters. EU Industrial Production, US Retail Sales will follow, then on Wednesday the Bank of Japan announcement will come in the early hours. It’s difficult to imagine the BoJ sitting on their hands for another month (though that is what the market expects, according to Thomson Reuters data). The Fed’s announcement will be the same evening and it’s difficult to imagine the FOMC not sitting on their hands. We’ll also have UK jobs data, and US PPI. Thursday will bring the Australian Labour Force Survey in the early hours in Europe, UK Retail Sales, and possibly the least widely anticipated Bank of England Announcement in modern times. Perhaps the most interesting focus point from the BoE proceedings will be whether Governor Carney puts himself out there again for more political scoldings by reiterating the Bank’s ‘Remain’ stance. There will also be an SNB meeting on Thursday. No changes are expected from that either, though the Swissie rallied hard last week so some sort of retaliation by the bank may be only a matter of time. Canadian CPI rounds off the major data week on Friday.