Month: June 2016

Who could have possibly predicted years and years of central bank policies aimed at making the rich richer while crushing the middle class, would ultimately result in the kind of “shocking” outcome as that observed last week when in an unexpected outcome, a majority of Brits gave their collective middle finger to an establishment that had only given lip service to fixing their plight when in reality it was simply backstopping banks, propping up stock markets and generally making billionaires out of millionaires (aside for tinfoil blogs who warned from the very beginning that the outcome of one after another failed central bank policy will be precisely income inequality, eventually culminating in war).

Apparently not Bank of America, which in a note by Alay Kapur, titled “The Tide is Turning – Populism and Panic”, suggests that “If you are going to panic, panic early.“

Here is why, as excerpted from: “Brexit: If you are going to panic, panic early”
by BofA’s Ajay Kapur

If you are going to panic, panic early – Brexit is here. And so is risk-off sentiment. Our US economists now call for the US Fed funds rate to be lower for longer with the next forecast rate hike pushed out to December this year rather than in September. We suspect that overall global policy is now likely to be easier for longer, with even more unconventional policy possibly more palatable (helicopter money, anyone?). Our views continue to be the same as they were last week.

* * *

We also think that Brexit has now possibly opened up more uncertainty about the European Union project and that the already beaten down Asian and EM equity markets could receive asset allocation flows from Europe.

As the move for Britain to leave the EU was largely unexpected (Oddschecker average probability of BREXIT implied from betting odds was only 23% before the referendum day), a majority of investors were caught off-guard. Some of the high frequency sentiment indicators like VIX Index, put/call volume ratio, trading in the S&P500 Index versus its components, etc., are in panic now.

We reiterate our views on the potential deeper message from Brexit. As Figure 4 shows, the past 30 years have seen a silent collaboration between the EM middle classes and global plutonomists, at the expense of the bottom 50% of developed market citizens.

While globalization, immigration and the free market have strong support from the winners of these themes – the plutonomists and the highly educated, in our view they seem to have underestimated the frustration of developed market middle and working classes. We think Brexit could just be the first surprise in a re-calibration of the world away from globalization towards more inward looking policymaking. Away from Wall Street and more towards Main Street. Away from financial asset reflation to more income support and wage inflation. We suspect that few will pay attention to these tectonic shifts – it will require more Brexit-type surprises for the message to sink in.

Bottom-line: It is a bit too late to panic.

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Despite ECB’s Nowotny explaining earlier that “markets are getting more quiet” and that “Brexit has virtually no impact” on his economy, documents seen by Bloomberg show that Mario Draghi is extremely concerned. Warning of years of slowing growth due to Brexit, Draghi stated that if U.K. goes into recession the effects would be immediate on the euro area. Draghi further noted he’s concerned by reactions of countries trying to correct with what they view as wrong exchange rates because this could start competitive devaluations and may increase risk premiums and turbulence. Concluding that the ECB would do everything necessary to ensure price stability, we suspect this fearmongery is nothing but ‘using’ a crisis as excuse to enabling moar QE and utlimately helicopter money.

 

Here is Nowotny earlier playing down the impact of Brexit…

• *NOWOTNY SAYS BREXIT HAS VIRTUALLY NO IMPACT ON AUSTRIAN ECONOMY
• *NOWOTNY SAYS EXCHANGE-RATE CHANNEL NOT AS IMPORTANT ANY MORE
• *NOWOTNY SAYS MARKETS GETTING MORE QUIET, BALANCED

And now Draghi in full panic-monger mode… (via Bloomberg)

• *DRAGHI SAID TO SEE BREXIT VOTE CUTTING EURO GDP AS MUCH AS 0.5%
• *DRAGHI SAID TO SEE GDP GROWTH REDUCTION FOR NEXT THREE YEARS
• *DRAGHI CONCERNED BREXIT WILL LEAD TO COMPETTIVE DEVALUATIONS
• *DRAGHI SAYS IT’S TIME TO ADDRESS BANK VULNERABILITIES
• *DRAGHI SAYS `WE CANNOT AFFORD NOT TO’ FIX BANK VULNERABILITIES
• *DRAGHI SAYS BREXIT RECESSION WOULD AFFECT FX MARKETS

Of course, the panic-mongering is simply the excuse to enable moar QE… and ultimately Helicopter money.

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In May, Brazilian soccer great Rivaldo told tourists to stay away from the Olympics in Rio because of the violence, saying "You'll be putting your life at risk here." After that dire warning, the Rio state government declared a state of "public calamity" because it had gone completely broke. The government warned of total total collapse in public security, health, and transport.

As a result of the declared state of calamity, the federal government was supposed to transfer $860 million to the state but the AP reports that as of yesterday the money hadn't been received. Rio's acting governor Francisco Dornelles said that there is a concern that the Olympics will be a big failure if things don't get back on track quickly. "I'm optimistic about the games, but I have to show reality. We can have a great Olympics, but if some steps aren't taken, it can be a big failure" Dornelles said.

"How are people going to feel protected in a city without security" Dornelles added. Which is an excellent question, because the Rio police force rallied against the non-payment of wages and even the lack of basic supplies on Monday.

At the city's airport a group of protesters spread banners that read "Welcome to hell. Police and firefighters don't get paid, whoever comes to Rio De Janeiro will not be safe" – probably not the message the world wants to be seeing just over a month away from the Olympics.

Around 300 officers took to the streets to demand their salaries be paid by the government in full, and to express their anger over lack of basic supplies such as water, ink, and even toilet paper. According to RT, one officer said that he had only received half of his pay last month, and hasn't been paid for overtime in the last five months either.

"At the stations we don't have paper or ink for the printers, there's no one to come in to clean and some stations don't have a water supply anymore so the toilets are not functioning" said a member of an elite police unit entrusted with providing security at the upcoming olympics.

Seen at the airport in Rio today: First responders welcome toutists. A sign of what's to come during the Olympics? http://pic.twitter.com/mCOYB3deuo

— Michael Smith (@SmithMarkets) June 27, 2016

If the banners and protesting police weren't enough to scare those who arrived in Rio, someone even put up a warning on the way out of the airport that there are no hospitals either:

Welcome, we don't have hospitals! – “Aviso” na estrada do Galeão. (Foto: Tiago Bla) http://pic.twitter.com/NfnrEukkuT

— Cecília Olliveira (@Cecillia) June 26, 2016

* * *

We don't want to scare everyone completely with the realities of how poor the Brazilian economy is doing, and the fact that Rivaldo was probably correct with the warning, so as we reminded everyone last time, the silver lining is that Brazil will always remain rich in natural resources.

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While both Angela Merkel and David Cameron, and perhaps Boris Johnson, have been doing all they can to restore some of the badly burned bridges between the UK and Europe over the past week, the European Commission president, Jean-Claude Juncker, perhaps once again under the influence, is seemingly engaged in a one-man crusade to accelerate and crush any last hope of an amicable UK departure with lingering ties to Europe.

As we reported earlier, Juncker pulled a fast one on the EU parliament when he first said that “we must respect British democracy and the way it has expressed its view,” a statement that was greeted by rare applause from the UKIP members present. However, Juncker promptly turned the tables when he said “that’s the last time you are applauding here… and to some extent I’m really surprised you are here. You are fighting for the exit. The British people voted in favor of the exit. Why are you here?” Juncker continued, breaking from his speech text.

Then, according to a Telegraph correspondent, Juncker added that he has imposed a Presidential Ban on all contact between EU officials and UK officials until Art 50.

But the coup de grace, to use the proper language, came when as AP reported, Juncker decided to refuse speaking in English altogether. In contrast to recent speeches on Britain’s future in the European Union, European Commission President Jean-Claude Juncker didn’t speak English Tuesday as he lamented the U.K.’s departure from the bloc.

Juncker’s official speech to EU lawmakers was made only in French and German. He did, however, respond to hecklers among the British EU lawmakers in English.

Previously, Juncker has often used the EU’s most widely spoken and written language as well, particularly when addressing issues close to British hearts.

It’s unclear whether the move was a political message from one of Europe’s longest serving leaders, or an act of caution due to criticism he has received for making mistakes in English in the past.

Whatever the motivation, it almost appears that Juncker is doing everything in his power to sabotage any lingering hope of some last minute mending of relations between the EU and the UK.

* * *

Meanwhile, the fate of the UK aside, the blowback inside Europe is growing and now the prime ministers of four central European countries say the European Union needs to be reformed to renew the trust of citizens in its institutions. The prime ministers of the Czech Republic, Hungary, Poland and Slovakia also said the forthcoming exit negotiations between the EU and Britain must not leave EU members and their businesses in a worse position than Britain and its companies.

They said the EU should focus on economic growth, an increase of prosperity and the development of a common security policy. The four countries form an informal bloc known as the Visegrad Group and released a joint statement ahead of a summit of EU leaders in Brussels Tuesday.

What was left unsaid is that the balance of power has now shifted dramatically, and what was once Merkel’s sole domain now sees the periphery as gradually dominating all negotiations thanks to the impromtpy threat of a referendum that any one nation may invoke at a moment’s notice. In the aftermath of Brexit, this is a threat that Merkel and Brussels have no choice but to do everything in their power to remedy, even if it means succumbing to every single demand.

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Well that didn’t last long. With hopes of a face-ripping ride higher this morning as Draghi jawboning lifted bank stocks and Cable, the bounce was nothing but an opportunity for sellers to escape at better prices. While Deutsche eked out a tiny gain, RBS, Unicredit, Credit Suisse, and UBS all tumbled to end the day red…

 

 

And Cable has rolled over notably… back below 1.33!

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While one can speculate about the causes of today’s global risk-on rally (as we did earlier today on two occasions), a more important question is whether after the recent historic rout (which as shown yesterday surpassed the volatility of the 2008 great financial crisis for various, mostly FX-linked assets), stock markets will simply brush it off, forget about all that’s happened and as has been the case all too often in the past several years, surge in yet another V-shaped recovery.

According to Barclays, the answer is no.

As the firm’s equity strategist, Keith Parker, writes today, active investors considerably increased risk exposures in the week leading up to the UK referendum. That trade did not play out as expected, and as a result this is where active money managers (MFs and HFs) find themselves now:

“By our measures, aggregate equity positioning by active managers is again near post-crisis highs as the market braces itself for a potential acceleration in redemptions after the equity collapse. With cash levels at equity MFs fairly low and net cyclical sector positioning near the highs, we believe managers are unprepared for outflows and lengthy risk aversion. Although there is cash on the sidelines, the current environment of heightened uncertainty gives rise to a “buyer’s strike” as investors wait for a sufficient value cushion to open up before deploying precious dry powder. Finally, short interest has considerable room to rise across cash equities, ETFs and futures.”

Barclays goes on to add that it sees scope for “positioning to turn much more defensive at active managers and for equity outflows to pick up.”

And the biggest wildcard, and the reason why we suggested recently BofA’s “smart money” clients have pulled money in 21 of the past 22 weeks, not just existing redemption requests, but the threat of a surge in “massive redemptions” over the next few months. Here is Barclays: “Weak active manager performance YTD increases the risk of even larger redemptions in H2.”

 

The bank’s conclusion: “The positioning overhang coupled with the ‘prove it mindset’ of investors now, points to further equity downside risk as well as a prolonged market bottoming process like we saw in 2011-12, rather than the v-shaped rebounds that have characterized equity markets of late (like January).“

* * *

Finally, since this is a touchy topic for countless 17-year-old hedge fund managers whose only trading strategy during this “business cycle” has been to BTFD, here is Barclays’ summary of the key points:

• Composite equity positioning is 2std above average, at the post crisis highs. Funds increased risk exposure considerably in the week leading up to the referendum. US MFs and balanced funds are the most exposed currently, while Europe funds went from underweight to neutral.

 

• Rebalance bid for equities at the end of month/quarter is unlikely to be material. Our implied US equity vs. bond allocation proxy is still well above recent lows as US equities are down just 3% in Q2. Additionally, the relative spike in equity vol vs. bond vol does not point to net equity buying by multi-asset funds. The rebalance bid may be more pronounced outside the US where the selloff was more acute.

 

• Elevated equity fund betas combined with redemptions fuelled prior selloffs. US equity MF beta is 2.5std above average despite equity MF redemptions running $30-40bn a month. The selloffs in 2011 and 2012 were preceded by elevated MF beta, underperformance, and redemptions – which then helped fuel the corrections.

 

• Short interest has considerable room to rise. S&P 500 short interest in single stocks is at 2.15% compared to about 2.4% at the recent highs; this implies nearly $50bn in potential selling pressure. ETF short interest is also at all-time lows and a rise to September levels would also imply about $50bn of selling pressure. Finally, S&P futures positioning is net long, compared to being net short in February.

 

• Sector positioning turned much more cyclical heading into the referendum. Net cyclical minus defensive positioning by our measures has risen toward the highs, and is reversing. US equity MFs are the most cyclically positioned while global MFs and long-short equity HFs are closer to neutral.

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Following the resignation of more than 20 members of his shadow cabinet, UK Labour Party Leader Jeremy Corbyn has just lost a vote of no confidence by a vote of 176 to 40. Despite his previous statement that he is “not going anywhere” we suspect this will lead to a formal leadership challenge. Notably Cable is weakening on the news as yet another level of uncertainty hits The UK.

As The Independent reports,

Jeremy Corbyn has lost a no-confidence vote among Labour MPs.

 

The party’s parliamentarians voted 176 to 40 against Mr Corbyn’s leadership in a secret ballot on Tuesday afternoon.

 

The motion was formally proposed at a meeting of the Parliamentary Labour Party on Monday evening.

The short statement http://pic.twitter.com/N8zgSUSSsI

— Mike Smithson (@MSmithsonPB) June 28, 2016

Which has sent cable modestly lower…

 

The vote is non-binding and so far Corbyn has indicated he won’t step down as head of the main opposition party.

He has lost much of his support in the parliamentary ranks of the Labour Party after Britain voted to leave the European Union last week, but claims he still has support in the party’s rank and file.

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