Markets Today: D-I-V-O-R-C-E

Lows for the day on Friday in all things GBP and AUD and highs for the USD and US Treasury prices came early to mid-afternoon Australian time almost as soon as it became clear the UK had voted for Brexit.

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Lows for the day on Friday in all things GBP and AUD and highs for the USD and US Treasury prices came early to mid-afternoon Australian time almost as soon as it became clear the UK had voted for Brexit.

Somewhat remarkably, the UK stock market recovered smartly from its opening crunch with the FTSE closing -3.1% having been -8.7% early on and despite a falls of +/-20% in the share prices of Lloyds, Barclays and RBS. GBP/USD similarly recouped a good chunk of its 17.5 big figure or 12% record intraday fall, closing at 1.3679 (-8.05%). Both our London and New York institutional sales desks on Friday picked up plenty of chatter about repatriation flows – actual or prospective – from international bond and equity sales by UK fund managers.

Moody’s on Friday formally put the UK sovereign on negative ratings watch. Though S&P and Fitch have as yet done nothing formally, both said that Friday’s news is credit negative. S&P currently has the UK on AAA, Fitch and Moody’s both one notch below.

The biggest stock index losses on Friday were reserved for continental Europe, where an 8.6% loss for the Eurostoxx 50 was led by Italy’s FTSE MIB (-12.5%) and Spain’s IBEX (-12.4%). The latter came in front of Sunday’s Spanish general election and where incoming results suggesting another inconclusive outcome.

The S&P 500 lost about 2.75% in the opening minutes of cash market trading US and then lost another percent or so to end NY at 3.59% – a smaller fall than suffered by S&P futures during the APAC session. The VIX ended 50% up on its Thursday closing level at 25.76, close to the intra-day highs and at its highest since 11 February. Yet in the context of Friday’s events, the surprise perhaps is that risk aversion indicators aren’t higher. That can yet transpire.

In bonds, 10-year Treasuries finished 16bp up from their (1.40%) APAC session low at 1.561% (-18.6bps on the day); 10 year gilts finished 28.7bps lower at 1.086% and Bunds -14bps at -0.047% having been as low as -0.17%. Pricing for the Fed now has 3.7bps of easing for September (meaning a 15% probability of the December quarter point rate rise being reversed) and December 2016 shows 0.1bps of easing.

So in FX, GBP/USD finished in NY -8.05% at 1.3679 having been 1.3229 around 2:30pm AEST. EUR/USD -2.35% at 1.1117; USD/JPY -3.71% to 102.22; AUD/USD -1.93% to 0.7466 and NZD -1.74% to 0.7124; The SNB earlier confirmed intervention and after EUR/CHF had traded sub-1.0650). The narrow DXY dollar index ended Friday +2.05% at 95.45, the broader BBDXY +1.81%.

Commodities, with the exception of gold predictably got hammered on global growth concerns and dollar strength. WTI and Brent crude both lost $2.50. The LMEX index lost 1.56% and iron ore $1.30 to $50.61. Gold gained $58.80 to $1,320 having been as high as $1,358.

Data published Friday, albeit ignored, showed US durable goods orders -2.2% (-0.5%E, +3.3%P). Ex-transport, orders were -0.3% (0.1%E, +0.5%P) and orders non-defence ex-aircraft -0.7% (+0.4%E, -0.4%P).  Final University of Michigan consumer sentiment came in at 93.5 vs. the 94.1 expected and the preliminary 94.3. There was an unusually large (upwards) revision to 5-10 year inflation expectations (2.6% from 2.3%) – this after the Fed had implicitly acknowledged the dip in the preliminary reading in the June FOMC statement. German IFO survey 108.7 up from 107.8 in May and better than the 107.4 expected. Both current conditions and expectations readings rose.

CoreLogic RP data’s weekend auction market summary shows the capital city weighted average clearance rate up to a preliminary 69.1% from 67.4%. Sydney cleared a preliminary 77.1% up from 73.4% and Melbourne 68.4% little changed from last week’s 68.3%.

Coming Up

The weekend brought nothing but increased uncertainty about how the enormity of Friday’s decision by the UK electorate plays out. Amid a UK political vacuum, the timing of the exit (assuming there will be one) is highly uncertain. Scotland looks like it may have a second referendum on independence from the UK; Northern Ireland will have real problems sharing a border with Eire. From a global perspective, whether we signs of dissent  elsewhere in Europe will be a key for gauging whether the fall-out from ‘Brexit’ will be limited to a UK recession. In currencies, we see the USD and JPY remaining supported, GBP and EUR under further pressure and AUD and NZD weakness largely confined to movement down against the US dollar.

Overnight

On global stock markets, the S&P 500 was -3.59%. Bond markets saw US 10-years -18.6bps to 1.56%. In commodities, Brent crude oil -2.95% to $48.41, gold+4.1% to $1,320, iron ore -3.2% to $50.61. AUD is at 0.7434 and the range since Friday 5pm Sydney time is 0.7361 to 0.7508.

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