Earlier we pointed out that while the “real money” has been tiptoeing into “obvious” sectors like utilities, the cause of the overnight buying scramble appears to be yet another short squeeze. There is a reason for that. As RBC’s McEllifott follows up, there are “signs of capitulation yesterday in US equities (high beta basket -5.6%, cyclical beta -5.3%, biotech -4.2%, small cap -3.4%), and monetization / outright “tap outs” on further near-term downside bets through ETF and index options. The view here is that although that is part of the “recovery” process, you still have the quarter-end dynamic into a long US holiday weekend which is keeping new risk-taking “capped.”
HIGH BETA EQUITY BASKET’S TWO DAY NEGATIVE RETURN NEARLY 4 STANDARD DEVIATION EVENT (all outcomes dating back to ’08): De-risk.
So is anything aside from a squeeze keeping markets alfoat today? As we pointed out in our early morning wrap this morning, it is the old standby: “coordinated intervention by central banks.” To wit:
HAVE GOVERNMENTS BEEN ‘SPOOKED’ INTO READING THE FISCAL STIMULUS MEMO?:
I continue hearing of “hope” that a “backdoor deal” could be worked-out to keep the UK in the EU “single market” somehow, with the logic going something like this: off the back of the clever-move by Cameron to “buy-time” in waiting to trigger Article 50 (until a new govt is formed), you thus allow discord and fear in the country grow in the meanwhile, as to the implications of actually “going-through” with divorce seed further fears on the referendum and implications on the UK economy, peoples’ livelihoods and well-being…and thus, the future PM never “triggers.” I think this route remains unlikely, not just based on the language coming out of the Eurocrats (*’YOU’RE NOT COMING BACK’ JUNCKER TELLS FARAGE IN EU PARLIAMENT // *MERKEL: EU WON’T MAKE `CHERRY-PICKING’ CONCESSIONS TO U.K.), but also the view that it’s “not a good look” for the credibility of a parliamentary democracy to not act on the will of the people around a (terribly thought-out and poorly-executed) referendum. Thus, I have to believe that the likely future PM BoJo will go through with Article 50, but on watered-down terms, as both sides step off the ledge, because neither the UK or EU win from playing a game of chicken.
I actually think the much bigger “hope” for markets is that this vote could “spook” more coordination between the political ruling class, central banks and markets on the desire for FISCAL policy enhancements to eventually help with the heavy-lifting that is currently being done entirely from MonPol with ever-growing negative implications (for example dysfunctional govt bond markets, or NIRP destroying banking systems–Topix (Japan) banks index -38.6% YTD / EU banks -36.1% YTD). The longer-term risks of Brexit triggering a global “crisis-of-confidence” which will spill-over to the real economy (e.g. a Capex recession driven by lack of visibility on direction) might not just elicit “still looser” monetary policy, but also, potential for fiscal policy enhancements that populists and markets are seemingly clamoring-for. Overnight, we saw first signs of movement here from South Korea (where the KOSPI finished +0.5% overnight btw):
“South Korea plans a fiscal stimulus package of more than 20 trillion won ($17 billion) to cushion risks from corporate restructuring as external uncertainties grow with the U.K.’s vote to leave the European Union. The package will include an extra budget of about 10 trillion won that mainly would be used to create jobs and support regional economies that would be hurt by corporate restructuring, according to government statements on policy outlook.”
This then ties nicely into the speculation swirling out of Japan in recent days that Toshihiro Nikai, chairman of the ruling party’s general council, proposed a 20 trillion yen ($196B) stimulus package to Abe. The speculation in turn has kept the Nikkei the global leading outperformer WTD, +2.5%, and reiterates that markets are prepared to reward governments that are willing to shift in this direction.
That and oh yeah, helicopter money. #GOLD.
And so, seven years later into this “recovery”, we are back to square one it is.
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