After a tough seven days trading in markets since we hit the 14 day countdown to the Brexit vote two Thursdays ago, this week ushers in June 23’s decision by the British people to either remain in, or leave, the EU.
That could mean either more, or less, volatility depending on any polls and the approach of traders and risk managers to the irreducible uncertainty surrounding the vote.
Usually, at times like these, and after big moves such as we’ve seen in the past seven trading days, the contrarians come out of the closet and take the opposing position to the one the market has been pushing.
Some may have.
But because the potential moves in the aftermath of the vote are so great — along with the gaps in market pricing that may eventuate — usual risk management protocols may be hard to follow. That means discretion is by far the better part of valour for traders, money managers and certainly their risk manager overlords. That means many will be predisposed to sit on the sidelines. That in itself can add to volatility.
Luckily we are in the second half of the month so there are less catalysts than usual to concern traders. But Janet Yellen’s trip up to Capitol Hill for her, early, semi-annual testimony is the highlight.
In the end, it is more likely than not that fears of a market catastrophe in the wake of a British vote to leave are overblown. But the risk that they are not is high.
The British EU referendum — It’s increasingly looking like the Leave campaign has built up enough momentum to win this week’s referendum. The past week was a strong one for the campaign to take Britain out of the EU and after months of trailing Remain in the majority opinion polls, the Leave campaign has performed a stunning turnaround. Adam Payne reports that the folks at Macquarie research have a great chart which illustrates how Remain’s winning margin has totally crumbled since May.
Markets have noticed that and there have been big rallies in global safe haven trades like gold, the Japanese yen, and high-grade government bonds over the past two weeks. Gold finished the week at $1298, its highest close since August 2014. The yen’s strength saw USDJPY close at 104.09 which was also its lowest level since August 2014 while the rally in bonds saw record low levels around the world with German 10-year bonds closing at 0.02% after dipping into negative rate territory before Friday’s rise in yields.
It’s likely to be a thin and somewhat illiquid week of trade on many markets as risk managers rein in their traders bets. That means it could be either extremely quiet as traders sit on the sideline or it could be another week of volatility as very short term traders push their luck without the usual — and larger — players to oppose them. It also sets up a huge day Friday when the results are released during the Asian trading session.
The Brexit vote fits perfectly with BAML’s new term for this market regime — the “buffalo” market — People like to say the market is in either Bull or Bear mode but Seth Archer reports the folks at BAML reckon the current market is best described as a “buffalo”. That’s a market that “tends to roam over a long period of time, is herd-like and rather heavy, and can run the other way when worrisome obstacles get in the way”.
That puts some nice context around this year’s volatility but also last week’s move in markets in the run up to Britain’s EU vote. Of course it’s really just a neat way to explain a market dominated by short-termism with little fixed view on the long-term outcome for the economy or markets. Karin Kimbrough, head of macro and economic policy at Merril Lynch said the Buffalo brings “low returns and higher volatility”. It also brings the perfect mindset for a massive reaction to this week’s Brexit vote. Strap on your tin hat.
Australian Calendar — (courtesy NAB Economics, our emphasis)
It’s the back end of the month and that means its fairly quite on the domestic front this week. The key events are all based around the RBA.
Tuesday sees the release of the minutes to this month’s meeting. The NAB says many traders were surprised that there was a “lack of a clear easing bias in the final paragraph of the governor’s statement” in June. That suggests the current policy stance is “consistent with both sustainable growth and inflation to return to target over time”, they say. Of course the NAB doesn’t expect the RBA to ease again anytime soon and is the only 1 of 23 economists polled by Bloomberg who thinks that the RBA won’t cut rates by August.
So they are reflecting their own view to a certain extent. They highlight that this makes the CPI in late July very important but it also means that the minutes, and what they tell traders the RBA board is thinking, is vitally important for interest rate expectations and also the Australian dollar.
We also have two RBA speakers -– Debelle and Heath — all on Tuesday. Guy Debelle continues his recent academic discussions about markets and is talking about liquidity in bond markets while Alex Heath as the head of the RBA’s economic analysis department is talking at CEDA. Heath could say something market moving. Debelle also speaks Thursday as does the RBA’s head of its financial stability department Luci Ellis.
Otherwise it’s mainly a second tier week with the release of consumer confidence and quarterly house prices Tuesday, skilled vacancies Wednesday and latest population data Thursday.
International Calendar (also courtesy NAB Market Economics)
UK: Markets to increasingly fixate on Thursday’s Referendum. Elsewhere it’s public finances and CBI trends survey (Tuesday).
US: Fed Chair Yellen’s testimony before the Senate (Tuesday) and the House (Wednesday) the major US events. The Fed’s Kashkari, Powell, and Kaplan are also speaking this week. The data flow includes Existing Home Sales Wednesday; weekly jobless claims, Chicago Fed National activity index, Markit Manufacturing PMI, New Home Sales, Leading index, and the Kansas City Fed Manufacturing activity all Thursday. Then Durable Goods Orders and the University of Michigan Consumer sentiment final June survey all Friday.
China: Nothing is moving.
Euro: Thursday sees the June PMIs and the German Ifo Survey Friday; ZEW survey due Wednesday.
Japan: The BOJ’s Kiuchi and Nakaso speak Thursday, Friday. Trade on Monday, All industry activity index Tuesday, Nikkei manufacturing PMI Thursday.
Canada: Wholesale trade sales come ahead of retail sales on Wednesday.
NZ: Consumer Confidence, Services PSI Monday, Net migration, Card spending Wednesday.
Here’s the NAB full calendar of all the key data and events in the week ahead.