Where Has The Risk Gone?
I have been pointing out all week how the markets went from six days of selling last week on Brexit concerns to an outright flip of risk after weekend polls showed a sentiment flip post-Jo Cox assassination. What was difficult for me to believe was the accuracy of the polls and that the British population would flip so suddenly. There are still a great deal of undecided voters, but the polls have the ‘remain camp’ in the lead; however, some internet polls show the ‘exit camp’ with a slight lead. What we do know is that it is far from over, and it will likely be close. Some more polls hit the wires today, but it looks like the market has made up its mind for now with the BUY THE RUMOR TRADE. From what I am reading, British polls will not close until 10:00 pm London time, and it’s likely that they will not have the final tabulation until Friday morning. I am even hearing that we will not know until daylight hours on the East Coast of the U.S.
This week the equity index futures have seen a quiet trade on low volume. Last night I was speaking to a currency desk manager who expressed the sentiment that in the forex markets several pairs are not behaving as expected. What I believe has happened is that everyone expected this week to be so volatile. They squared their books and hedged last week ahead of this week’s poll-sensitive trade, and while they are on the sidelines, volumes are low and algos/HFT’s are running the market. That would explain much of the price action seen the last few days.
Sell The News?
Yesterday the ESU16 stayed in a choppy range; it did rally to the 2091 area and then break back down to 2076 before the close. Then it gapped higher on globex as some new Brexit polls were released, and continued its bid along with European markets overnight, trading up to 2102. Last week I said this was possible, but I didn’t think it would play out quite like this. Once again the S&P futures are fighting over the ultra-pivotal 2100 level and are within flirting distance of new all-time highs. After such a sharp ‘buy-the-rumor’ rally, is the market in store for a ‘sell-the-news’ response? I think that the algos will push it higher through today, and perhaps tomorrow money will flow into equities if the vote to remain is verified. Once everyone has gone long again and begin to target new all-time highs, then the bus too full will eventually steer off the road.
In Asia, 7 out of 11 markets closed higher (Nikkei +1.07%), and In Europe 12 out of 12 markets are trading higher this morning (DAX +2.10%). Today’s economic calendar includes Weekly Bill Settlement, 52-Week Bill Settlement, Jobless Claims, Chicago Fed National Activity Index, PMI Manufacturing Index Flash, Bloomberg Consumer Comfort Index, New Home Sales, Leading Indicators, EIA Natural Gas Report, 3-Month Bill Announcement, 6-Month Bill Announcement, 30-Yr TIPS Auction, Fed Balance Sheet. Money Supply, and Robert Kaplan Speaks.
Our View: Another algo-induced day, and we have to trade like an algo; fade the edges, expect for a range-bound trade early, then a range expansion midday when all is quiet, then fade the edges of that range. I cannot say to sell the early rally or buy the early pullback. This price action is not logical or sensible. While it is great for scalpers, it is not good for intraday momentum/swing traders. Whatever you do, I suggest trading small, picking spots extra carefully, keep stops tight, and as always, “Never Fall in Love With Your Positions”
‘Brexit – Should I Stay Or Should I Go?’
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 7 out of 11 markets closed higher: Shanghai Comp -0.47%, Hang Seng +0.35%, Nikkei +1.07%
- In Europe 12 out of 12 markets are trading higher: CAC +2.28%, DAX +2.10%, FTSE +1.38% at 6:30am ET
- Fair Value: S&P -8.58, NASDAQ -8.49, Dow -100.75
- Total Volume: 1.4m ESU and 3.7k SPU traded
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