Pavlovian market prices out own stimulus hopes

So much for Brexit! Central banks have such a following of salivating dogs in markets now that they don’t even have to stimulate. A twitch here, picking your nose there, could all be signs that Daddy is reaching for the dinner bell.

As the panic passed, the US dollar softened:

So did yen while zombieuro shuffled higher:

Commodity currencies launched, especially Brazil:

Gold rose:

Oil rocketed:

Base metals didn’t fall when the US dollar rose but they’re rising as it falls:

Big miners piled it on:

So did US and EM high yield debt:

Stocks soared:

And bonds sold but not much:

So, with Brexit behind us lets get long. Not! Markets have effectively just priced out their own hoped for stimulus!

JPM says:

Trading trends are pretty slow and that is a function of disbelief/skepticism in the recent rebound (there is a lot of doubt that the SPX will wind up getting off this easy from the referendum and thus people are reluctant to chase). The underlying price action is a pretty-standard risk-on move but a few items are standing out. Banks are outperforming but would prob. be doing a lot better if yields were higher. Tech, health care, industrials, and materials are all up ~1.5-1.7%+ (outpacing by a mild amount). Nothing is dramatically outperforming w/the exception of larger money center banks, internets, energy and transports (up ~2% each). Note that safe-haven assets aren’t weak – gold is up, TSYs are flat-to-up, and the safe haven groups are doing OK (staples, REITs, utilities, and telecoms are all lagging but not by that much).

Market update – more of the same. The SPX sank ~5.7% peak-to-trough since the referendum and has since bounced ~3.5% (the SPX is now off only ~2.3% from its Thurs 6/23 close). Positioning-related fears continue to calm while the press remains full of articles discussing potential relationship structures between the EU and UK that don’t look very dissimilar from the current arrangement (although there is still enormous uncertainty on this front and it doesn’t help that British politics are in chaos at the moment w/the Tories electing a new leader while the Labor head comes under siege). Otherwise nothing major happened on the news front (the eco data in the US was OK in aggregate, the PR legislation doesn’t impact the US macro backdrop http://goo.gl/h1IX5r, and none of the earnings reports have macro implications). The calendar is still pretty sparse – other than month/quarter-end, the Jul PMIs/ISMs and auto sales (Fri 7/1), and June jobs (Fri 7/8), the main focus (by far) will be on the CQ2 earnings season (the first few reports will hit during the week of 7/11 but the heaviest volume will be during the week of 7/18 and 7/25). The CQ2 earnings season will be particularly important as investors are eager to hear updates from CEOs/CFOs on the extent to which Brexit-related disruptions materially impacted the outlook for their businesses. If the tone on the Jul/Aug conf. calls sounds relatively similar to the Apr/May updates (i.e. Brexit is acknowledged but doesn’t dramatically change H2 guidance) that would go a long way towards alleviating investor concern. Prior to the 6/23 referendum investors were penciling in a ~$130 SPX figure for ’17 – if that number only has a couple of dollars of downside stocks will continue stabilizing.

Citi is confused:

The UK vote to leave the EU surprised almost everyone, especially market participants. It left unprecedented uncertainty about future economic and political relations between the UK and the EU.

From the US perspective, the market selloff has been large but orderly. Indeed, global markets began to stabilize today, after two days of probing for equilibrium prices and their implied trajectories going forward.

Whereas spot prices have stabilized, there appears to be little conviction among traders and other financial market participants about the course of exchange rates and asset prices going forward.

• Market sentiment remains tentative; small catalysts can be very disruptive.
• A common trading floor comment is: “No one knows how to price the Brexit scenario going forward.”

Our past research has shown that uncertainty is pernicious: it can induce a significant drag on economic growth. The Brexit vote amplifies uncertainty with unprecedented economic and political considerations whose impact on global economic activity is difficult to discern. Fed policy remains sensitive to market sentiment, and the FOMC likely would not do anything that could be disruptive.

Clear as mud then.

My own view is unaltered. The euro is in jeopardy. That is such a disaster in the making that any news flow that confirms further gains for exit movements is asymmetric. That is, gains will be small and losses big.