Chris Weston, Chief Market Strategist at IG Markets
For all the drama surrounding Boris Johnson’s move to the ‘Leave’ Camp, the volatility has been well and truly confined to the currency market with equity markets not showing any duress.
Sterling had a descent run up into Friday’s close, but much of that goodwill has dissipated with traders punishing the pound in early trade. Cable traded to a low of $1.4252 (from the close of $1.4406), but has since pushed up a touch ($1.4275 at the time of writing), although the bigger percentage move has been seen in GBP/AUD, which should continue lower from here. The more interesting conundrum is that FTSE futures have opened up bid and are trading up 0.7%, completely at odds to the move lower in GBP which is certainly confusing. Boris Johnson (BoJo) showing his hand does throw a spanner in the works, but the odds of a ‘Brexit’ are still around 35%. If the referendum can be won by the media then a scan of the headlines would say the odds of a ‘Brexit’ is modestly higher, but clearly the ‘Leave’ camp would certainly have liked a longer lead time.
It does threaten to be a fairly volatile few months for the sterling, but GBP/USD three-month implied volatility has only increase 1.6% today (to 10.56%) and there doesn’t seem a huge demand to buy volatility. We’ve also only seen a very modest demand to sell EUR’s, which given that 48% of UK’s exports find a home in Europe and 41% of outbound FDI heads in the same direction is interesting. Perhaps it’s a realisation that so much is expected from the European Central Bank on 10 March that it’s hard to really add shorts with any conviction in case of another 400 pip spike on disappointment like what we saw on 3 December. Obviously March is still someway off in a market which thinks so short-term. But when two-year German bund yields are at -53 basis points, it’s hard to see how they go much lower and it’s clear that significant easing is in the price.
I am specifically watching for EUR/JPY upside given market pricing and the pair finding buyers off strong support levels. See weekly chart below.
The FTSE continues to hone in on a move into 6000, with European markets also looking upbeat. S&P futures have pushed 0.4% higher, taking inspiration from an upwards move in Japanese and Chinese equities. In terms of China, a key personnel change at the helm of the securities regulator has given some belief that change and reform will be good, potentially one day even helping to attract overseas capital – a fate the outgoing Xiao Gang failed to do so miserably. The ASX 200 has once again tested 5000 and it feels as though the bulls do want to convincingly push it through and onto the February highs of 5073.
Oil has also opened stronger, which is providing backbone and a certain quality to the move. The range (in the April contract) of $28.76 to $36.28 should remain in play this week. Dalian iron ore futures have also hit their daily limit and this is helping the AUD to a strong outperformance. A number of traders have pointed to a number of more upbeat articles on US growth, which also suggest the probability for a recession is overdone.
