Article / 29 June 2016 at 8:21 GMT

From the Floor: Risk-on establishes foothold

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  • Risk-on return has not yet spread across all asset classes
  • Brexit fallout still reverberating as referendum rerun hopes fade
  • Vix dives as long gold position holds for 'interesting divergence' — Van-Petersen
  • EURUSD trading turns technical as it hits 1.1108 Fibo — Hardy
  • Global earnings growth hits lowest since 2005 — Garnry
  • Moody's hits UK banks, but the likes of Barclays offer value — Garnry

By Martin O'Rourke

Bounce back

The post-Brexit shock risk-on bounceback initiated in US equities spread overnight through the Asian session to send the Nikkei, the Hang Seng, and the Shanghai Composite back into the green.

"The dust has settled and I think we can see this extend into today's session", says Saxo Banks head of equities strategy Peter Garnry. "We can see a return to risk-on".

But, reflecting the sense that this trauma has not yet fully settled, the sentiment is by no means convincing.

"We have quite a bounce through in risk appetite but there is far less follow through into forex as markets continue to deal with the shock of last Friday", says Saxo Bank's head of forex strategy John J Hardy.

"We are still in this settling phase", he says.

Whatever that settling phase is, it looks increasingly unlikely to include the possibility of a second referendum in the UK as German chancellor Angela Merkel used her platform at the EU leaders summit in Brussels to urge her counterparts to get to grips with the new reality.

That new reality of course means a UK-less EU and prime minister David Cameron will no doubt be getting the fullest picture of what that actually means as the remaining 27 meet to discuss how to handle the Brexit with Cameron excluded from the chamber.

That has left EURUSD by and large trading according to technicals, says Hardy, having hit a perfect fibonnacci at 1.1108. "The market is very technical and we're looking for some kind of follow through and fresh resurgence in risk appetite".

A close above 1.12/50 would effectively be a rejection of a downward move, he adds.

EURUSD alights on the 1.1108 Fibonnacci:
Source: SaxoTraderGO

Elsewhere, sterling continued to bounce along at what for now seems to be a new equilibrium at the 1.33-34 zone (GBPUSD was at 1.3353 at 0655 GMT), the yen was on the wane and dollar weakness continued to pervade.

The PCE inflation figure – a key indicator for the Federal Reserve – comes out in the US today and depending on the result, may add ballast to the view that the Fed is more likely to cut interest rates this year than raise them.

Fear this

The divergence between the Vix index and gold has moved towards alarming levels with the Vix, in essence the fear index for the S&P 500, sliding to the 22/23 mark overnight.

"This really is an interesting divergence between the Vix and gold with a lot of long positions in the precious metal but the question now is whether it holds or breaks down", says Saxo Bank's Asia macro strategist Kay Van-Petersen.

"The Vix is degrading and gold is holding up and the market is very positioned long gold", Van-Petersen says. "We had a similar situation in February".

Van-Petersen, speaking from Saxo Bank's Singapore hub, also adds that with month-end and quarter-end flows doing the rounds tomorrow, there could be some odd discrepancies in the market and traders should factor this into their planning.

The Vix/gold divergence has become stark in the last few days
 Source: Bloomberg

Earnings muted

Global earnings growth has slumped to its lowest since 2006, says Garnry, citing the MSCI World AC Index which shows annualised earnings at just 1.4%.

"If you factor in inflation of around 3%, then that is actually negative 1.6% growth earnings since 2006", says Saxo's equities chief. "The reason for this is that P/E has gone from 16.5% to 20%".

"Central banks have pushed down bonds yields and that has forced investors to increase valuation multiples in equities markets which is why we have had a pretty good runup of 5-6% return in global equities when you reinvest dividends in that period despite pretty poor economic growth".

"We are really in unusual market times", he adds.

Annualised earnings steadily declining
 Source: Saxo Bank, Bloomberg

And finally....

Credit ratings agency Moody's downgraded UK banks overnight but Garnry feels that the banks are due for a bounce back sooner rather than later.

"That might trigger some interest in UK banks, but despite that negative sentiment from M, I feel that they are in a short-term speculative position and it's worth looking at UK banks with Barclays the most interesting one".

 The focus will be firmly fixed on the EU leaders summit today. Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.
29 June
KaranKK KaranKK
Van-Petersen, speaking from Saxo Bank's Singapore hub, also adds that with month-end and quarter-end flows doing the rounds tomorrow, there could be some odd discrepancies in the market and traders should factor this into their planning.

Does it mean, the expiry date for closing the positions, is tomorrow and we might see the Indices rallying ?

I am not able to understand (Flows doing rounds tomorrow). Are these signs for indices to rally ? If so which ones ?


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