- The UK is 'once again coming to Europe's rescue': Jakobsen
- Leave shock routs sterling, GBPUSD plunges to 1985 levels
- Credit spreads widening, fixed income markets 'chaos': Boye
- 12% downside likely in European stocks, 'lots of opportunities': Garnry
- Safe havens such as yen, gold skyrocket, XAUUSD 2014 highs in view
- CLICK ON THIS LINK FOR A REPLAY OF OUR MORNING CALL
By Michael McKenna
Following preliminary and ultimately premature celebrations by Remainers last night, the United Kingdom has voted to leave the European Union.
Sterling plunged from over 1.50 to south of 1.3250. FTSE futures dropped by nearly 9%. Gold shot up by over 5% and USDJPY plunged below 100.00 as panicked investors sought any port in the storm.
"This is the best day for the markets in 20 years," says Saxo Bank chief economist Steen Jakobsen. "The UK has come to Europe's rescue again, to the marketplace's rescue. But it will be the policy response that drives markets today."
Jakobsen's delight, of course, stands out rather sharply on Saxo Bank's Copenhagen trading floor, where torrents of red ink continue to flow in from Asia and from the European opening bell.
But today's vote was in many ways a sharp rebuke to the idea that asset valuations could continue to rise in the low-growth, low-inflation, low-energy environment that Jakobsen termed "the new nothingness
" just over one year ago.
"The massive moves seen in sterling and other assets were made more severe by last night's presumptions of a Remain victory, which were based on bookmakers' odds," says Jakobsen, adding that he predicts that the Bank of England will cut interest rates by midday.
"We will see announcements from both the BoE and the European Central Bank [imminently] – at the bare minimum, they will say that they can provide unlimited liquidity".
Today's ballot, says Jakobsen, is something both forthright and not, something whose import is immediately obvious but whose ultimate outcome is "far less black-and-white than the Remain scare campaign implied".
No state has left the European Union before, and the unprecedented situation invokes Article 50 of the Lisbon Treaty, gives the UK two years to work out the nature of its departure but also, emphasises Jakobsen, stipulates the renegotiation of ties between the embattled bloc and its departing member.
This renegotiation lies at the heart of Jakobsen's somewhat counter-trend optimism. "It's not black and white," he says, adding that "this will free up the ability to reform Europe faster – this is what voters have been saying for a long time".
The great revaluation
Looking into the assets closest to the heart of today's historic shift, Saxo Bank head of commodities Ole Hansen calls gold "the clear winner," noting that collapsing bond yields and stocks, along with the massive uncertainty just introduced into Europe's financial core, will likely place XAUUSD's 2014 highs above $1,400/oz back in view.
"Gold is also up 10% as priced in sterling", notes Hansen, "and the dollar tear has triggered an 8% surge in XAUEUR."
In FX markets, Saxo Bank head of forex strategy John Hardy stresses that the action seen in cable overnight was shocking, characterised by swings entirely unbefitting a major currency.
"The ranges seen in GBPUSD today are unprecented," says Hardy, adding that he is focusing on the 1.35 level for the currency pair – a level he calls a "generational low, a level last seen in 1985."
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Source: Saxo Bank
After its initial plunge to below 1.3250, the pound retraced upwards to 1.3750 before turning south again in the immediate aftermath of the European opening bell. Elsewhere, Hardy says that the stabilisation of the USDJPY rout – the pair dropped below 99.00 at one point – may point to Tokyo's determination to hold the line at 100.00.
"I think we are seeing intervention here," says Saxo's head of FX strategy.
In the euro, Hardy says that today's session may see markets shift to a negative euro focus "at some point", adding that such a move could see traders begin to focus on 1.08. Ultimately, however, Hardy sees 110.00 as the key level and perhaps the pivot, noting that a reversal – something he personally sees as highly unlikely – could see the pair shift its focus towards 111.0.
Today's sweeping revaluation of the globe's currencies, along with the uncertainty now reigning at the heart of Britain's (and in many ways, the world's) financial capital, is obviously bound to create some interesting dislocations in stock markets, with Saxo Bank head of equity strategy Peter Garnry stating that the plunge in both shares and sterling is bound to "create some interesting opportunities".
"All indices look set to close below their February lows," says Ganry, adding that today's Asian session foretold the rout in cyclicals and financials that is likely to play out over the coming hours, days and perhaps weeks, while the "generational" drop in sterling and the shattering of Europe's brittle political framework appear ready to lead to some landmark reassessments of asset values across world markets.
"Look out for a downside breakout in Deutsche Bank," says Garnry, adding that widening credit spreads could hit the troubled European financial giant hard today. "The effects will play out of other European banks... look at Santander...".
(Barclays, Lloyds and RBS are down by 30% each in early trading...)
Finally, says Garnry, the currency fluctuations will open up some opportunities in firms whose operations depend heavily on cross-border movements. "For German carmakers, the drop in the euro could offset some of the rout we saw in their Japanese counterparts this morning," says Garnry, and Burberry might be an interesting play given the weakness seen in the pound.
Over at the fixed income desk, Saxo trader Michael Boye calls the situation this morning "total chaos" as bond yields plunge and spreads widen.
"The only real indicator we had prior to the European open was the US 10-year Treasury bond," says Boye, "which saw its 10-year yield plunge to 1,42% – an all-time low". In Boye's view, the big question now is liquidity, and he echoes Jakobsen in focusing on the central banks. "The policy response is the next major trigger," emphasises the Copenhagen-based trader.
As European markets bleed out following their respective opening bells, we are seeing the first of Europe's elder statesmen make their chagrined appearances before the press, with European Council president Donald Tusk offering a rather tepid repetition of the adage that "what doesn't kill you makes you stronger".
For his part, president of the European Parliament Martin Schulz was out saying that he will be meeting with German chancellor Angela Merkel in an effort to halt a "chain reaction" among other EU nations.
"We are finding our footing now," says Steen Jakobsen. "Yes, this will be a boost for [US presidential candidate] Donald Trump, for [French Front National leader] Marine Le Pen, for the anti-immigration parties and leaders – this will be a day to remember." However, Saxo Bank's chief investment officer emphasises, the consequences of the UK's vote will not be as binary as initial readings of their implied sentiment may claim.
"It's not black-and-white," says Jakobsen. "Look at Norway and Switzerland's deals with the EU – they aren't free trade deals. They pay fees to access the European market just like any compliant EU member... everything being equal, this vote could pave the way for improved growth and productivity."
In our time
Whatever the outcome in terms of Europe, in terms of markets, and in terms of reform, today's vote is an historic event. The Brexit marks the first major advance by the populist forces that have risen up in response to the perceived stagnation, the perceived arrogrance and anti-democratic nature of the new nothingness.
For Remainers, today's move, and perhaps the greater popular backlash as well, represents a foolish blow struck against the determinedly transnational order erected in the wake of the second world war. To this faction, today's ballot is a victory for all things retrograde and provincial, a victory against cooperation and even world peace.
For the victorious Leave supporters, "retrograde" is no pejorative; for Brexiteers, the European Union represented a forward step into foreign rule and imperial oversight; for them, today's vote is a victory by the small over the large, by the local over the global, and by the particular over the general.
By the outcome of this conflict, our era will be judged.
Will Britain's decision to leave the European Union spell doom for the bloc,
or will it prompt much-needed reforms? Photo: iStock
Editor’s note: From the Floor takes advantage of TradingFloor.com'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.