- Volatility is the only certain thing week ahead of FOMC – Li
- Brexit contagion is gone global across all asset classes – Hardy
- It's all about risk-on/risk-off and responses thereto – Hardy
- Higher dollar is hurting crude oil but gold is gaining – Hansen
- Equity markets are very vulnerable at current levels – Garnry
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By Clare MacCarthy
Global markets are engulfed in a sea of fear this Monday morning as the heightened risk of a Brexit hammers equities (particularly banks and miners), exerts pressure on sterling crosses and triggers a flight to the usual safe havens of bonds, gold and the Japanese yen. The fear factor has spilled over into oil, sending WTI crude, the US benchmark grade, back below the psyychologically important $50/barrel level.
Volatility spikes as the fear becomes deeper
Source: Bloomberg, Saxo Bank
While the US dollar is now losing versus the yen, it notched up gains against other major currencies, including the euro and sterling in the course of a two-day advance at the end of last week. Edmund Li, of Saxo's Singapore trading desk, says, though, that the greenback advance was tempered into the Asian session. "Obviously, volatility is the only certain thing week as investors await the Federal Open Market Committee meeting on Thursday for further clues on USD direction," Li says.
"The Brexit contagion is finally going global across all asset classes. We're getting the classic VAR [value at risk] response to this where correlations head to one and it's to be taken seriously. Some of the charts are looking pretty grim," John J Hardy, Saxo's head of FX strategy reports.
And where do we go from here? "It's all about risk-on/risk-off and how each currency is affected and to what degree by that. So the dollar's a bit of a safe haven and of course so is the yen – the classic safe-haven currency."
What should have been the main event of this week – the FOMC meeting on Wednesday/Thursday – is fading somewhat in importance with next week's UK referendum vote taking precedence as a bigger event risk. "The Fed's message will still be wait-and-see, we think hikes are coming and we hope that the economy improves," Hardy says.
Brexit is the driver of volatility across markets
Meanwhile, given the elevated levels for the dollar, crude oil is hurting with WTI dipping under $50/barrel and Brent heading the same direction. The rot set in already on Friday when a second weekly rise in the rig count brought pressure to bear, reports Ole Hansen, Saxo's head of commodity strategy.
The move lower is now being compounded by fears of what havoc a British European Union departure could wreak on the world economy.
WTI Crude to test support at $47.50. Break signaling move to $45 and potentially $42
Gold, meanwhile, is riding the risk-off wave higher and despite the generally stronger dollar being at a three-month high measured in euro, Hansen reports. Funds added 30,000 lots of the yellow metal last week and though this is a sizeable jump it is still 47,000 lots below the May 3 peak of 234,000.
Source: Bloomberg, Saxo Bank
Finally, equities are in for a tough week – their second in a row – with cyclicals (financials, industrials and consumer discretionary) being particularly vulnerable, says Peter Garnry, Saxo's head of equity strategy. "If Brent breaks below $50/b energy will be under renewed pressure," he adds, before ending with a stark warning. "We reiterate that equity markets are very vulnerable at current levels and further macro weakness would ignite a10% selloff."
Red screens across Europe as Brexit fear sets in. Pic: iStock
Clare MacCarthy is deputy editor at Saxo Bank
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.