Oil has hit a 15-month high on the back of optimism over the Opec deal which needs to be sorted out by November 30. But, with a record long position building across the combined benchmarks, a disappointment could leave some exposed. Full report to come within the hour....
Article / 23 June 2016 at 6:01 GMT

It's showtime, as Brexit/Bremain plays out

Global Macro Strategist [Asia based] / Saxo Bank
  • Bookies are still firmly in the 'remain' camp while the polls continue to put it as 50/50 
  • If the leave vote wins, expect massive risk-off
  • If the remain camp wins, then my overall feel is quite a bit is priced in 

By Kay Van-Petersen

Back in the saddle and hitched – the first of two wedding events could not have gone any better and we are super pleased, grateful and very happy. And looking forward to No.2 in Mother Russia.

No KVP is not marrying two wives (cannot even afford the first, but don’t tell her that! At least the bitcoin is helping), but when you and the Ms have a global macro family, one location is not enough. At least that was what I was told “and I said who I may to blow against the wind…”

The quest for TRT (The Retirement Trade) continues…
A few changes off the bat, we are going through quite a bit of content revaluation here at Saxo, with the aim to get more actionable, practicable and leaner to what is being put forward to clients.

So the weekly Global Macro Take that has been a KVP staple is going to be folded into the Macro Monday morning call that we have now had running for a few weeks – it’s a great call and we are just getting started. So please check it out (will send out more info on this later).
The focus on my end will be on a lot more client dialogue, trade views and thoughts on positioning.
If you have not already seen it, check out our dedicated Brexit page: That has plenty of views from some of my peers including our FX and EQ strategists John Hardy & Peter Garnry, our CMD and FI strategists Ole Hansen and the Simon-Michael duo, and of course from our Global Chief Economist and Globetrotter-At-Large, Steen Jakobsen.

And let the show begin ... Britons will soon know whether they will 
remain a part of the EU. Photo: iStock
On the Brexit/Bremain situation at hand, it is interesting to note that bookies are still firmly in the “remain” camp while the polls/headlines continue their 50/50 dance.
The market I think overall is pricing in a remain outcome. Note this, as always is a topic of much debate … what is priced in and which assets classes and within those asset classes which securities … and of course what time frame are we talking, etc.  
One thing is for sure, the risk is to the downside. Mark my words, if we do get an exit vote, it will be the dual epitome of:
1.[ _____ ] hitting the fan and 2. It does not get bigger than this in global macro context. Bottom line it would be a very, very big deal … and an accelerated end to the ultimate demise of the EZ (i.e. who’s next, peripherals would just get crushed).
In such a scenario expect massive risk-off: With big moves in people going:
  • Long USD, yen (we’d break 100), Swiss franc, gold, silver, US bonds (new record low yields, break 1.50% in a heartbeat), German bunds (back to new record negative low yields, down 10 basis points here we come)
  • The VIX would explode, easily moving from yesterday's 21.17 to above 30.0, a 42% move
  • EUR, GBP, equities and commodities would puke
  • Just for some context, implied volatilities as of this morning in APAC on cable, gave a break-even of 1.39/1.57 with cable ref. of 1.48
  • While I would expect some co-ordinated central bank intervention – you’d have to think the Bank of England/European Central Bank/Federal Reserve/Bank of Japan have hopefully had a call or two on this (But I would not hold my breath … the hubris and incompetence of central bankers knows no bounds) – I think there would still be quite a bit of carnage before any sort of calm returned. Also central bankers would be late to their own funerals, they are never early 
If we get a remain, then my overall feel is quite a bit is priced in (in the near-term).
It feels almost like you tactically fade the pop in risk-on and sterling. Because what has really changed overtime? We go back to focusing on Fed/US: NFP and Fed July 27 meeting and start asking “what’s the next issue with the EZ?” (where is the next rubber band going?)

Yes, cable, will probably squeeze to 1.5300 perhaps a spike through 1.5500 but that is toppy levels …  and takes us back to Q315 when global growth and outlook were better than currently is the case [See overnight IMF downgrade on US growth this year 2.2% (2.4%)]

At 1.4800 GBPUSD implied vol as of June 23 Thursday Morning APAC, was implying a break-even of 1.37/1.57
Source: Bloomberg 

Only three things really resonate with me from a positioning perspective post a remain vote:

1. Tactical short gilts, still plenty of room for those yields to mean revert

At 1.313% UK 10yr gilts have a lot more yield to gain, if we get a remain vote. 1.50-1.60 looks very doable
 Source: Bloomberg

2. Tactical short gold, as we probably have a small pop in risk-on and reduction in market hedges (few days at the most it feels). Also while I am a big time, multi-year structural long gold (especially through miners and it's hands down the best hedge against the false gods era of central bankers), that recent price action above 1300 and quickly back was pretty poor. Also positioning is against you given the record longs.

Recent price action in gold has been weak, tactical shorts make sense in remain scenario. But don’t confuse the tactical with the strategic, i.e. I would still have a very big high conviction long bias in the gold miners, I just think this is for the trading clip to reload lower.
Source: Bloomberg 

3. Structural long UK equities, this is a potential flow and fundamentals play. As lot of UK equity names have multi-year low international shareholders, who have had to reduce/eliminate their exposure given the vote risk. Granted the FTSE as a whole at 6300 does not feel like a steal. But from a chart perspective it does look bullish. But again, this is structural, so you have to do your bottoms up. Perhaps there are some interesting long/short trades between long UK equity names, short EZ equity names  

UK equities could be a strategic potential flow and fundamentals play, as a lot of offshore fund managers have had to reduce their UK equity holdings to multi-year lows. I’d look at blue-chips, divie guys and good value names  
 Source: Bloomberg

Obviously selling volatilities also makes sense.
A few remaining thoughts

  • You will already see the price action tonight APAC time during the US session. We will get updates on the votes as they come in and if it's anything similar to the Scottish referendum, the outlook could be set and maintained from the beginning.
  • Expect potentially very bad liquidity, a lot of banks have pushed spreads wide and if we get an exit vote, proxies may at time be a better option. i.e. don’t jump on trying to short GBP, but go long yen or short EUR, etc.
  • I don’t think people realize just how bad the potential lack of liquidity that is out there. As we’ve now been saying for well over a year – the price you see out there is not real
  • If we get the remain vote, look through it and start to think about Fed/US, non-farm and July 27 (next Fed meet). As always the best of breed are always a few steps ahead of everyone else
  • A lot of people have been focusing on the number of undecided voters, in my book, they will revert back to the status quo. So in essence most of them should go into the remain camp at crunch time
  • Thoughts/comments/feedback welcomed

I will leave you with some timing guidelines from our Saxo Cross-Asset Morning Report APAC (note these are SG/HK times on Friday). Polls formally close at 2200 tonight UK time.
EU referendum timing (SGT/HKT time; GMT+8) 

  • 0500 – Sky News YouGov Poll (accurate for the Scottish referendum, less so for the UK General Election) 
  • 0730-1030 - Starting with Newcastle and Sunderland, taking us through to half the results
  • 1030-1200 - Busiest period of results culminating in the larger populous areas (N.Ireland and Birmingham followed by Glasgow, Manchester and Liverpool) 
  • 1200-1400 - Unless the vote is exceptionally close, the result should be clear by this stage Please note these official times could potentially slip 

– Edited by Gayle Bryant

Kay Van-Petersen (KVP) is Asia Macro Strategist at Saxo Bank, the home of social trading. In addition to, please follow him on twitter @KVP_Macro.


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