06 July 2016 at 11:31 GMT
Sterling's devastating plunge to fresh 31-year lows may have bottomed out for now, but there is every chance that the trapdoor to further lows will suck the ailing pound in ahead of next week's Bank of England meeting.
European equities are firmly in risk-off, Brexit-laden territory, safe-haven flows to gold are rising, and sovereign bond yields decline ever further with the Danish 10-year benchmark rate the latest to turn negative for the first time in its history.
- US May Trade Balance (-40.0B exp.) (1230)
- US June Final Markit Services PMI (51.3 exp.) (1345)
- US June ISM Non-Manufacturing (53.3 exp.) (1400)
- Weekly API Oil Inventories (2030)
- FOMC Minutes (2000)
EURUSD continues to hover around the magnate 1.1100, so it will be interesting to see if this is reclaimed at the end of the day. If not, positioning for more turbulence from the banking sector could be in play, so we are watching for a close below the 110.20 area for such a signal. But generally, itlooks weak against USD under current circumstances and any rallies above 1.1100 could be met with decent tech resistance. USDJPY is approaching the very psychological 100.0 level. Sub-100 and the speculation as to when/if the bank of Japan starts interfering will mount. The next Fibo level post 101.50 (50% Fibo on weekly charts from rally starting Q3 2012) is at the 95.70 area. US yields need to start increasing for USDJPY to stabilise and potentially rebound. A rebound possibility is slim under current circumstances. GBP is going from bad to worse. Tech supports are some 30+ years old at the 1.28 area and then around 1.2730 (how useful this may be is questionable after such a shock referendum). Next week, the BoE meeting might be what market is looking at in terms of a potential cut. The low does not look over yet.
FX Options volatilities
All major volatility started higher this morning, especially against JPY and GBP, but even with lower levels in USDJPY now, curves are not really moving. We have seen 6-month AUDJPY trading 16.75% at the money to the tune of AU$ 150 million. Two-week AUDJPY is given at 17.5% this morning. USDJPY has been a seller of the August 30 102 strike at 13.5% in Asia and again in the European session.
USDJPY 1-month vol are now trading close to a high for the last five years. In EURUSD, the higher curve this morning has been sold so 1-month is down 0.3-0.4% since the open. GBPUSD is staying at the high from this morning.
AUDUSD has also been markedly lower during the day but very little reported trading.
Government yields continue to reach for record levels across developed markets with the 10-year and 30-year sovereign yields in both UK gilts and US Treasuries dipping to all-time lows. Likewise, the Bunds futures extended gains and test the 168 contract level with the yield dipping below minus 0.20% at one point.
The moves coincide with some notable weaker sentiment, which is evident in credit trading, where XOVER spreads are currently some 10 bps wider for the session. In other news, our Weekly Bond Update has just been published on TradingFloor.com
where you will find the monthly update on the performance of our #SaxoStrats corporate bond portfolios.
European markets extendedtheir decline into Wednesday following losses in Asian equities overnight. Concerns over global growth post-Brexit and bid to safe-haven flows had investors running for cover.
In the UK, three real estate funds halted redemptions by retail investors due to a lack of liquidity. Property and home builders were under pressure in London today.
Gold miners are up on precious metals continuing to rise to new multi-month highs. Randgold and Fresnillo shares were up 5.1% and 7.1% respectively.
Italian Banca Monte dei Paschi shares rose 7% today after short selling was restricted by regulator in Milano.
Mid-session Europe is part of TradingFloor's stable of commentary running through from the US close, through Asia to the European session. Click below to keep abreast of all the developments as they happen.
Sterling has fallen to a fresh 31-year low and for those who work in Canary Wharf, there
could be a price to pay as the post-Brexit vote fallout continues to reverberate. Photo: iStock
— Edited by Martin O'Rourke