A global bonds selloff has pushed yields up across the board towards post-Brexit highs while the anti-establishment wave sweeping the western world could force a 'No' vote on the Italian referendum in December.
Article / 14 June 2016 at 12:00 GMT

This is ourselves under pressure

Director / Accumen Management
United Kingdom
  • German bund yields go negative
  • Investors seeking safe havens
  • US retail sales, FOMC likely to be overlooked

Stormy seas
They say any port will suffice in a storm, but happens when 
every sailor chooses the same one? Photo: iStock

By Ken Veksler

The German bund has finally gone negative this morning and joined the plethora of other government paper that has been sitting in the same boat for some time now. End of the world, bond bubble, et cetera? Frankly, no, but from my point of view a reiteration of the paradigm in which we find ourselves. 

Money is looking for a home where it can sit things out while figuring where and how to be deployed next. And this most certainly is not a flight to safety. A flight to a comfortable mattress maybe, but not safety. 

It does, of course, raise a series of intertwined questions: what is it going to take for his situation to change? What will be the catalyst? How ugly will the unwind be when we do finally see this very change occur?

I’m not a fixed income specialist, and in fact I barely get by day to day trying to understand the FX markets, but the dynamic here is not difficult to understand... When everyone is positioned the same way and owns the same assets, it very quickly becomes ugly when those same people choose to exit their positions. 

The desire to be first through the door of a burning theatre outweighs the cost of getting oneself into pole position. Thus, more harm is done than good but it also almost certainly becomes a problem for another day. 

This is where we currently are. No one is considering what the exit (whenever it eventually comes) will look like, but rather solely focusing on the here and now. This short-termism can prove to be extremely dangerous to one’s health, not to mention one's book.

One final (anecdotal) statistical fun fact on the above is that cash levels in global equity funds are apparently at their highest (about 5.7%) since 2001. Let that sink in for a moment, especially as it's set against a backdrop of already high global equity indices.

Now that my tourism amongst asset classes has come to an end, some attention for the FX market where the nerves and associated jitteriness continue unabated as we fast approach June 23. The Federal Open Market Committee meeting tomorrow night has been all but forgotten and certainly isn’t garnering any attention presently. 

While it may be a foregone conclusion that the Fed won’t move on rates tomorrow, assuming that it will be a mute meeting is a dangerous assertion to make. Having said that, though, unless the statement and then press conference are heavily directionally biased (be it hawkish or dovish) we’re likely to see a small amount of frenzied two-way volatility and be done.

Incidentally this would further serve to confirm my own prior bias that the DXY simply continues its broader consolidation theme as legacy long USD positions continue to be unwound (albeit with less fervour than a month ago) while more broadly speaking there still remains a glimmer of hope (and even smalls data-supported) that the Fed will continue to tighten in due course.

Brexit (and the polls) remain front and centre, as do the Muppets on both sides of the leave/remain fence. 

The GBP is very obviously under pressure and will remain that way, especially as recent polls come out with a swing to the Leave camp and not an insignificant one at that. Time will of course tell, but for now, it’s just brutally painful. The UK inflation print this morning was largely in line and equally benign. The market reaction was, however, catatonic.

The AUD has only slightly peeled lower this morning, but once again (just like the EUR) this is likely more a function of DXY movement than any outright desire to fade the underlying.

This afternoon’s US retail sales may give the market something to think about, but in truth given how preoccupied it is with Brexit and to a much lesser degree tomorrow’s FOMC, I wouldn’t bank on it.

As always, helmets on and good luck out there.

There's not much that could make markets take their eyes off the Brexit polls. Photo: iStock 

— Edited by Michael McKenna

Ken Veksler is director of Accumen Management


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