I have a confession and then an apology to make to RiskReversal readers or those who watch my market commentary on CNBC. First the confession. Not for a moment in the last couple months have I seriously considered that UK citizens would vote in favor of a Leave vote from the European Union. We’ll find out soon if my gut feeling was right as the results will be upon us in a matter of hours. Betting markets nearly all along, and global financial markets recently, have been telling us that despite polls showing a near dead heat, a Remain vote always had the better odds. As far as the substance I see both sides of the argument. But the Leave vote always had that hint of anarchy to it and I figured late deciders would likely (reluctantly) vote for the status quo, just as they had in Scotland secession, and other similar votes.
As for the apology I want to drop on you… because I never got caught up in the Brexit hype I’ve probably offered fairly apathetic commentary on the topic in these pages and on the programs. To begin with, esoteric political/financial topics that have a very small probability of occurring just aren’t my sweet spot (I’m reminded of the debt ceiling showdowns). And because they have a very small probability of wreaking havoc on our investment portfolios I usually don’t spend a ton of time on the subject. The only real value add from moi to tu on this topic was last Thursday after the tragic and brutal of British Parliament Member Jo Cox at the hands of a Neo-Nazi / pro-Leave anarchist:
But today’s reversal off of all time lows might create a short term trading opportunity. Tragically the reason for the bounce was today’s news of the brutal murder of the Labour Party parliament member Jo Cox in the UK. She was outspoken in her favor of Britain remaining in the EU and given her history of humanitarian and charity work had been a voice for Syrian refugees in Parliament. Groups opposed to remaining have already promised to take a breather in the rhetoric following the murder. And with the referendum vote just around the corner on June 23rd, markets feel the remain vote will be more united. Because of all that, Europeans banks may continue to see a short squeeze. It’s not my cup of tea to trade off of headlines like this, frankly it’s just tragic, but it is market moving and I wanted to lay out what’s going on.
For those of you who share my worldview on the bigger issues facing European banks, it’s important to be aware of these headlines and not press shorts at what could be an inflection point.
The main point is the last one. Playing for anarchy in financial markets is a tough bet. Those who were positioned for anarchy in European financial markets last week, and did not move a finger, have been subject to an epic short squeeze with the Euro Stoxx 50 (SX5E) up 8.5% from Thursday’s 3 month lows, The Euro is up nearly 3% vs the US dollar, and the German 10 year bund’s yield is back in positive territory.
So why didn’t I buy the Euro Banks last week? I wish I had. But it’s my view that all of this will reverse as the longer term issues in Europe quickly come back into focus. The past week has essentially been an event trade. The volatility around the Brexit vote presented a trading opportunity for those nimble enough to play both ways. But just as I thought a short squeeze was about to happen last week, I think a “sell the news” is about to happen after the official vote tallies come in.
A further rally tomorrow morning may be a great short entry for those looking to reload or for those think that Brexit movement was a canary in the coalmine in the troubled region. I’m in that camp. I think the bounce in Euro banks (SX7E up 16% since last Thursday’s lows) is the one to lay into tomorrow morning on a Bremain verdict.
Lastly, for those tracking the election in the US and how it plays in the markets. The Bremain/Brexit referendum in the UK mirrors the Trump/Clinton match-up in many ways. Trump’s candidacy represents a similar itch to lay flames to the globalized status quo and roll the dice on a bit of isolationism anarchy. But as we’re seeing, the likelihood that a majority of citizens ultimately pick anarchy is lower that the media would prefer for ratings. And instead of a “shy tory” effect, it seems like voters are more likely to tell a phone pollster they want to blow the whole thing up than actually doing so in the ballot booth.