Week End Blog – #BrexitOrNot!

· by · in FINANCIAL MARKETS, MACRO. ·

Well, this turned out to be quite an interesting week. A ‘boomerang’ week. First, we got ‘mayhem.’ Brexit was going to ruin us all. As expected the British Pound was among the biggest losers. The trade weighted GBP declined by 10% in just two trading days.

Banks were also severely hit. In the first couple of days after Brexit Italian banks lost a whopping 27% of their value. Did I mention already that Brexit was going to ruin us all?

Everywhere in Europe (and beyond) banks were discarded by investors. Interestingly, average bank stock prices fell to levels not seen since Draghi’s famous ‘whatever it takes’ speech back in 2012.

To conclude, after two days of Brexit, big UK banks lost more than 30% of their value, Eurozone banks slumped 23%, GBP fell 12% against the USD and Eurozone stocks were 11% lower. Great, thank you United Kingdom.

Obviously, Brexit caused bond yields to fall even further. Hence, we got yet another historical yield moment. The UK 10-year government bond yield fell below 1% for the first time ever. By the looks of it, you liked that tweet very much ;-).

When yields go lower, you know Switzerland is up front. Hence, this week even the 50-year(!) bond yield dipped below zero, which means that now the whole yield curve is negative. I bet no one would have guessed this was possible a couple of years ago.

In an earlier tweet I already mentioned the Swiss bond madness out there. Giving your money to the Swiss government for 50 years earns you less return than giving it to the US Treasury for 1 month! Just imagine…

Bond craziness equals bond returns. And Japan is an excellent example to show this. At one point this week the year-to-date return-gap between the Japanese 40-year government bond and the Nikkei index measured 70%.

Let’s move over to the next ‘wow’-graph. No less than USD 11.3 trillion in outstanding government bonds globally comes with a negative yield.

In addition, Brexit causes rating downgrades. First the UK, later the Eurozone, as economic and political risks have increased considerable. So, the list of AAA countries grows ever shorter.

And, what about that Fed rate hike this year? Well you can forget about that one. Or next year, for that matter. The Fed futures reveal that investors do not expect a Fed rate hike until 2018.

The map below is also pretty impressive. Brexit has created a precedent for other, let’s say, less European Union friendly countries. With my own country being among those with most contagion risk.

But now, for the ‘boomerang’ part of the blog. On Thursday something remarkable happened. Within a couple of days after the Brexit capitulation, the FTSE 100 Index rose above its pre-Brexit level. I know, I know, it’s the GBP, right? Well, that certainly helps. The FTSE 100 Index gets about 60% from its sales abroad, But even then you can’t go past the fact that something big has happened and risk has significantly increased. So I’m not so sure about this post-Brexit rally, yet,

Perhaps, investors were anticipating the withdrawal of Boris Johnson as Tory leader? Pretty amazing that you provoke a Brexit and then leave the ‘how to’ for somebody else to figure out.

To follow-up on the ‘glass half full’ approach, Brexit gives the UK everything it needs. GBP down to improve competitiveness, higher stock prices and higher inflation expectations. Brexit realized more than Mr. Draghi did so far.

Hence, we need more Brexits! To be clear this is a joke.

Thanks for reading the Week End Blog. Enjoy your weekend.

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