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A great day to be Icelandic

It’s certainly been a miserable night to be English, with the football team losing to a team with no professional domestic clubs and a manager who is a part-time dentist.

Lloyd's
Source: Bloomberg

The goal keeper even directed the video for the country’s 2012 Eurovision song contest entry. In the financial markets, sterling was clobbered again and it’s going to go lower, although I wouldn’t be surprised to see GBP/AUD rally a bit from here in the short-term. To top matters off, we saw Fitch and S&P take a cleaver to the UK’s credit rating by two notches, which is the only time in history that an AAA-rated sovereign has been cut by this extent.

To rub salt into the deepening wounds, the GBP/ISK (Iceland Krona) fell 2.7%. Just in case the English public wanted to escape the craziness of British politics and holiday in Iceland!

UK and European banks are getting destroyed, having the worst two-day move ever. The UK referendum has not just left a stain on British politics (and society), but it has unmasked a number of macro concerns that were largely smoothed over in the wake of the coordinated central action in February. The solvency of the European banking sector is again in play and European equities are getting a work over from the short sellers, but we are also facing a stronger USD and the prospect of another strong weakening of the CNY at 11:15 AEST. Capital continues to flow into fixed income and any sell-offs remain a buying opportunity, with inflation expectations continuing to head lower (largely as a result of renewed USD strength). Risk aversion isn’t even widespread yet, with the VIX down 7% overnight – which in itself is quite bizarre.  

The fact that we are seeing the German 30-year bund heading towards commanding a negative yield, while the UK ten-year at 93bp has lost 46bp in two days is incredible.

The ASX 200 is eyeing a test of yesterday’s low of 5051 on open and it will be a tough day for those who bought yesterday, although the sectors that outperformed yesterday should also today. BHP and RIO will find some support from a raging iron ore price but will still fall on open. Banks will likely be sold aggressively, notably Macquarie, which has already dropped close to 14% since Friday’s high, on huge volume.

Japan is likely to open 150 points lower, although there is a growing fear to be long JPY as we enter the month of July, with the prospect of unilateral intervention, fiscal support and an increase in the current rate of asset purchases. The environment for hedge funds to really increase speculative short selling is growing, as buyers step aside amid the uncertainty and the technical set-ups in many markets looking pretty ugly, highlighting a certain vulnerability for further downside. Hard to be anything but cautious, as these are strange and mysterious times…but great to be Icelandic.

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