Love It? Well Then Buy It!

If you see something, buy something.

That’s been the mantra since Tuesday. Put simply: it’s up. It’s all up. Every single bit of it. Stocks, oil, gold, Treasuries, bunds. All of it.

UK equities have rallied an astounding 10% since Tuesday. And why not? It’s not like they just voted to leave the EU.

There was some speculation that this was all just a function of quarter end flows, but it feels more like the collective belief in central banks’ omnipotence has been restored. After all, we already knew the BoE was going to ease following the Brexit vote and we already knew the ECB was running out of bonds to buy and would thus have to relax the rules around its QE program, so really, Mark Carney’s televised address and the report suggesting Draghi was indeed reviewing PSPP rules were just confirmation of what the market already knew.

That is, it looks like the market was already pricing in those two events starting on Tuesday. The headlines just added fuel to the rally fire. There was no “sell the news” this time. Have a look, for instance at how CDX and iTraxx traded on Thursday:

(Charts: BofAML)

And then consider that they were already tightening markedly as the risk-on sentiment gained momentum:

Perhaps the most notable part of Friday’s action is the move in 10-year Treasury yields (you can see it in the first chart above)...

...which touched 1.38 at one point, a record low:

Frankly, it’s incredible they took this long to get there. After all, the market is now pricing in a non-zero chance of a Fed cut in the not-so-distant future and 140 bps sure looks “juicy” compared to the record negative low yields on German and Japanese 10Y paper.

Of course no one with any sense is buying (both figuratively and literally speaking) this rally. Consider what Deutsche Bank had to say about the action in the UK:

“Another potentially weak link in the new narrative is its apparent reliance on strong monetary response. While some equity benchmarks are at pre- referendum levels, bond yields remained close to their recent lows, with 10yr Trsys -25bp from last Thrs, 10yr Bunds -20bp (at -11bp), JGBs -9bp (at -22bp). BOE is expected come out with some form of response two weeks from now, which is likely to have a local, and not global scale.”

“Thinking about longer-term consequences of recent events, it is interesting to observe how UK assets are outperforming EU assets in recent sessions, including equities (Figure 7) and yield curves (Figure 8, UK’s yield curve flattened less than that in EU). If tail risk here is defined as other EU members considering an exit, datapoints like these are not helpful in arguing the case against such an outcome.”

(Charts: Deutsche Bank, BBG)

Having said all of the above and having expressed the appropriate level of incredulity towards what’s been a truly monumental move to the upside, markets can of course remain irrational for prolonged periods of time. Especially when they’re riding another central bank-induced sugar high like they are now.

With that in mind, we’ll leave you with two charts from Deutsche Bank which show that if you’re looking at Spanish yields (a proxy for periphery panic) and investor positioning, European equities could still move higher:

(Charts: Deutsche Bank)

Spread the love

Comments are closed.