HSBC Brexometer points towards Hard Brexit

We haven’t heard much about Brexit so far… This is going to change. UK’s PM Theresa May is expected to give a speech about her strategy to manage UK’s exit from European union: it’s a two-option strategy: « Soft » or « Hard » Brexit, with consequences that few can yet imagine, since Brexit in itself will be a very lengthy process. Lire la suite

Post Brexit, European banks have lost 228bn euros of market cap

Source: Goldman Sachs

Source: Goldman Sachs

That’s a severe correction (knowing it started way before the UK referendum). But Goldman’s analyst add some interesting comments:

 » Whilst EUR funding is exhibiting no sign of strains, funding pressures are gradually building in USD (USD/EUR and USD/GBP cross-currency basis) and GBP funding indicators. This said, they remain at levels that are a fraction of previous crises (2009 and 2012) peaks. We maintain that funding shocks are unlikely, given generous central bank backstops – these were sufficient to contain the aftermath of both the Lehman and European sovereign crises. »

European banks are probably stay in such a comatose stage for some time, as long as there are no sign of steepening yield curve or a better macro environment. On top of that, due to there high beta, banks are considered a good play to short the market when everything goes wrong. So be careful if you decide to pick one.

Always a good question: what’s priced in?

And the answer from Barclays:

« While valuations are certainly not pricing in a full-blown global recession, we are not far away from pricing a 2012-style moderate recession. If such a scenario were to fully materialise, the fundamental floor appears to us to be a STOXX 600 level of 300 (c. 10% below today’s levels). However, if a more benign economic scenario were to occur, as per our economic team’s forecasts, we expect valuations to eventually revert higher. Till further evidence of this materializes, in the near-term, we expect markets to remain volatile and follow economic and political developments. »

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Morgan Stanley Cross asset views after Brexit

MS_cross_asset_views_Jun2016

Source: Morgan Stanley

Interestingly, one week after the event, systemic risk doesn’t seem to be an issue…

MS_cross_asset_views_Jun2016_Systemic_Risk

Source: Morgan Stanley

Views per asset classes:

  • Equities: stay defensive (global earnings have been falling, and valuation are relatively fair)
  • Currencies: USD bull market is not over…
  • Rates: lower for longer
  • Credit: best option for carry

Goldman’s strategy after Brexit

From GOAL report dated June 26:

« Brexit has driven a sharp drawdown in equities
The UK vote to ‘leave’ the EU has triggered a sharp drawdown in European and global equities. We have long argued that equities are stuck in a ‘Fat & Flat’ range given both elevated valuations and a lack of growth. The impact of Brexit on confidence and the ERP, as well as on European growth, increases the risk that we move downward in this trading range. We have highlighted risks of a correction in our recent GOAL – Global Strategy Paper No. 19 and strategies to mitigate this risk. A key concern remains the lack of diversification or availability of ‘hedges’ for equities as most safe assets, in particular bonds, remain expensive alongside equities.

Potential for further weakness & volatility in global equities We think equities will remain volatile and stay defensively positioned in our asset allocation (neutral equities over 3- and 12 -months, overweight cash over 3 months). While we think investors have been lightly positioned into the drawdown, we feel that due to policy uncertainty and lack of growth, risk appetite might remain low in the near term. However, a combination of further declines in valuations and positive growth/policy surprises are needed to stabilise equities within their ‘Fat & Flat’ range.

Lowdown on the drawdown
Comparing the current EURO STOXX 50 drawdown to history indicates that it might continue (most drawdowns have lasted more than a month), valuations might have to drop further and bonds have been less good hedges for equities. Gold and Yen performed best as ‘risk off’ hedges. »

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