|Wed, June 22, 16|
There is a calm before the storm as the UK referendum vote is less than 24 hours. Global markets are in a state of low liquidity and it’s conditional state could generate unwanted volatility that is what central banks despise. In the 2am hour EURUSD caught a bid advancing to the 1.13 handle to only be rejected at the 7am hour. GPBUSD is flat lined at the 1.46828 handle post murder of MP Cox. Sad to say, but the murder of MP Cox produced +400bps advancement in GBPUSD as well as a risk on for global markets. In return global 10Y treasury yields caught a bid after global markets were searching for safety in the weeks leading up to the UK referendum event. Recent polling data shows the remain advancement from last week was temporary as the leave polling data is narrowing according to FT. We note, the statistics and FX market (GBPUSD) can easily be manipulated by large parties, so we take all preliminary data with a grain of salt, but have our eye on volatility. EVZ is the CBOE EUROFX volatility index at levels seen in the 3Q08 time frame. SKEW current prints at 136 indicating 11.75% probability of SPX in a 2 std. dev 30 day log return. The suppression of volatility caused by excessive use of monetary policy is dangerous. In recent weeks, the FED has lost credibility welcoming a new period of volatility as depicted in the VIX month entering the cloud. Such technical break could set a new range for the VIX in the 17.50-30 area. We notice on the High/Low beta ratio the market has started to search for low beta in the month of June. Rydex Money Markets prior session spiked >100 not seen since the first week of January 2016. SPY/TLT Ratio still points to treasuries as the ratio prints <50sma. At the 8am hour, DXY prints at 93.84 backing off from the 94 handle. Prior session the DXY advanced in an impressive manner even through Yellen Senate Committee meeting. We note, in the Monetary Policy Report released by the FED on June 21, 2016; the FED states, “Forward P/E ratios for equities have increased to a level well above their median of the past 3 decades”. Implying the market is overvalued in their standards, and Yellen states in her famous last words the risks of financial stability aren’t elevated. We notice transports, retail, financials, and healthcare are in a laggard state printing well below daily 320 simple moving averages. In a surprise counter punch to the FED, Bill Gross responds on twitter by calling Yellen outdated. Steve Liseman asks John Taylor on his response of Yellen’s perception of the Taylor Rule as he disagrees that the neutral rate has changed. Then Steve Liseman sums it up “ if u adjust a policy rile in a pure discretionary way, then its note a rule at all any more”. And there you go, creator of the Taylor Rule as well as Steve Liseman with animal spirits not in favor of Yellen.