Risky assets on sale as German PMI slides

The last FOMC meeting left undeniable after-effects on investors’ mind-set. The last two days of trading clearly shows that market participants don’t know where to stand. Equities rallied sharply yesterday afternoon with the S&P 500 climbing more than 1% to around 2,854, gold sliding 1.30% to $1,305 and US yields going nowhere. On Friday, it is a completely different story, investors shifted to risk-off mode and got rid of risky assets and bought treasuries as well as the Japanese yen and a bit of the yellow metal. European equities bore the brunt of the sell-off with the German DAX erasing 0.70%, the Footsie -1.10% – thanks to Brexit’s two weeks reprieve (only) – while the EuroSTOXX 50 gave up 0.95%.

In Europe, the last batch of manufacturing PMIs fell short of expectations. France’s manufacturing PMI printed below the neutral threshold at 49.8 in March, while economists expected a reading closer to 51.4. In Germany, the picture is even gloomier as March manufacturing PMI collapsed to 44.7 compared to 48 expected; this is the lowest reading since August 2012. This doesn’t bode well for economic growth.

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We find is quite fascinating that that both soft and hard data are pointing towards a slowdown of the global economy, while at the same time investors keep buying stocks. It looks like things are changing course. Following the publication of the manufacturing PMI, the German 10-year treasury yield quickly dip below 0% this morning. The single currency is free falling and gave up 0.90%. The greenback is rising across the board with the dollar index up 0.25%. Only the Japanese yen managed to edge higher, up 0.25% against the buck.

Brexit extension?

Not much is moving in markets today. Drivers have been on repeat for so long investors are suffering from boredom. FX volatility has declined significantly of the past week but GBP volatility remains least effected. Cleary the lower pace fall is due to critical political premiums still relevant. PM May has requested that Brexit would be official postponed to 30th June from 29th March. This offer is again dependent on UK Parliament approving a Brexit withdrawal agreement next week. This should increase the likelihood that UK Parliaments approved a deal in its third attempt.

It important to note in our view that European policymakers would like to dodge an economically catastrophic “hard” exit. In addition, the extra time gives “remainer” time develop a new strategy. By breaking the hard deadline, the rational that other absolutes are flexible becomes material. With over 2 million people signing an online petition to cancel Brexit the possibly of “No Brexit” has increase significantly. The pace of signatures surged after May statement on Thursday. Interestingly the petition is only focused to “Revoke Article 50 and remain in the EU” and remains well meaningfully number in reality. However, it might be just enough to convince political to put the decision to the people. Finally, figures from the poll indicates that signatories were not only from the UK. We remain skeptical on long GBP bet despite the supportive development. We should see fall in volatility as an opportunity to reload long vol positions. The Brexit chaos is far from over.


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