Is the Brexit vote now being stolen?

Is the Brexit vote now being stolen? (by Yann Quelenn)

As we mentioned in September we continue to be suspicious of the postponement of the triggering of Article 50.

 When Theresa May was announced as prime minister, she stated that it was important to respect the people’s voice, that the Brexit was non-negotiable and that Article 50 would definitely be triggered. She also seemed very determined that financial markets would start to price in a “Hard Brexit”.

We feel that any negotiations would largely benefit the UK as the predicted economic nightmare did not happen but also because the economy is far from collapsing. There are even signs of recovery. This scenario now has other EU member states wondering whether they could follow suit.

The current turnaround is one we considered several months ago. The High Court ruling that the British Government cannot trigger Article 50 without parliamentary approval means that MPs will need to vote to start the exit process. What is that if not tampering with democracy? Theresa May seems to have lost her main battle, respecting the British people’s vote. Indeed most MPs are against a departure from the EU. The Brexit is therefore very likely to be blocked. Many officials said that a referendum is not legally binding. So, what was the point to vote?

Theresa May now has one card up her sleeve. She can still call for a snap General Election in order to change the majority at the parliament to trigger Article 50. What a long road ahead. 

The Brexit seems destined to join an already long list of European referendums that have not been respected over the past ten years, including the Lisbon Treaty in France in 2005.

Dont Panic

Don't panic. Yes we see the signs. Eight down days on the S&P 500 (after four months of sideways trading), global long-end yields rallying, volatility rising across-the-board, Trump close to ascending into the White House and the Chicago Cubs winning the world series. 

Maybe now is the time to sell….everything…the problem however, is that in our mind, structurally nothing has changed. Speculation and innuendos are driving uncertainty. Chatter that central bank reflation experiments have failed, the UK parliament is plotting to steal the EU referendum for the UK citizens and dead people voting for Hillary Clinton - all further evidence that the financial fridges are now mainstream. While this desk has its fair share of conspiracy theories and can see clear value in some of the ideas getting tossed around, now is just not the time. Let’s remember that in 2016 plenty of experts predicted the crash. Perhaps the end-of-year has the same effect on elderly people who lack the understanding to see the world in a fluid continuum but rather in distinct calendar years.

First, is the wall of liquidity just waiting for opportunities. There is evidence that equities are being overbought (S&P p/e is at manageable 19) even less so with the current pullback they are experiencing. Estimates indicate that $12bn is now sitting in negatively yielding paper. This massive number is unlikely to remain trapped especially after clearing the Nov. 8th event risk. 

Second, the OECD lowered their 2016 growth estimate 0.1% to 2.9%. While not an amazing number it is stable and comes with acceleration in the US and China, which means that demand is starting to safely recovery. Improvement fundamentals have supported the rational decisions to liquidate long end paper and predicted the normalization of policy. However the shallow recovery indicates that tightening will not occur too quickly, allowing for normal adjustment. 

Finally, it's clear that central bank policy is nearing exhaustion point. BoJ owns over 455 of the government bond markets and 65% of the domestic ETF market. However, there are still tools and strategies to keep conditions loose and and never underestimate a central bank's commitment to distort market conditions to their benefit. Despite the hype with plenty of liquidity, improving fundamental and central bank-prepared stimulus, we think that the current correction in risky asset is an opportunity to reload long positions. History also suggests that regardless of who is in the White House (think President Obama), the USA still remains largely unaffected by a single individual. 

Swissquote Sqore Trade Ideas: http://en.swissquote.com/fx/news/sqore

EUR/JPY - Monitoring Upward Channel.

EURUSD

EUR/USD is trading around 1.1100 without direction. Hourly resistance is given at 1.1126 (03/11/2016 high). Key resistance is located far away at 1.1352 (18/08/2016 high). The short-term technical structure suggests further strengthening. In the longer term, the death cross indicates a further bearish bias despite the pair is increasing since last December. Key resistance holds at 1.1714 (24/08/2015 high). Strong support is given at 1.0458 (16/03/2015 low).

GBPUSD

GBP/USD is consolidating. Hourly resistance is given at 1.2494 (03/11/2016 high) while hourly support is given at 1.2083 (25/10/2016 low). Yet, strong resistance stands far away at 1.2620 then 1.2873 (03/10/2016). Expected to further consolidate. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USDJPY

USD/JPY's momentum is turning negative. Hourly support lies at 102.55 (03/11/2016 low). Hourly resistance is given at 105.53 (28/10/2016). Next key resistance lies at 107.49 (21/07/2016 high). Key support can be found at 100.09 (27/09/2016). Expected to further decline. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USDCHF

USD/CAD's bullish momentum is fading. However, the pair is still trading within resistance area between 1.3278 (24/10/2016 low) and 1.3433 (28/10/2016 high). Expected to see another monitoring of resistance at 1.3433. Key support at 1.3000 (22/09/2016 low) seems far. In the longer term, there is a golden cross with the 50 dma crossing the 200 dma indicating further upside pressures. Strong resistance is given at 1.4690 (22/01/2016 high). Long-term support can be found at 1.2461 (16/03/2015 low).

Resistance and Support