June 2016


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Let us separate matters. We face a political upheaval of the first order, but this is a necessary catharsis. Governments come and go. So do political parties.

We face a much more serious constitutional crisis. It is why some of us want a national unity government, keenly alert to the interests of Scotland and Northern Ireland.

As Professor Kevin O’Rourke from All Souls College argues here,  most Leavers waltzed into Brexit with scarcely a moment’s thought for trauma inflicted on both sides of the Irish border. This carelessness must be rectified immediately.

What we do not yet face is a global financial crisis or a “Lehman moment”. The world’s central banks were ready for Brexit and have acted in unison.

The S&P 500 index of Wall Street stocks has shrugged off the vote. It is 13pc above its lows in February, when we really did have a nasty fright across the world.

Jerome Schneider from Pimco says there have been none of the tell-tale signs of systemic seizure. Rates on commercial paper have hardly moved. The Libor/OIS spread – the stress gauge – has been well-behaved. So have collateralised funding markets.

This may be no more than the calm before the real storm. The prime money market funds have much shorter maturities than in 2008, and this could lead to a “roll-over” crunch if fear returns. Assume nothing.

It was a dead certainty that the rating agencies would strip Britain of its AAA status. Standard & Poor’s told this newspaper before the vote exactly what it planned to do, and we reported the warning – not that it has made any difference to borrowing costs.

More worrying is what S&P also said: that debt coming due over the next 12 months is 755pc of Britain’s external receipts and large sums have to be rolled over continuously. This is the highest for all 131 rated states, thanks to London’s role as a global financial hub. We will not know whether there is any mismatch, either in currencies or maturities, until the repayment deadlines hit and the skeletons come out of the closet. The test lies ahead.

What we have learnt from the market moves since Brexit is that Europe is just as vulnerable as Britain. The vote has already triggered a banking crisis in Italy, where the government is struggling to put together a €40bn (£33bn) rescue but is paralysed by the constraints of euro membership.

The eurozone authorities never sorted out the structural failings of EMU. There is still no fiscal union or banking union worth the name. The North-South chasm remains, worsened by a deflationary bias. The pathologies fester.

The FTSE 100 index of equities in London is back to where it was on the eve of the vote, compared to falls of roughly 6pc in Germany and France, 10pc in Spain, 11pc in Italy, 13pc in Ireland, and 14pc in Greece.

My point is not that they we are in OK and that they are in trouble. That would be facile. The FTSE 100 is cushioned – or flattered – by the devaluation effect on foreign earnings of big multinationals. The broader FTSE 250 is a purer gauge, and that has dropped 8pc. Homebuilders Persimmon and Taylor Wimpey are still down by a third. It is not painless.

Yet it should be dawning on European politicians by now that the economic fates of the UK and the eurozone are entwined, that if we go over a cliff, so do they and just as hard, and therefore that their bargaining position is not as strong as they think. They cannot dictate terms.

Few seem to grasp this, much like the wishful thinking in September 2008 when so many supposed that Lehman posed little danger to them. Britain has “collapsed politically, monetarily, constitutionally and economically,” said Dutch premier Mark Rutte, almost seeming to enjoy the flourish of his own words. Our great ally William the Silent would not have been so frivolous.

Morgan Stanley says they need to wake up. It warns that the eurozone will suffer almost as much damage as Britain in a ‘high stress scenario’, and so do others. Danske Bank says the UK and the eurozone will both crash into recession later this year.

If so – and that is not yet clear – it is hard to see how the eurozone could withstand such a shock, given the levels of unemployment and the debt-deflation dynamics of southern Europe, and given the intesity of political revolt in Italy and France.

Contrary to the supposition of Mr Rutte, the fall in sterling is a blessing for the British economy, and a headache for the eurozone. The exchange rate is acting as a shock-absorber, just as it did in 1931, 1992, and 2008,  all bigger falls, and all benign.

Devaluation strikes no fear in a chronic deflationary world where almost every major country is trying to push down its currency to break out of the trap, and largely failing to do so. It would facetious to suggest that Britain has pulled off this trick. Crumbling investor confidence is never a good thing. But the UK has stolen a march of sorts, carrying out a beggar-thy-neighbour devaluation by accident.

The pound needs to fall further. It is still too strong for a country with a current account deficit running consistently above 5pc of GDP. The International Monetary Fund said just before Brexit that sterling was 12pc to 18pc overvalued, and may have to fall more than this to force a lasting realignment of the British economy.

This cure has hardly begun. As of today, sterling is 5pc below its trading range for the last month against the euro and the Chinese yuan. It is weaker against the US dollar but the dollar is on steroids, much to the horror of the US Treasury.

The more sterling falls, the greater the net stimulus for the British economy. The reverse holds for the eurozone. It is a further deflationary shock at a time when Europe is already in deflation, when inflation expectations are in free-fall and bond yields are collapsing below zero, and when the ECB is running out of options.

There are two dangers for the world economy. One is that China is exporting deflation with alarming intensity. Morgan Stanley estimates that China’s trade-weighted devaluation is running at an annual rate of 11pc, and factory gate deflation adds another 2pc. This is a tsunami coming from the epicentre of global overcapacity.

The other danger is that British and European politicians fail to understand what is coming straight at them from Asia. Britain’s Brexiteers must come up with a coherent policy on trade very fast, and the EU must come off their ideological high-horse and face the reality that they have absolutely no margin for economic error.

US Secretary of State John Kerry warned in stark terms on his post-Brexit swoop into Europe that nobody should lose their head, or go off half-cocked, or “start ginning up scatter-brained or revengeful premises.”

Nobody seemed to heed his words at the EU’s imperial summit in Brussels, an exercise in righteous anger but not much else. The markets may yet speak in harsher language.

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Crazy and not-so-crazy scenarios

Here are the chances we’ll see these election outcomes.

Electoral College tie 269 votes for each candidate 0.4%
Recount At least one decisive state within 0.5 ppt 3.6%
Clinton wins popular vote 83.5%
Trump wins popular vote 16.4%
Clinton wins popular vote but loses Electoral College 4.2%
Trump wins popular vote but loses Electoral College 0.7%
Johnson wins at least one electoral vote 5.5%
Clinton majority wins at least 50 percent of the vote 40.9%
Trump majority wins at least 50 percent of the vote 3.4%
Clinton landslide double-digit popular vote margin 34.5%
Trump landslide double-digit popular vote margin 1.8%
Map exactly the same as in 2012 0.1%
Clinton wins at least one state Mitt Romney won in 2012 87.4%
Trump wins at least one state President Obama won in 2012 65.6%
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Donald Trump just took the lead in a major national poll for the first time in roughly six weeks.

In a Rasmussen poll released Thursday, Trump held a 4-point lead over presumptive Democratic nominee Hillary Clinton. Of the 1,000 likely voters surveyed, the presumptive Republican nominee won over 43% of support compared to Clinton’s 39%.

The margin of error was plus or minus 3 points.

The poll is the first Trump has lead over Clinton since mid-May, when Trump held a 2-point lead in an ABC News/Washington Post poll.

The Rasmussen poll breaks a streak of 22 consecutive polls Clinton has topped Trump in.

After the Rasmussen survey, Clinton’s lead in the RealClearPolitics average of several polls is now 4.9%.

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US stocks are more or less, back to their starting point prior to Brexit.

Clearly, no-one actually has any idea what will happen and what effect that will eventually have. So stocks are probably going to fluctuate in a sideways range until some form of consensus is formed.

This, if correct, opens up a number of trading strategies that are effective in sideways markets. The increased volatility, if it remains, is obviously going to be an issue, but is potentially manageable.

Obviously in this market, one needs to remain extremely flexible, as positions are likely to be very vulnerable to news flow over the next few days certainly and likely couple of weeks.

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They wanted to restore their country – they wanted to make Britain great again.

If that sounds familiar, that’s because it’s little different than the groundswell of support that swept Donald Trump to the Republican nomination – and will sweep him to the White House this November.

It turns out our country is headed towards its very own Brexit. Just like the voters in the United Kingdom, Americans are fed up with a status quo that ignores their problems and constantly leaves them falling farther behind. A staggering two out of every three Americans believe America is on the wrong track. Now they’re making their voices heard.

Don’t believe me? The facts speak almost as loudly as the millions of Americans who want to make America great again.

One of the things that stunned the so-called experts is the huge turnout that led to Brexit. The same thing happened on this side of the Atlantic during the Republican primary season. An enormous number of people voted for the outsider candidate. The previous record was 10.8 million votes for George W. Bush in 2000 – Trump blew past that record with over 13 million primary votes. In the nine presidential elections I have worked in, I have never seen such voter energy and enthusiasm.

This amazing turnout reflects the simple fact that Donald Trump has broad appeal. Independents in particular are responding to him.  Our recent polling in two battleground states shows independents flocking to Trump over Hillary Clinton. In Ohio, independents go for Trump by 19 percentage points. In North Carolina, they prefer him over Clinton by 24 points.

These numbers show just how upset the American people are with the status quo. They don’t want a third term of President Obama’s abysmal economic growth and feckless foreign policy. They want someone who will upend the status quo rather than worsen America’s decline.

Wonder why independents strongly support Trump over Clinton?  He’s authentic, he’s not a political insider, and he has a positive vision for America. And that’s exactly what voters want.

Trump’s positive vision for America is especially important. People in this country are sick of “political correctness” and “politics as usual” – they want a leader who recognizes the problems America faces and calls them by their name. Trump does exactly that. Everything he does is centered on “Make America Great Again,” and he has inspired tens of millions of people.

The bottom line is that he is the only one who can deliver change in Washington D.C., because he’s the only one who hasn’t spent the majority of his life sucking up to political elites or being a politician himself. He is a successful businessman with a proven track record of creating jobs and improving people’s lives.

His experience is exactly what’s missing in Washington – and it’s exactly what the American people want.

Our latest data proves this, too.  Our political action committee has identified millions of Trump supporters across the country in recent months.  And our engagement with these voters shows a clear, overwhelming trend.  When shown a negative attack on Clinton and an optimistic vision of our country conveyed by Trump, the response is as much as 50 percent higher for the latter. They know he has what it takes to make put America back on the right track.

You don’t need data, polls, or any analysis by the so-called experts to see this. You only need to talk to the American people. They’re demanding a change. They’ve had enough with the broken status quo and they want a brighter future. Donald Trump is the only presidential candidate who can give them what they want, which is exactly why millions of people are energized by his positive vision to make America great again.

This is just happened in the Brexit vote. So no one should be surprised when the same thing happens here in November.

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There seems to be no earnings trade available in NKE. The pricing seems to be a consensus on a +/- 5% and with that small of a move, there is no trade worth the risk.

So I’ll simply pass on this trade.

*After hours earnings reported

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So the market makers were pretty spot on with -3.5%

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There has been and still is the idea that ‘diversification’ is a risk management tool, and to a certain extent, it is. However, diversification linked to leverage, changes that assumption into something very different.

Diversification, of uncorrelated markets, or securities, say Nike common stock and London mortgage securities, would seem prima facie, unrelated or uncorrelated. However a trader who holds these same securities as another trader, now correlates those securities as any trader who holds them becomes linked to every other trader who holds those securities.

When leverage forces you to sell, you sell what you can, not what you should.

Now when selling what you can, that may very well be Nike, and now you have a rush for the exits in Nike, of every trader on margin, who holds London mortgages [or whatever]. In times of stress, all markets and securities are correlated by the traders who hold them. Diversification is a chimera.

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