BNY Mellon: Small Signs Of Life

Mar 12, 2019

While the dominant theme in markets might be one of continued muted trading (largely thanks to continued assurances from the Fed and others), Monday’s trading did provide some clues as to what might upset this environment.

As previously noted, some scattered clues have already emerged to indicate that the levels of stress in global economy might be greater than is currently being reflected in more mainstream indices and currency pairs.

In particular, the downward pressure on a range of commodities & shipping prices provided an interesting reminder of the summer of 2008 when sharp declines in a similar group of instruments provided an early warning of fragility in the global system despite (or, perhaps, because of) oil prices having more than doubled in a year.

Given this, it was interesting to see the negative impact the news that Saudi Arabia plans to cut its crude oil exports in April to below 7 million bpd had on US equity futures.

While the losses seen in the hour after the announcement were only modest (mirroring a mild increase in Brent crude prices), this provided a useful indicator of one of the things that could prove a driver of market sentiment in the weeks ahead.

The other story that has the potential to significantly influence market sentiment remains Brexit. This was highlighted once again yesterday morning as a headline emerged indicating that UK PM Theresa May might change the status of Tuesday's parliamentary vote on her Brexit deal “from a meaningful one to a provisional one” swiftly followed by a report that if the PM delayed the vote then she could face resignations and possible removal as leader.

In the aftermath of these two headlines, it was noticeable that not only did GBP come under mild pressure (along with Gilt yields and some Brexit-sensitive stocks), but also US equity futures (even if only very modestly). This pattern was also reflected overnight with positive sentiment towards GBP (on the back of the newsflow out of Strasbourg) feeding into a broader improvement in sentiment in a range of risk sensitive currency pairs and instruments. This, in turn, was an interesting reminder of the impact the referendum vote on June 23 2016 had on markets outside of the UK.

More broadly, it should be noted that spot GBP/USD is providing relatively few signs of being particularly stressed by the developing uncertainty around Brexit, continuing to trade not that far from the post-referendum average.

There is a certain degree of logic to this given the uncertainty about how events will develop over the next few weeks. As a result it is certainly possible to imagine both positive and negative outcomes for GBP to emerge. However, it’s noticeable that shorter-dated ATMF implied volatility is now starting to behave much as it did in late May 2016 as the UK referendum date came into view.

Today may therefore prove an important one not just for UK markets but more generally for risk sentiment.