Buckle Up: FOMC and Brexit A Few Threats Amid Deepening Risk
- While favored volatility readings (like VIX) may suggest quiet, risk is exceptional and easy to catalyze
- The Brexit vote is less than two weeks out, and a poll triggered a sharp selloff in Pound despite liquidity
- Top event risk ahead includes: FOMC Decision; China lending; BoJ, SNB, BoE; Draghi commentary; inflation data
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There are plenty of headlines drawing our attention heading into the trading week - including the FOMC decision and Brexit speculation - but it is the underlying market conditions that present the greatest risk. Heading into the close of this past week, a sharp and broad drop in risk appetite across those assets that follow sentiment winds belied the assumptions of quiet that misleading metrics like volatility indexes suggest. These are conditions that warrant exceptional caution and a 'tactical' mentality that focuses on short-term positioning, tighter risk control and closer vigilance.
For event risk moving forward, the FOMC rate decision will likely attract the most headlines - though Brexit will give it a run for its money. A hold on the benchmark range at its current 0.25 to 0.50 percent perch is highly likely. The market sees it as such (98 percent according to Fed Funds futures), but it is a low tail risk as well considering the ramifications of shocking the market in current conditions and the central bank's awareness of its position. Instead, the focus will be placed on the chances of a July hike and keeping to the 50bps-in-2016 commitment set in March. This will weigh as much on risk trends as the Dollar.
If there were any doubt that anticipation in the Brexit could trigger strong swells in the Pound crosses, we dispelled them this past Friday. A late-in-day release of the Indepent/ORB poll showed 55 percent support for the 'Leave' camp and 45 percent for 'Remain'. That is the largest skew for an exit to date and the Sterling responded in kind. GBP/USD crashed through its 100-day moving average. Don't presume this is a clear trend however. Trend is difficult to fuel in these conditions but volatility easy - from Pound to Yen to S&P 500 to oil. We discuss our increasingly risky markets in this weekend Trading Video.
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