Investors Calm As Brexit Negotiations To Begin
James Woods | Mar 21, 2017 10:26
Originally published by Rivkin Securities
The UK will officially trigger Brexit negotiations on Wednesday the 29th of March a UK envoy told the EU President Donald Tusk overnight. Given the market has been anticipating this for months, the reaction in financial markets was muted. The pound declined -0.28% after touching the highest levels in three weeks, UK 2-year yields were unchanged at 0.085% and the 10-year yield declined just 1 basis point to 1.235%. The FTSE 100 edged higher, up +0.07% sitting modestly below the all-time high of 7,447 while the more domestically focused FTSE 250 gained +0.30% to close a new record high.
Investors don’t seem to be pricing a significant degree of risk ahead of the two-years of negotiations. The implied one month volatility for the pound is sitting at the lowest levels since January 2016 and the one month implied volatility for the FTSE100 at the lowest levels since January 2014, implying a calmness around investors. The spread between the UK and German two-year yields is sitting well of recent highs and below level prior to the Brexit referendum shown on the first chart below. While this has predominantly been a result of rising German yields, overall UK yields do not seem to suggest any significant risk premium.
Elsewhere spot gold continues to rise after bouncing of the psychological support level at US$1,200 shown on the second chart below. The precious metal initially gained following Trumps election as a hedge against inflationary policies but is now being boosted by a less hawkish Fed, which in turn increases demand for the precious metal as a hedge against inflation.
Overnight a number of Fed speakers reiterated the recent message that the Fed remained on track for three hikes this year should inflation and unemployment continue to evolve with expectations. Chicago Fed President Charles Evans noted that “three for the entire year is entirely possible” while the lone dissenter at last week’s meeting in favour of leaving rates unchanged, Minneapolis President Neel Kashkari suggested there was no rush to raise rates stating there was no threat of high inflation.
Monday was very data light providing little in the way for guiding markets, the Nasdaq 100 gained modestly up +0.08% while the S&P 500 edged lower by -0.20%. The US dollar index was flat, up just +0.02%, and both the two and 10-year treasury yields declined -2.5 and -3.5 basis points respectively.
Locally the S&P/ASX 200 index finished -0.36% lower on Monday and this morning we can expect a softer start to trade with ASX SPI200 futures down -11 points in overnight trade.
h2 Data releases:/h2· Australian Weekly Consumer Confidence (Mar 19) 9:30am AEDT
Get The App
· Australian House Price Index (QoQ & YoY Q4) 11:30am AEDT
· RBA Minutes 11:30am AEDT
· UK Consumer, Retail and Producer Prices (MoM & YoY Feb) 8:30pm AEDT
Chart 1 – UK – German 2 Year Yields
Chart 2 – XAU/USD (Spot Gold)
Source: Rivkin, RivkinTrader
h2 /h2
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.