Sterling Volatility Explodes To Record High As Brexit Looms
By Tyler Durden
With two polls being unleashed on the markets today indicating the largest lead for Brexit over Bremain yet with regard the UK referendum, it seems FX traders at least have begun to wake up to the short-term uncertainties a “leave” vote may entail. A short-term measure of expected price swings for the pound climbed for a third week as traders sought protection as two-week implied volatility, a period that covers the June 23 voting date, closed at its highest on record today.
With just 13 days left, things are not looking good for Cameron and his cronies…
- U.K. Poll on EU Shows 45% Remain, 55% Leave: ORB/Independent
- “LEAVE” ON 53 PCT, “REMAIN” ON 47 PCT BEFORE BRITAIN'S EU REFERENDUM – SKY NEWS
And it is having an effect…
It seems this “wait til the last minute too panic hedge” behavior is not unusual in the new normal as Credit Suisse describes the same occurred last year in the lead up to Grexit...In the case of Brexit, equity markets waiting until last minute to price in equity risk premium similar to Grexit last year?
If this is anything like the “Grexit” catalyst last year, equity markets may wait until the last minute to price in the appropriate risk premium.
As you can see from the EFA vol chart below, even though “Grexit” was a well-known and well-anticipated catalyst last year, EFA 1M implied vol was still trading as low as 11.7% the week before Greece’s June 30th IMF repayment deadline.
EFA 1M implied vol ended up surging 8 vol pts in the final week before the deadline and another 3 vol pts after a surprise referendum was called over the July 4th weekend last year.
And it wasn’t just EFA. VIX also didn’t start reacting to “Grexit” risk until the final week when it jumped from 12 to 19.
Will the same thing happen this time? If so, I think it makes sense to hedge now when you can (and when it’s cheap!), not when you have to in the final days before the deadline when implied vols will have already climbed higher.
Is this merely another symptom of the now deeply embedded belief that markets are invincible thanks to The Central Bank Put? Why hedge? Why reduce exposure? When you know… because The Fed promised… that if stocks fall, they will magically levitated to confirm that all is well and the central planners are in control. But, as Charles Hugh-Smith recently noted, by making the stock market the only game in town, the Powers That Be can no longer afford to let it decline for any reason…
This new rule simplifies trading, confidence and sentiment: Bulls can now relax, knowing that the market will never be allowed to decline. Sentiment can stay pegged at “extreme greed” forever, and there is no longer any need to hedge long positions because markets will only move higher.
Volatility will drift lower because any decline will be mere signal noise, only of interest to high-frequency trading (HFT) machines …read more
Source: Sterling Volatility Explodes To Record High As Brexit Looms
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