UBS’ Trading Roadmap For The "Day After" Brexit
By Tyler Durden
Moments ago we presented the contrarian thesis from Greg Peters, who hinted that the equity response may be one of “selling the news” in case of Remain, and one where US stocks actually surge if Leave wins, as a result of an influx of global funds seeking US “safe haven” assets. Next, we go back to a more conventional model of how assets would react, and present “a roadmap for the ‘Day After’” from UBS, which seeks to answer the question “at what level would we buy or sell each key asset class in either a Remain or a Leave scenario?” It then show ranges of the potential near-term market reactions.
Any moves outside these ranges, UBS says, could signal that the market is under-pricing or overpricing the relevant macro risks. The Swiss bank caveats by warning that it can not predict exactly how the markets will trade immediately following the 23 June vote, as there could be liquidity driven dislocations or surprising reversals of price spikes.
Here are the summary cases:
A “Leave” scenario
Following the risk-rally of the last few days, we believe there is significant room for downside in the event of a “Leave” vote. We estimate percentage moves in the midteens for UK and EU equities but materially smaller moves for the S&P 500 and EM equities. While GBP may come under significant pressure, the EUR may be more stable. Risk currencies (CHF & JPY) would benefit, but policy responses could limit the degree of strength quickly. We think Euro-area core yields and UK yields would decline substantially (roughly 10-40 bps), and potentially even more so in the US. Moves in the range of 50bps look possible in Euro-area periphery yields and corporate credit spreads.
A “Remain” scenario
Outside European and UK stocks (where a significant relief rally is likely to manifest) we would expect much less pronounced moves across assets. In equities, we think the S&P 500 could reach new highs, albeit near-term no more than 1-3% higher than current levels. Fundamental pressures limit the potential upside in global bond yields. Yields could rise more for core Euro-area bonds, which look the most expensive. We also see limited upside across EM assets (except perhaps local currency bonds). Interestingly, we believe the potential sell-off in Gold in a “Remain” scenario would be small relative to the upside potential in the opposite case.
And the details:
Market levels for the day after
The UK referendum was always likely to be a source of uncertainty with potentially significant spill-overs across markets. We have argued that the UK’s macro imbalances would imply downside risk for the pound, and for UK domestic demand-driven UK equities and bonds. We have also argued that the macro read-across to the EU carries broader implications across European equities and bonds.
Over the past few weeks, the market’s focus on the outcome of the vote has increased. By the end of last week, the risk premium attached to the event was already quite sizeable. …read more
Source: UBS’ Trading Roadmap For The "Day After" Brexit
