The Brexit punch bowl ... Best downside hedges
Updated
On the risk side as much as the media is trying to sell the China softening stance there is little evidence of any change. Premier Liu sending loud messages yesterday that China has enough tools to ensure growth. With this backdrop and no changes to the Whitehouse administration protectionist tactics, in my books markets should not be optimistic of any changes in the immediate term. For those trading Sterling in FX it’s time to start working more risk-off positions which includes Pound shorts for those who subscribe to the bearish risk story.
Local UK politics is returning to the main focus of markets with Parliament scrambling around to avoid a no-deal, too little too late. The outcome is polarised and in my models a chance of a no-deal Brexit is materially higher (85%). There are still opportunities to hedge exposure in UK markets although the clock is ticking... for the most part FX markets have priced a disruptive Brexit however there is a lot more meat left on the bone for GBPUSD.
The odds of GBPUSD trading below 1.15 in the next year is a 58% probability (scary), gilt yields going to zero is around 48% and FTSE trading a bear market 45%. These three metrics continue to rise making it difficult to construct any positive scenarios.
For those following my Fixed Income strategy the 3m seagulls are working well (1.21/1.26/1.15). Coupled with 3m put, 1.21 with 1.05 knock in.
For those following my Equity strategy, small caps in FTSE will get hammered while domestic banks and real estate will overshoot. FTSE250 will underperform FTSE100.
Best of luck all those riding this pig.
Local UK politics is returning to the main focus of markets with Parliament scrambling around to avoid a no-deal, too little too late. The outcome is polarised and in my models a chance of a no-deal Brexit is materially higher (85%). There are still opportunities to hedge exposure in UK markets although the clock is ticking... for the most part FX markets have priced a disruptive Brexit however there is a lot more meat left on the bone for GBPUSD.
The odds of GBPUSD trading below 1.15 in the next year is a 58% probability (scary), gilt yields going to zero is around 48% and FTSE trading a bear market 45%. These three metrics continue to rise making it difficult to construct any positive scenarios.
For those following my Fixed Income strategy the 3m seagulls are working well (1.21/1.26/1.15). Coupled with 3m put, 1.21 with 1.05 knock in.
For those following my Equity strategy, small caps in FTSE will get hammered while domestic banks and real estate will overshoot. FTSE250 will underperform FTSE100.
Best of luck all those riding this pig.
Note
1.216x is the only level to track today 
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