"Panic May Have Passed... But This Is Far From Over"

Don’t read too much into the relief rally of the past 24 hours, warns Bloomberg's Mark Cudmore. While the initial panic may have passed, markets are very far away from having fully priced the impact of the referendum. For a start, there’s still little firm grasp of exactly what the impact will be...



In any major bout of risk-aversion, the sell-offs don’t happen in a straight line; bear markets see declining liquidity and hence heightened volatility.

In that context, perhaps the most notable thing has been the meekness of the relief rally in some assets. European financial services and bank stocks performed well on Tuesday, with their respective industry groups rising more than 2.5%, but those moves are nugatory when viewed against the 17%-plus retreats seen by both sectors through Friday and Monday.

[Doesn't exactly look like a 'normal' buyer is back]


Meanwhile, havens have barely budged, with gold solidly above $1,300 an ounce, German yields are negative out to 15 years and no Japanese government bond pay more than 0.1%.

The situation is further clouded by the quarter-end which means portfolio rebalancing flows are “distorting” the market.

Central banks around the world have also made it abundantly clear they are willing to act to support markets if needed – another complication for the risk-reward decision around trading this event from the short side.

While we can’t put a scale on the economic damage until we know what the future U.K.-EU framework will be, we do know that the economies of the U.K. and many other European countries will be negatively hit.

However, it’s also important to emphasize that this is now a European issue.

Sure, Europe makes up a sizeable portion of the world economy and there’s no doubt this will dent global growth. But with the specific shock-moment behind us, the rest of the world can soon move on and adapt, supported by the fact that global yields have dropped further yet again.

Before the vote, investor cash levels were at the highest level since November 2001 according to BofA Merrill Lynch’s Fund Manager Survey. Once the new quarter begins, that cash will be put to work in a relatively aggressive fashion – just predominantly outside Europe.

Where markets will finish on Friday isn’t clear. Focus on the economics rather than the price-action. There’s an abundance of assets that will flourish in the second half of 2016 – just not in Europe.

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A glance at the very recent market action and once could be forgiven for thinking tradewrs are positiioning for another Fed-QE trade.