"I Initially Doubted What I Saw On My Screen" - Wall Street Responds To The Historic "Pounding"

Today's biggest story was supposed to be the September payrolls; instead courtesy of a few wild algos, a fat finger, or a deliberate attack on sterling during the most illiquid time in the day,  it was the 6% "pounding", as sterling tumbled dramatically in chaotic trading that included a flash, 2 minute drop in early Asian hours and sustained falls in London. By morning it had managed to recoup much of its losses however the selling pressure has continued and the currency appears unable to regain all of its losses as would have been the case if this was a mere "fat finger." 

The sharp drop in illiquid Asian trading came amid worries about the U.K.’s "hard exit" from the EU, accelerated by computerized trades. The pound fell more than 6% just after 7 a.m. Hong Kong time on Friday to as low as $1.1819 from just above $1.26, before recovering above $1.24, according to Thomson Reuters data. But it took another dive in London hours and was down to just over $1.23.

But more interesting even than the drop itself, were Wall Street's reactions to the "pounding", and none was more indicative than that of Kenji Yoshii, a foreign exchange strategist at Mizuho Securities, who told WSJ that “I initially doubted what I saw on my screen."

Here are some other notable quotes from stunned market participants:

  • “This is not something you would expect in a half-efficient market,” said Ulrich Leuchtmann, head of FX at Commerzbank. “We have a liquidity situation which has eroded massively over the last few years and policy makers have largely ignored it. All the regulation that we have in place, for good reason, has the side-effect that liquidity in the FX market is much more shaky and fluctuating heavily, and we have times when it’s extremely low, especially in Asian trading.” 
  • “It’s becoming more a fact of life,said Kay Van-Petersen, global macro strategist at Saxo Capital Markets Pte in Singapore. “A lot of the risk takers that used to supply liquidity before are no longer there, the prop guys at the banks. That’s definitely one of the key issues affecting the markets.”
  • There was a complete lack of two-way interest in buying the pound on the way down,” said Jeffrey Halley, a senior market strategist at Oanda.
  • “A sudden move in a very quiet time not linked to any information is highly unlikely to be due to any algorithm,” said Lyle Pakula, chief investment officer of Melbourne-based hedge fund AE Capital, which uses automated computer programs to make trading decisions. “In my opinion, the source of the run is likely due to a discretionary trader trying to push the market.
  • It caught the market wrong-footed and triggered a lot of algorithmic selling,” said Hugh Killen, Westpac Banking Corp.’s head of trading for foreign exchange, fixed income and commodities in Sydney. “We didn’t see any significant demand for sterling off the low.”
  • We’ll probably never know why it has actually sold off, if it’s a fat finger, or just algos,” said Ryan Myerberg, a portfolio manager at Janus Capital in London. “There’s no doubt that there’s an electronic component to it.”

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Below is a more comprehensive reaction from Mint's Bill Blain

It’s a little bit Funboy Three this morning.

 

What does last night’s algo-driven Sterling fat finger moment tell us? As the pound momentarily crashed 6 big figures – in fact Bloomberg reports a low trade at $1.1378! - it seems to confirm incipient fear and uncertainty on where the UK is headed. Brexit over? Don’t believe it for a moment. 

 

Of course, some folk will say last night’s spike is just another example of fat-fingers in a thin market and means nothing. I doubt it. Fat fingers tend to follow the narrative. 

 

Will the UK narrative continue to get worse? At a dinner with Europe’s hard-men enforcers last night (Juncker, Barnier, et al), Hollande was calling for aggressive Brexit negotiations to discourage other nations from “such foolishness” – I’d think he’ll get a shock if his own countrymen got the vote.. 

 

Oh they do? Next year! Swings and roundabouts indeed.

 

I don’t suppose it helps that the great and the good of the UK’s exit-driven right-wing loonies were punching each other out on the floor of the European parliament. Nice. Perhaps that’s the right message to send Europe.. “we’re so frecking crazy we’re beating ourselves up”. The Russians must be wetting themselves in anticipation of a divided Europe sans the Parachute Regiment as they ponder real estate on their (current) borders.  

 

And, we had a surreal moment on the desk y’day as we wondered what it means for the UK as the slightly more elected right-wing lunatics threaten to take back the asylum known as monetary and fiscal policy.  As we digested speeches, news flow, moving gilts and stocks, and considered the Leaderene’s latest comments on beating up bankers, up flashed a story about a US school menaced by a pratfall (yes, that is the collective noun) of clowns*! 

 

How apt I thought…

 

Apparently, the school sent an automated message to parent’s phones: “Hi this is Fairhope middle school calling with an important message,” the cheerful voice began. “Please rest assured that your students are safe and the school is taking necessary precautions due to rumored clown activity. The school perimeter is secured and the police are on campus.”

 

If that doesn’t scare the bejesus out you, then you don’t suffer from coulrophobia. 

 

Should we be concerned that Phil “Spreadsheet” Hammond is earnestly talking about taking back the economy for the people? The hints the Treasury is going to start a serious bout of fiscal experimentation.. with taxes and some proper spending plans … are there. Yesterday they declared against further QE. 

 

I suspect someone has been booked a one-way family ticket back to Canada… 

 

It makes you think.

 

If the UK switches off QE because of an unforeseen outbreak of common sense among politicians.. what hope for elsewhere? What if Germans suddenly see the light? Or Italians decide.. “well, actually, it’s our country… and if we want to borrow and spend.. that’s our problem.. (till we can convince the ECB it’s theirs!)” Or the Spanish finally decide a government might be a good thing – especially one that promises jobs for the kids.. 

 

No wonder bunds are paying interest again…

 

And… if Theresa May has actually decided she’s going to run the UK – unlike her predecessor who thought it a much better idea to let his chums in the City and Bond Street “just get on with it” – then it’s absolutely essential everyone subscribes to the Daily Torygraph... As someone famous once said.. “I read the Torygraph so I know what the enemy is thinking..”

* * *

Finally, while nobody anticipated last night's flash crash which stopped out countless cable longs, here is what much of the sellside said about yesterday's "pounding" courtesy of BBG:

HSBC

  • Keeps forecast at 1.20 for GBP/USD by year-end and 1.10 by end-2017 with EUR/GBP at parity, David Bloom, global head of FX research, writes in client note
  • GBP used to be a relatively simple currency that traded on cyclical events and data, but now it has become a political and structural currency
  • Pound is now the de facto official opposition to the government’s policies

Deutsche Bank

  • Expects pound to revisit lows seen during the Asian trading session and keeps forecast for GBP/USD at 1.15 by next year
  • “Shocking moves overnight, even for GBP bears like us,” analyst George Saravelos writes
  • Pound plunge is likely to give U.K. PM Theresa May and her team second thoughts on the tone of future statements on Brexit: MORE

BofAML

  • Low in forecasts is 1.26 for early next year, with downside risks to projections, Athanasios Vamvakidis, head of G-10 FX strategy, writes in e-mailed comments
  • Still, today’s move has nothing to do with fundamentals given algos triggered stop losses; it could prove to be a tactical buying opportunity

Bank of Montreal

  • Cuts GBP/USD forecasts on Friday; now sees cable at 1.18 in 6 mos. from 1.25 previously, strategist Stephen Gallo writes in note
  • Sees GBP rebound by the end of 3Q 2017 as weak currency will result in an improvement in the U.K.’s income deficit within the current account
  • Doesn’t expect a “hard Brexit” and sticks to upward sloping profile for GBP; 12-mo. forecast at 1.35

UniCredit

  • Reiterates year-end forecasts for GBP/USD at 1.20 and EUR/GBP at 0.93, strategist Vasileios Gkionakis writes in client note
  • In addition to the U.K.’s free access to the single market and trade becoming costlier, investors are now perplexed by the country’s vision on immigration, openness and business friendliness
  • Still early days to determine the end result but one thing seems certain: sterling will remain under “severe pressure”

Credit Agricole

  • Latest developments pose some downside risks to long- term GBP forecast, strategist Valentin Marinov writes in e-mailed comments
  • Even if selling pressure on GBP fades near term, prospects for a “hard Brexit” and lower potential U.K. growth could mean the pound will linger close to the lows for longer than previously expected

BBVA

  • Sticks to forecast for EUR/GBP to consolidate between 0.85-0.90 and cable dropping to 1.23 by year-end, strategist Roberto Cobo Garcia writes in e-mailed comments
  • Sterling unlikely to weaken further given stretched speculative short positioning; Brexit noise and fears of a “hard Brexit” will continue to weigh on GBP

Rabobank

  • Very likely to be pushing forecasts lower in coming days, analyst Jane Foley writes in e-mailed comments
  • Bank was of the view that it may have taken another 6 to 9 months to reach 1.24

Societe Generale

  • Keeps forecast for GBP/USD to hit 1.23 in March; bias is to automatically overreact to every move, strategist Kit Juckes writes in e-mailed comments
  • “Just because we are going there quickly doesn’t mean we should blindly extrapolate, unless there’s a genuine reason to do so,” Juckes writes