The Biggest Event Risks In June

Almost half of 2016 has come and gone, and before we know it, we will be staring at an event packed June right in its eyes. Sell in May and go away has proven to be a viable option for traders, as we and other analysts have warned of trendless but volatile markets. May was generally skinny on major market events but June will not be the same. The summer of shocks might have begun for real.

With the passage of both the April FOMC statement and rate decision, and the subsequent publication of the April FOMC minutes, markets have gotten even more unpredictable and have been behaving ever so wildly. We have a feeling that many participants are confused, and so are we.

As such, we generally prefer to remain liquid, taking only shorter term trades and riding out medium term volatility by having few to no positions in that time spectrum. In times like these, having no position is a position in and of itself.

A storm of events in June

Today being the first day of June, and the start of the last month of the first half of 2016, we thought it would be aptly appropriate to list down some of the biggest event risks that June will bring. These are the known unknowns — uncertainties which we already know about but not their outcomes.

The biggest risks in June (in our opinion) will be the EU referendum by the UK in the later part of the month, the June ECB monetary policy decision and press conference, the June FOMC statement and interest rate decision, and lastly the BoJ's monetary policy decision.

As you can already tell, besides the UK vote on its European membership, most of the key event risks orbit around central bank policy.

  "New opinion poll results surfaced in Britain Tuesday showing a 47% vote for leaving the EU (Brexit), and a 44% vote for remaining in the EU (Bremain). The news sent GBP crashing 130 pips against the USD and shockwaves across risk markets will global indices all down on the day and for the week. While such poll results are questionable, the consensus is that the Brexit vote is quickly catching up to the conservative.    Regardless of results, the UK referendum is surely one of (if not the most) the nuggets event risks in June and markets will likely continue to trade wildly on every ebb on this event."    Business Of Finance on Facebook, 1 June 2016

"New opinion poll results surfaced in Britain Tuesday showing a 47% vote for leaving the EU (Brexit), and a 44% vote for remaining in the EU (Bremain). The news sent GBP crashing 130 pips against the USD and shockwaves across risk markets will global indices all down on the day and for the week. While such poll results are questionable, the consensus is that the Brexit vote is quickly catching up to the conservative.

Regardless of results, the UK referendum is surely one of (if not the most) the nuggets event risks in June and markets will likely continue to trade wildly on every ebb on this event."

Business Of Finance on Facebook, 1 June 2016

We feel markets will likely be most sensitive to these types of events, having chopped around for almost half a year now. There is great anticipation for guidance on where to go next, and we feel markets will likely take cues from central banks, chiefly the Fed.

Year to date, returns across the spectrum of global financial assets have been abnormally dispersed. This might be the market's signals to us that no one really knows how to position for the medium to longer term. And we won't pretend to know it all either. Until we get more clarity on where the major central banks are likely heading with their respective monetary policy stances, we expect this environment to continue as the mainstay.

  "The best and worst performing global financial assets in May and YTD (in both local currency and USD terms) as analyzed by DB:    May was a month of decoupling: oil decoupled from the dollar, and global risk decoupled from the once again sharply devaluing Yuan, but most notably May was a month where Fed rate hike expectations repriced midway through the month.    Markets largely took the move in their stride and reversed a difficult start to the month. Having said that we saw evidence of the repricing with dollar strength and EM/Gold weakness a theme. In fact for equity markets in particular the old adage ‘sell in May and go away’ was looking relatively apt for the first week or so into the month before sentiment turned positive, seemingly supported by a combination of increasing comfort that the market can accommodate Fed tightening, higher oil prices, positive news from Greece and another decent performance for European Banks.    Looking at the winners and losers for the month one thing which stands out is the relative performance between local currency performance and US Dollar hedged performance during the month such was the strength of the Greenback. That was certainly the case with equity markets where in Europe in particular markets were generally up between 1-3% in local terms with banks in the middle of that range. With the Euro weakening 3% during the month however, on a USD return basis we see most European equity markets finish flat to slightly negative. It was a similar story in credit markets too where following two decent months of performance (on the back of the ECB CSPP announcement) May saw Euro indices eking out more modest gains of less than a percent in local terms in May with financials the relative outperformer. Looking at these in USD terms though results in most European credit indices down 2-3%. Performance was more impressive then for the S&P 500 (+2%) and higher beta US credit indices (+0.5%).    Further afield the top of our May leaderboard is headed by the performance for Greek equities (+11% local, +8% in USD terms) which rallied following the latest positive developments with regards to the bailout. Thereafter its WTI (+7%) and Brent (+5%) which rank second and third, extending what has essentially being an ongoing rally since mid-February now. Corn (+6%) also had a strong month. Developed sovereign bond markets sit in the middle of the pack although with concerns about Brexit starting to abate, it was Gilts (+2% local, +1% in USD terms) which outperformed. Finally the bottom of the leaderboard sees Brazilian equities (-10% local, -15% USD terms) prop up the rest as the political situation came to a head. Elsewhere Gold (-6%), Silver (-10%) and Copper (-8%) all suffered with the Fed repricing. EM equities and bonds (-4% and -5% respectively) also succumbed for the same reason.    Taking a look at year-to-date performance, it’s still commodity markets which are dominating the top of the leaderboard. Indeed in local currency terms the top five has WTI (+33%), Brent (+19%), Silver (+15%), Gold (+15%) and Corn (+13%) hogging the limelight, although if we flip to USD terms then Brazilian equities (+23%) and Russian equities (+19%) jump to second and fourth respectively. The impressive rally for the Yen (+9%) is still a standout while the overall performance for credit continues to be strong. Indeed in local currency terms we see US indices up between 3-7% this year, led by HY while European indices are up between 2-4%. There’s a familiar look to the bottom of the leaderboard with the Shanghai Comp (-17% local, -19% USD terms) the biggest outlier. Italian equities (-14% local, -12% USD terms) and European banks (-14% local, -12% USD terms) are still down double digits although have bounced back from how they ended Q1."    Business Of Finance on Facebook, 1 June 2016

"The best and worst performing global financial assets in May and YTD (in both local currency and USD terms) as analyzed by DB:

May was a month of decoupling: oil decoupled from the dollar, and global risk decoupled from the once again sharply devaluing Yuan, but most notably May was a month where Fed rate hike expectations repriced midway through the month.

Markets largely took the move in their stride and reversed a difficult start to the month. Having said that we saw evidence of the repricing with dollar strength and EM/Gold weakness a theme. In fact for equity markets in particular the old adage ‘sell in May and go away’ was looking relatively apt for the first week or so into the month before sentiment turned positive, seemingly supported by a combination of increasing comfort that the market can accommodate Fed tightening, higher oil prices, positive news from Greece and another decent performance for European Banks.

Looking at the winners and losers for the month one thing which stands out is the relative performance between local currency performance and US Dollar hedged performance during the month such was the strength of the Greenback. That was certainly the case with equity markets where in Europe in particular markets were generally up between 1-3% in local terms with banks in the middle of that range. With the Euro weakening 3% during the month however, on a USD return basis we see most European equity markets finish flat to slightly negative. It was a similar story in credit markets too where following two decent months of performance (on the back of the ECB CSPP announcement) May saw Euro indices eking out more modest gains of less than a percent in local terms in May with financials the relative outperformer. Looking at these in USD terms though results in most European credit indices down 2-3%. Performance was more impressive then for the S&P 500 (+2%) and higher beta US credit indices (+0.5%).

Further afield the top of our May leaderboard is headed by the performance for Greek equities (+11% local, +8% in USD terms) which rallied following the latest positive developments with regards to the bailout. Thereafter its WTI (+7%) and Brent (+5%) which rank second and third, extending what has essentially being an ongoing rally since mid-February now. Corn (+6%) also had a strong month. Developed sovereign bond markets sit in the middle of the pack although with concerns about Brexit starting to abate, it was Gilts (+2% local, +1% in USD terms) which outperformed. Finally the bottom of the leaderboard sees Brazilian equities (-10% local, -15% USD terms) prop up the rest as the political situation came to a head. Elsewhere Gold (-6%), Silver (-10%) and Copper (-8%) all suffered with the Fed repricing. EM equities and bonds (-4% and -5% respectively) also succumbed for the same reason.

Taking a look at year-to-date performance, it’s still commodity markets which are dominating the top of the leaderboard. Indeed in local currency terms the top five has WTI (+33%), Brent (+19%), Silver (+15%), Gold (+15%) and Corn (+13%) hogging the limelight, although if we flip to USD terms then Brazilian equities (+23%) and Russian equities (+19%) jump to second and fourth respectively. The impressive rally for the Yen (+9%) is still a standout while the overall performance for credit continues to be strong. Indeed in local currency terms we see US indices up between 3-7% this year, led by HY while European indices are up between 2-4%. There’s a familiar look to the bottom of the leaderboard with the Shanghai Comp (-17% local, -19% USD terms) the biggest outlier. Italian equities (-14% local, -12% USD terms) and European banks (-14% local, -12% USD terms) are still down double digits although have bounced back from how they ended Q1."

Business Of Finance on Facebook, 1 June 2016

List of key events in June

Below, we present a list of key event risks in June courtesy of UBS. There are of course much more than what is included here, but these are what the markets will be focusing on for the most part.

The biggest event risks in June according to UBS:

June 2016 is a month in which the number of event risks is particularly high. In our baseline scenarios we do not see market upsets, but the potential is there: Japanese fiscal policy; meetings of the ECB, Fed and BoJ; new ECB policy implementation; a German Constitutional Court ruling; the UK referendum; elections in Spain; and a decision on the FTT are all thrown into the mix.
 Table courtesy of UBS

Table courtesy of UBS

1 June: Closing day of the Japanese Diet – new fiscal action?
We expect Japanese Prime Minister Shinzo Abe to announce new fiscal policy on 1 June – the closing day of the current session of the Japanese Diet. We think that the scheduled rise in the consumption tax will be delayed and a supplementary budget of ¥5-10tn could be announced. It is also possible that the Lower House is dissolved and new elections called.
2 June-16 June: Central bank meetings
On balance, we do not expect any change in monetary policy to be announced by the ECB, the Federal Reserve or the BoJ in June, but statements and guidance will be watched closely.
First up is the ECB on 2 June. The ECB will present its new staff forecasts at the press conference. We think the key challenge for Mr Draghi will be to not appear too hawkish amid rising oil prices and robust Eurozone Q1 GDP growth, and we believe it too early for the ECB to send strong signals about the duration of QE beyond March of next year. But much will be discussed.
After that, the FOMC will meet on 15 June. We think that it will wait until September before it next raises rates (in part because of upcoming event risk). However, the minutes of the April meeting and recent Fed rhetoric has kept this meeting “live” and expectations higher than they might otherwise have been.
We don’t think that the BoJ will announce a further easing on 16 June, but it will be a close call. We see a 40% chance that it does, and a 60% chance that this takes place by July. If conducted in combination with a fiscal expansion (see above), Japan would in effect be conducting a policy of 'helicopter money' and we would expect the polemic to increase in global markets on this subject
6-10 June / 24 June: TLTROs, and other ECB policy implementation
While we do not expect new ECB policy to be announced at the June meeting (see above), June is the month in which some already-announced policies are implemented for the first time. The first auction of the new Targeted Long-Term Refinancing Operations (TLTRO II) will take place on 23 June, with the publication of the results on 24 June. Market focus has been on the ability of banks to borrow 4-year money at an interest rate (to be set by ex-post calculations) as low as the current deposit rate of -0.40%.
However, we think that more important will be the first voluntary repayment of TLTRO I to be announced at 11.00am London time / 12.00pm CET on 10 June. (The repayment itself will take place on 29 June, coinciding with the first settlement date of TLTRO I). It is likely that the bank repayment ofLTRO I will be larger than the take-up of TLTRO II – and result in the first significant reduction of the ECB's balance sheet since QE began in March of last year. In turn, this might appear as an involuntary tightening of monetary policy.
The reason this might happen is that one of the effects of QE has been a largescale creation of deposits in euro area banks. But TLTRO I took place before QE was announced and banks have been unable to repay it until now. Many of them – particularly in core countries – have been burdened with large excess liquidity as a result. In turn, this has meant a drag on Net Interest Margins (NIM) for these banks as risk free rates have been negative while they are (by and large) paying 0% to depositors.
 Chart courtesy of UBS

Chart courtesy of UBS

Also in June, we expect the Eurosystem to begin its purchases of corporate bonds in its Corporate Sector Purchase Programme (CSPP). It is likely that this will begin in the days shortly after the ECB’s press conference on 2 June. The corporate bond market will be watching the implementation of purchases on a daily basis. We believe that once the CSPP settles in, the Eurosystem will be buying around €12bn a month in corporate bonds. Last Wednesday Reuters reported that – citing “several bank sources” – these will amount to €5-10bn per month initially.
21 June: German Constitutional Court ruling on OMTs
On 21 June, the German Federal Constitutional Court in Karlsruhe will give its final ruling on the acceptability of the ECB’s Outright Monetary Transactions (OMTs) programme in the field of German law. In our view, this represents less of an immediate market risk than a contingent one. In a scenario where the Court ruled against OMTs, uncertainty might increase over the ability of the ECB to respond to another period of extreme volatility in European sovereign markets
Some appear to think that a ruling against OMTs might impede the purchase of peripheral bonds in the ECB’s current QE programme. We believe this to be unlikely. Bundesbank opposition to QE as a monetary policy tool in principle (even if not in timing) seems slight.
It is widely accepted that the announcement of OMTs in the summer of 2012 was the beginning of the end of the sovereign debt crisis in Europe. But in October 2014, the German Constitutional Court found that the policy was “incompatible with primary law”. At the same time, the judges in Karlsruhe passed it on to the European Court of Justice for review, which last year came to the opposite conclusion (though in the context of European law).
24 June: Result of the UK referendum on EU membership
The recent rally in sterling and the tightening of peripheral sovereign spreads have been widely attributed in the media to an increase in confidence that the UK referendum will result in a vote to remain. If correct, this would mean that there would be potential for sterling to fall and peripheral spreads to widen once more in a scenario where there is either a vote to leave or if opinion polls showed increased support for that outcome.
26 June: Elections in Spain
Spain will hold another general election on 26 June, after its 21 December 2015 election resulted in no government being formed. In general, we think that Spanish yield spreads to Germany should tighten over the coming months as the relatively strong growth heals the economy and improves debt dynamics.
However, Spain missed on its deficit targets in 2015 by a wide margin and is likely to miss again this year, according to the European Commission. In part, this can be attributed to the dominance of elections in the public calendar. But there is a risk to sovereign spreads if a government is formed after the elections which might take an anti-austerity stance and widen the public deficit even more.
 Chart courtesy of UBS

Chart courtesy of UBS

30 June: A decision on the European Financial Transaction Tax
A group of European governments have been proposing a European Financial Transaction Tax (FTT) for several years. In the most recent statement, the proponent governments indicated that “taxation should be based on the principle of the widest possible base and low rates and it should not impact the cost of sovereign borrowing”.
The statement also directs governments to decide on further details – including, importantly, the levels of the tax – by the end of June: “in order to prepare the next step, experts in close coordination with the commission should elaborate adequate tax rates for the different variants. A decision on these open issues should be made until the end of June 2016.”
It should be noted, however, that aside from the 10 countries currently promoting the tax there is opposition among other EU member states, most notably the UK. Under the “Enhanced Cooperation” framework, the countries will pursue the policy only if 9 or more member states support it. In December, Estonia withdrew its support for the project.