Markets bounced on the idea that a Brexit might not take place at all, we examine the two people most likely to determine whether or not it happens. The pound was the top performer on the day while the yen lagged but the overall moves were modest compared to the scope of the recent rout. Japanese retail sales are due later. Below is the link to today's Premium video, focusing on the existing trades and "Back to 2001-2008 Cycle & Gold-Oil Relation".
The Brexit headlines haven't improved despite the tone in markets. European leaders continue to drive a hard line, saying they won't give Britain a better EU deal and won't even negotiate until Article 50 is invoked.
Chancellor Osborne confirmed taxes will be raised and spending will be cut.
On the UK side, the political landscape is increasingly rudderless. Cameron will resign and it's unclear who will replace him and what they plan to do. The contest won't be decided until Sept 9 and the deadline for nominations in Thursday. The two leading candidates are Boris Johnson and Theresa May. Johnson campaigned for the Leave side but was slow to make up his mind and it may have been an opportunistic play. May was a light Remain supporter but largely stayed on the sidelines.
Polls and betting sites but May ahead of Johnson, but only fractionally. More important than who wins is where they stand on the issues. Both are likely to declare their candidacies on Wednesday and we will be listening closely to their comments to get a sense of how hard they frame their campaigns.
If they attempt to shift their focus away from a Brexit decision or open the door to remaining, then the bounce today could extend potentially much further. However if one or both candidates (among others) are ardently in favour of a Brexit, then continue uncertainty will inevitably weigh on sentiment.
In terms of economic news in the hours ahead, Japanese retail sales at 2350 GMT are a highlight. The consensus is for a 1.6% y/y drop in May sales and a flat reading m/m. Market reaction is likely to be limited with the ebb and flow of the Brexit story continuing to dominate.
The Brexit bit another 450 pips out of cable on Monday as the pair fell as low as 1.3121 before closing a cent higher. The yen was the top performer as USD/JPY slid towards 100.00. The Asia-Pacific calendar is light but the Brexit drama will surely keep the market occupied. The Premium short Dow30 trade hit its final 17070 low target for 540-pt gain. A new GBP trade was issued, with the charts added this evening.
Speculators move markets quickly but real money is what sustains the momentum. Pensions and funds often wait for the headline dust to settle before slowly shifting positions. The chart above shows the short sterling contract on BoE rates has escalated, allowing for improved odds of a BoE rate cut.
That's what got underway on Monday as the Brexit vote raises a series of unanswerable questions. To top it off, England was ousted from the Euro 2016 Tournament by Iceland.
A stream of Brexit comments including a push from Europe to hurry up an Article 50 notice weighed heavily on the pound. Late in the day, S&P downgraded the UK credit rating two notches. A move was largely expected as they had been the only agency that continued to rate the country AAA but they skipped AA+ and went all the way to AA. Fitch also cut the UK to AA from AA+.
The low in the day for cable came after Scottish leaders declared they would ignore the result of the referendum and remain in the EU. Those kinds of proclamations raise constitutional issues and more uncertainty.Global stock markets continued a freefall. The S&P 500 fell 1.8% to 2000 and closed below the 200-day moving average for the first time since mid-March.
Central banks are the next focus. The market has virtually priced out the chance of an FOMC hike this year and sees a 23% chance of a cut in September.
The Bank of England meeting is scheduled for July 14 and the market has priced in a 53% chance of a cut. That probability would be 100% if not for the inflationary effects of the collapse in the pound. Carney will need to balance that out as he fights off criticism for his perceived interference in the EU vote campaign.
Looking ahead, the economic calendar is quiet until core PCE on Wednesday and Eurozone preliminary CPI on Thursday. But economic news will have very little impact at the moment and likely for the remainder of the week.
Ashraf's quick on take on the British pound to CNBC.