Financials –
There was no major surprise in the results from the Italian referendum over the weekend. Italians rejected the constitutional reforms proposed by PM Renzi. Polls had indicated this would happen, so the only surprise was the margin of victory which proved to be a bit larger than anyone had expected. The initial market reaction on the open overnight was probably as you’d expect with an overall risk off tone. The euro was sold off aggressively, equities were weaker and bonds caught a bid. However, that has all seemed to reverse overnight. Looking at the screen at the time of writing I see equity markets higher with the dollar weaker and bonds selling off again. This might be partially due to another less high-profile election in Austria where a pro-EU candidate was the victor.
So picking the winners and losers from the Italian referendum is proving to be a bit difficult, which is just par for course here in 2016. The only obvious loser is Italian bank stocks and maybe Italian equities in general. In “macro-land”, whether or not this proves to be Euro-negative will take some time to play out. We’ve got to see which parties are able to seize control in Italy following their upcoming election.
There are a few charts I think are worth pointing out following Friday’s COT report. The first chart below shows the non-commercial net position in TY over the past few years. Note the market has quickly reversed direction from a sizeable net long to now a significant net short. While the new short position isn’t the largest we’ve seen during this period it is still fairly significant and appears likely to build further. This will be something to keep an eye on if we were to get a surprise risk-off event that were to put a bid in TYs.
The second chart shows the combined non-commercial net position across major currencies. I use this as a gauge to see the level of interest in the US in total. The lower this chart goes, the more heavily the overall market seems to be long USD. As you can see, the chart isn’t near the lows from last year but appears to be heading in that direction.
These are both charts to keep an eye on for signs of extreme positioning in the weeks/months ahead.
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