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Extension? - Risky assets on sale as German PMI slides

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By Peter Rosenstreich

Not much is moving in the markets today. Drivers have been on repeat for so long, investors are suffering from boredom. FX volatility has declined significantly this past week, and GBP volatility remains the least effected. Cleary the lower pace fall is due to critical, still relevant political premiums. Prime Minister May has requested that Brexit should be officially postponed from 29th March to 30th June. This offer is again dependent on the UK Parliament approving a Brexit withdrawal agreement next week. This should increase the likelihood that deal will be approved on the third attempt.

It is important to note in our view that European policymakers would like to dodge an economically catastrophic "hard" UK exit from the EU. The extra time gives "Remainers" an opportunity to develop a new strategy. By breaking the hard deadline, the rational is that other absolutes are flexible. With more than two million people signing an online petition to cancel Brexit, the possibly of "No Brexit" has increased significantly. The pace of signatures surged after Mrs May's statement on Thursday. Interestingly the focus of the petition is only to "Revoke Article 50 and remain in the EU". However, it might be just enough to convince politicians to put the decision to the people. Finally, figures from the poll indicates that signatories were not only from the UK. We remain sceptical on long GBP bet despite supportive developments. We should see a fall in volatility as an opportunity to reload long vol positions. The Brexit chaos is far from over.

Risky assets on sale as German PMI slides

By Arnaud Masset

The recent FOMC meeting has had an undeniable impact on the mind-set of investors. The last two days' trading clearly show that market participants are unsure of where to stand. Equities rallied sharply yesterday afternoon with the S&P 500 climbing more than 1% to around 2,854, with gold sliding 1.30% to $1,305 and US yields going nowhere. On Friday, it is a completely different story. Investors shifted to risk-off mode and got rid of risky assets and bought treasuries as well as the Japanese yen and a bit of the yellow metal. European equities bore the brunt of the sell-off with Germany's DAX erasing 0.70%, the Footsie -1.10% (thanks to the two-week Brexit reprieve), while the EuroSTOXX 50 gave up 0.95%.

In Europe, the last batch of manufacturing PMIs fell short of expectations. France's manufacturing PMI printed below the neutral threshold at 49.8 in March, while economists expected a reading closer to 51.4. The picture is even gloomier in Germany as the March manufacturing PMI collapsed to 44.7, compared to the expected 48. This is the lowest reading since August 2012 and it doesn't bode well for economic growth.

We find is quite fascinating that both soft and hard data are pointing towards a slowdown of the global economy, while at the same time investors keep buying stocks. It looks like things are changing course. Following the publication of the manufacturing PMI, the German 10-year treasury yield quickly dipped below 0% this morning. The single currency is free falling and gave up 0.90%. The greenback is rising across the board with the dollar index up 0.25%. Only the Japanese yen managed to edge higher, up 0.25% against the buck.

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