{"id":40997,"date":"2016-06-24T07:02:40","date_gmt":"2016-06-24T11:02:40","guid":{"rendered":"https:\/\/stateofthenation2012.com\/?p=40997"},"modified":"2016-06-24T07:02:40","modified_gmt":"2016-06-24T11:02:40","slug":"nightmare-coming-true-for-stock-bulls-blindsided-in-brexit-shock","status":"publish","type":"post","link":"https:\/\/stateofthenation2012.com\/?p=40997","title":{"rendered":"Nightmare Coming True for Stock Bulls Blindsided in Brexit Shock"},"content":{"rendered":"
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by Joseph Ciolli
\nBloomberg.com<\/p>\n

Global investors better pray their hedges prove more reliable than the bookmakers.<\/p>\n

In a rout worsened by the mistimed bout of investor optimism that preceded it, equities plunged around the world Friday in waves of selling that grew as the prospect of U.K. secession<\/a> became reality. In the U.S., futures on the S&P 500 tumbled 5 percent, triggering trading curbs. Equity indexes from Tokyo to Paris and Rome sank more than 7 percent.<\/p>\n

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The selloff takes its place with the worst market meltdowns of the last decade, rivaling the crash of Aug. 24, 2015, in which $2.7 trillion was wiped from global stocks in 24 hours, and reminding traders of the rush to the exits that marked the latter half of 2008. Everything that could go wrong did: shares rallied in the last week and surged Thursday, partly on assumption speculators sussed out the U.K. results before they were tallied.<\/p>\n

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\u201cThe market had front-loaded a lot of the rally,\u201d said Neil Sutherland, a New York-based money manager at Schroders, which oversees $415 billion of assets globally. \u201cThe expectation in pretty much all markets was that the \u2018Remain\u2019 camp would win. It was always going to be asymmetrical.\u201d<\/p>\n

While the majority of forecasters see less impact in the U.S. than in Europe, the consequences for American investors could be severe, as Brexit\u2019s passage joins a host of other threats that have weighed on equities. Profits are falling, valuations are the highest in a decade and the U.S. just reported the worst hiring since September 2010.<\/p>\n

Needing Hedges<\/h3>\n

Secession\u2019s triumph leaves global investors as reliant on their hedges as any time since the selloff that rocked markets in January and February. Trading of options and derivatives over the last week has risen in instruments that gain in times of market turbulence, among them futures on the CBOE Volatility Index.<\/p>\n

Volume in VIX contracts saw average volume of 122,007 contracts a day this week, more than 40 percent above the 2016 average prior to that. A spread monitored by options traders to track demand for protective hedges — implied versus realized volatility on the S&P 500 — widened to a record in recent days even as shares powered higher. The VIX soared 37 percent to 23.71 as of 4:15 a.m. in New York, when S&P 500 futures traded 3.2 percent lower.<\/p>\n

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Skew Index<\/h3>\n

The rush or protection has touched most asset classes. A Bank of America Merrill Lynch gauge that tracks cross-market risk, hedging demand and investor flows surged more than 90 percent in just three days earlier this week, the most since the August stock rout. Bank of America Corp.\u2019s Skew Index, which measures demand for protection against large swings in global equities and currencies, has more than doubled in June.<\/p>\n

Michael Corcelli, chief investment office at Alexander Alternative Capital LLC, a Miami-based hedge fund, said his firm\u00a0started selling S&P 500 calls to fund buying of puts this year while snapping up iPath S&P 500 VIX Short-Term Futures ETN to protect against losses that it predicted would swell to 10 percent.<\/p>\n

\u201cI did not think this would have worked yesterday at 3 p.m. I felt stupid and questioned myself. So while everyone had a great day, I lost 23 bps,\u201d he said by phone from New York. \u201cI thought that the bet was a loss of premium until I settled in to watch some news tonight. Tomorrow we will make money.\u201d<\/p>\n

Strategists have been united in a view that leaving the EU would spell extreme short-term pain for global equities — worse after the gains of the past week that sent MSCI\u2019s worldwide stock measure higher by 4 percent. Estimates of the battering in indexes from Britain\u2019s FTSE 100 to the Euro Stoxx 50 range from 5 percent to 20 percent or more, based on notes to clients in recent weeks. The regional gauge sank 8.1 percent on Friday, while U.K. shares lost 4.3 percent.<\/p>\n

Rebound Seen<\/h3>\n

Before the vote, few factored the prospect of secession into their forecasts. Strategists surveyed this month still expected a rebound to 3,161 for the Euro Stoxx 50 by the end of the year.<\/p>\n

Britain\u2019s decision comes at a time of extreme skepticism about the efficiency of European Central Bank stimulus, with inflation in the region still subdued and analysts projecting a 1.7 percent decline in corporate profits. The Euro Stoxx 50 had fallen 7 percent this year before Friday.<\/p>\n

A vote to leave the union could ignite a flurry of selling in U.S. markets by computer-driven funds whose signals are tied to volatility, wrote Dubravko Lakos-Bujas, JPMorgan Chase & Co.\u2019s head of equity strategy and global quant research. Equity divestitures by these managers could reach $300 billion in the vote\u2019s aftermath.<\/p>\n

Bigger Unknowns<\/h3>\n
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