Escalating systemic risk: BREXIT & more

We’ve observed a classic escalation of systemic risk last week, culminating in Friday’s European Equities led plunge, as several Brexit polls showed “Leave” in the lead. While UK is currently at the periphery of the global equity network, contagion spread throughout Europe and global equities as seen in Fig. 1 below.

Fig. 1. Global Equities FNA Correlations Outlier Ranking 10 Jun 2016

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Risk continued to escalate into this week, as Asian markets continued a negative cascade. Particularly worrying is was the 15 to 22 VIX spike from Friday to Monday, the biggest two day moves since last year’s August Flash Crash. Investors will do well holding on to safe haven assets like US Government Bonds and JPY. Not to mention Bitcoin, which has reached new two year highs and looks like an increasingly attractive asset class. The video below illustrated key risk dynamics.

Brexit Systemic Risk Escalation Video

Weak US Growth Sparks Global Rally

The S&P 500 reached a new 10 month high on Wednesday, in a global rally sparked by last Friday’s disappointing jobs report that showed the US added only 38,000 new jobs, its weakest showing since 2010. That’s right. Weak US growth led to a global asset rally because it took June Fed hikes off the cards. Not what one would call a convincing sustainable rally. As we can see in Fig 1 below, USD Index was the top cross asset outlier with a -3sd plunge, while just about everything else rose.

Fig. 1. Cross asset FNA Correlations 8 June 2016

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USD continues to be a major systemic pressure point, and broadly negatively correlated against most major assets. A weaker USD takes off pressure from China, which flows into broad global relief.

Below is a short video focusing on key pressure points and market dynamics using FNA’s cross asset dashboard.

Video 1. Weak 3 June US jobs report sparks global asset rally (3:11 min)