I’ve been traveling for the past two weeks, so haven’t yet had the chance to fully express my dismay (but, not surprise) at the way TPTB have snatched new highs from the jaws of the Brexit’s sell off.
As I detailed on June 22 in The Eve of Destruction, the EURGBP and SPX are highly inversely correlated. A sharp rally in EURGBP sends stocks plunging. And, a sharp decline in EURGBP sends stocks higher.
A successful Brexit, the theory went, would make the GBP plunge — meaning EURGBP would rise and stocks would sell off sharply.
As it happened, EURGBP had no trouble reaching those targets. In fact, .8599 was reached on Jul 6, over a month ahead of schedule. It was so ahead of schedule as to represent a breakout of the rising red channel.
We all know the punchline. The drop in SPX was sure and swift — 122 points in two days. The plunge was just as swiftly erased by massive central bank intervention. It wasn’t difficult, given that it around a very low-volume holiday week. It was done in the usual way: USDJPY and CL ramp jobs.
From the Jun 22 post:
To be sure, a little extra pain at the pump (for the have-nots) is NOT going to stand between TPTB and their inflated balance sheets. If EURGBP starts screaming higher and stocks start plunging, don’t be surprised to see CL pushing higher. I have a 54.76 upside target that could easily come into play if the Brexit happens.
Likewise, the BoJ has a long and distinguished history of throwing its citizens under the bus when necessary to prop up stocks [see: The Yen Carry Trade Explained.] Their need is a little more pressing, in fact, since they have borrowed trillions of yen in order to “invest” in global equities. The USDJPY recently bounced at an important Fib level, and there’s very little in the way of overhead resistance.
Crude’s rally was short-lived, but effective (though, the channel in which it’s been rallying since Feb 11 broke down last week.) USDJPY, which long ago broke down through anything resembling a bullish channel, managed to rally at all the right times (while the “market” was open.)
There were other tools at work, of course. But, the net result is that SPX managed to rally while EURGBP was also rallying. In a sharp departure from the usual relationship, they are again positively correlated — suggesting that a rapidly depreciating GBP is good for stocks.
This is utter nonsense, of course, as are so many other correlations that have broken down over the past several years. It’s what happens when central bankers and their lackeys manage stock prices as they’ve been doing.
This is no surprise to regular readers, as I have posted ad nauseum about the games central bankers have been playing for years. New guy? See: How They Did It, one of many posts illustrating the technique.
But, it is depressing for those of us who were brought up in the business thinking that stock prices were a logical reflection of the risk and reward inherent in an open and transparent marketplace. Those days are long gone.