Monday May 23 Daily Market Primer

Stocks rose in the US Friday after dropping earlier in the week, as the market adjusted to a higher possibility of Fed rate hikes this year.  Its surprising how quickly the market consensus has reevaluated a nearby Fed move, and there’s lots of market chatter from many market pundits to digest, including Mohamed El Erian.  Stocks were down slightly in Asia and Europe Monday.  The US stock market is in the green this morning – but just barely.  Oil prices came off slightly this weekend due to supply concerns.

	LAST	CHANGE	% CHG
DJIA	17500.94	65.54	0.38%
Nasdaq	4769.56	57.03	1.21%
S&P 500	2052.32	12.28	0.60%
Russell 2000	1112.28	17.5	1.60%
Global Dow	2281.53	-5.75	-0.25%
Japan: Nikkei 225	16654.6	-81.75	-0.49%
Stoxx Europe 600	336.65	-1.36	-0.40%
UK: FTSE 100	6133.78	-22.54	-0.37%
CBOE Volatility	16.25	1.05	6.91%
Australia: S&P/ASX 200	5318.9	-32.4	-0.61%
China: Shanghai Composite	2843.65	18.16	0.64%
Hong Kong: Hang Seng	19809.03	-43.17	-0.22%
India: S&P BSE Sensex	25230.36	-71.54	-0.28%
France: CAC 40	4318.19	-35.71	-0.82%
Germany: DAX	9840.96	-75.06	-0.76%
Italy: FTSE MIB	17392.38	-419.97	-2.36%
Spain: IBEX 35	8707.9	-63.3	-0.72%
U.S. 2 Year	0.905	-1/32
U.S. 5 Year	1.383	-2/32
U.S. 10 Year	1.839	1/32
U.S. 30 Year	2.629	1/32
Crude Oil	47.63	-0.78	-1.61%
Brent Crude	48.48	-0.79	-1.60%
Natural Gas	2.263	0.056	2.54%
E-mini S&P 500	2049	-1	-0.05%

Greece is moving toward more austerity to secure even more loans, and the Brexit debate continues to heat up as the vote draws closer (first story). Bayer’s bid for Monsanto is worth $62 billion, not the $42 billion originally reported last week, which is a 37% premium, and will make it the biggest German corporate takeover in history.  The drama over aging and ailing Sumner Redstone’s trusts is intensifying, and at stake are controlling interests in two major media companies – CBS and Viacom.   US presidential election politics continue to be front and center, as the polls are narrowing between the two candidates.  Angry Birds dominated the box office this weekend – go figure.

Here’s the news: "Brexit" would inflict yearlong recession, Osborne says Osborne (Ben Pruchnie/Getty Images) A UK Treasury report says the country's withdrawal from the EU would cause a yearlong recession. Under the "shock scenario," 2018 GDP would increase by 0.7%, instead of an existing forecast of 4.3%; inflation would rise sharply; and house prices would stall. Under the "severe shock" scenario, house prices would decline about 10% and GDP would be 6 percentage points lower. "With exactly one month to go to the referendum, the British people must ask themselves this question: Can we knowingly vote for a recession?" Chancellor George Osborne said. Bloomberg (23 May.),  The Wall Street Journal (tiered subscription model) Europe's big weekend

Political developments moved apace in Europe over the weekend. In a vote on Sunday the Greek parliament approved additional austerity measures  that will help the country unlock further loans from the euro area. Greece's creditors are preparing to disburse €11 billion ($12.3 billion) once the country successfully completes a review of its program, and Greek 10-year bond yields fell to a six-month low in trading this morning. In Austria, the results of the election for president - a largely ceremonial role - have been delayed as the run-off between the anti-immigration Freedom Party and a Green Party-backed candidate ended in a virtual dead-heat. That means the absentee ballots being counted today will decide the result. And in Turkey, the newly-installed prime minister has said he will work to change the constitution to transfer the center of power away from his own office and into the hands of President Recep Tayyip Erdogan.

Bayer bids for Monsanto

Bayer AG has offered $62 billion to buy Monsanto Co., with the two companies engaging in “constructive discussions,” according to Bayer Chief Executive Officer Werner Baumann. The offer, which represents a 37 percent premium over Monsanto's May 9 closing price, is hitting Bayer's shares again this morning, which were down 3.2 percent at 6:00 a.m. ET.

Markets mixed

Markets are mixed this morning, with the MSCI Asia Pacific Index rising 0.4 percent overnight in Asia, led by Taiwanese and Japanese stocks. In Europe, the Stoxx 600 Index was down 1.0 percent at 6:05 a.m. ET as miners and oil companies slid and commodities fell. S&P 500 futures were 0.1 percent lower.

Corporate bond woes

Bond investors in Chinese companies are starting to lose patience as defaults increase while excuses for failing to make payments are become increasingly incredible. In the U.S., corporate bond defaults are starting to spread beyond the commodity complex where the cyclical downturn has hit hard, according to new research from Deutsche Bank AG. Things remain relatively calm in Europe so far, as investors look to the European Central Bank's corporate bond buying program to stabilize the market there.

U.S. politics Presumptive Republican nominee Donald Trump is courting evangelical support in his campaign for the White House, as the thrice-married candidate looks to cement support that helped him win the primaries. As Republican stalwarts start to rally around their nominee, Paul Ryan's decision not to endorse the party candidate is leaving him increasingly isolated. "Brexit" would inflict yearlong recession, Osborne says Osborne (Ben Pruchnie/Getty Images) A UK Treasury report says the country's withdrawal from the EU would cause a yearlong recession. Under the "shock scenario," 2018 GDP would increase by 0.7%, instead of an existing forecast of 4.3%; inflation would rise sharply; and house prices would stall. Under the "severe shock" scenario, house prices would decline about 10% and GDP would be 6 percentage points lower. "With exactly one month to go to the referendum, the British people must ask themselves this question: Can we knowingly vote for a recession?" Chancellor George Osborne said. Bloomberg (23 May.),  The Wall Street Journal (tiered subscription model) The Federal Reserve continues to prep markets for a possible rate hike in June. Boston Fed president Eric Rosengren told the Financial Times that the conditions for another rate hike were "on the verge of broadly being met." Last week, several FOMC members spoke in favor of an interest-rate hike at their meeting next month if key economic data continued to be strong. On Wednesday, minutes of the Fed's April meeting showed that there was some disagreement among members, as expected, but that a June hike was clearly on the cards. The strong yen is crushing Japan's exports. The amount of goods sold abroad fell 10.1% in April, more than the Bloomberg estimate for a 9.9% fall, as imports slumped 23.3%. That left a trade surplus of 823.5 billion yen ($7.5 billion), the largest since March 2010, the Ministry of Finance said. The yen's appreciation this year, by as much as 9% versus the dollar, has made Japanese goods less attractive to overseas buyers using other currencies. Separately, a preliminary survey showed that Japanese manufacturing activity shrank at the fastest pace in over three years amid a drop in new orders. The Markit/Nikkei Flash Japan Manufacturing Purchasing Managers Index (PMI) fell to 47.6 in May on a seasonally adjusted basis, from a final 48.2 in April. European PMIs were slightly lower than expected in May. Preliminary figures from Markit's Purchasing Manager's Index showed that European industry expanded marginally less than expected in the month, with a composite reading of 52.9, down from 53 in April, and lower than the 53.2 forecast. Activity in Europe's service sector was flat at 53.1. PMIs are given as a number between 0 and 100. Anything above 50 signals growth, while anything below means contraction. Tribune Publishing rejected Gannett's latest $864 million takeover offer. The proposal of $15 per share in cash was inadequate, Tribune CEO Justin Dearborn said in a statement. "We stand ready to work with Gannett to assess whether there is a path forward that will create more value for both sets of shareholders," Dearborn said. People familiar with the matter had told Reuters that Tribune would share some confidential corporate information with Gannett under a nondisclosure agreement.  Anthem and Cigna are quarreling and could delay their merger. The Wall Street Journal reported that disagreements could delay antitrust approvals, which would make the $48 billion deal possible. The report said the two health insurers accused each other of violating the terms of their agreement announced last July. Cigna CEO David Cordani and Anthem CEO Joseph Swedish have disagreed in the past few months, particularly over Cordani's role in the new company. A deal would create America's largest health insurer by members. Polls show the gap between Hillary Clinton and Donald Trump narrowing. A Washington Post-ABC News poll released over the weekend showed that the presumptive Republican nominee had gained 11 points since March, giving him a lead of 46% to 44%. In an NBC News/Wall Street Journal poll, 54% viewed Clinton unfavorably, versus 58% for Trump. Both polls were within the margin of error, suggesting a neck-and-neck race. "Angry Birds" dominated the weekend box office. The Sony-distributed adaptation of the wildly popular smartphone game raked in $39 million at its debut in the US and Canada, while "Captain America: Civil War" earned $33.1 million and placed second in its third weekend, according to Bloomberg. The success of "Angry Birds" should support Rovio Entertainment, the game's maker, which has trimmed jobs amid slow merchandise sales. Futures rebounded, pointing to a near-flat open on Wall Street. Treasurys gained, and the yield on the 10-year note fell 2 basis points to 1.828%. West Texas Intermediate crude futures for July delivery slipped 1.1% to $47.87 a barrel. The data calendar is light. San Francisco Fed president John Williams speaks at 8 a.m. ET. Markit's preliminary manufacturing PMI for May is due at 9:45 a.m. ET. A ton of housing data and the second estimate of first-quarter gross domestic product will be released later this week; you can check out our full preview here. Trump Rally Hillary Clinton’s lead over Donald Trump has narrowed as Republicans have rallied behind the New York businessman in the weeks since he became his party’s presumptive nominee for the presidency. Mrs. Clinton now leads Mr. Trump by just 3 percentage points, 46% to 43%, in a test matchup between the two likely nominees, a new Wall Street Journal/NBC News poll shows. Other polls suggest an even tighter race. But Mr. Trump trails far behind the leading Democrat in organizing in key general-election states. Sen. Bernie Sanders, who faces long odds of wresting the Democratic nomination from Mrs. Clinton, would beat Mr. Trump by a much wider, 15-point margin, 54% to 39%, in a hypothetical matchup, the poll suggests. Yesterday the Vermont senator escalated his feud with DNC Chairwoman Debbie Wasserman Schultz, endorsing her primary challenger and saying she would lose her leadership role if he became president. Behind Enemy Lines The Afghan government is giving financial and military support to a breakaway Taliban faction in an effort to sow rifts within the insurgency and nudge some of its leaders toward peace talks. The program’s goal is to exploit divisions that emerged after the Taliban’s longtime leader, Mullah Mohammad Omar, was revealed last July to have been dead for years. Senior Afghan and U.S. officials described the program’s details and said that resources provided by the U.S. were used to support it. Meanwhile, the U.S. military conducted an airstrike inside Pakistan on Saturday that American officials said killed Taliban leader Mullah Akhtar Mansour, potentially setting the stage for another leadership struggle that could fragment the group further in the coming days. A Troubled Engagement Quarrels have broken out behind the scenes of Anthem’s $48 billion proposed acquisition of Cigna as the health insurers seek regulatory approval for their landmark deal. People on both sides say the squabbles could delay or derail antitrust approvals, which are typically harder to obtain if both parties aren’t in sync. While neither company has sought to terminate the merger, and it doesn’t appear in danger of imminent collapse, Anthem and Cigna are bickering on several fronts. The companies have privately accused each other of violating their July merger agreement and fumbling submissions to regulators. A key point of contention is Anthem’s lawsuit against Express Scripts Holding, a major middleman for prescription drugs, and simmering in the background are tensions about the future role of Cigna Chief Executive David Cordani. Tech Support Drone use across the U.S. is soaring, and the skies may soon get even more crowded, as the FAA expects sales of these unmanned aerial vehicles to jump to seven million in 2020 from about 2.5 million this year. But should you be allowed to prevent drones from flying over your property? In today’s Journal Report, we invited advocates on each side of this and other crucial technology issues to make their best case. Our team of experts debate whether consumers should be permitted to provide their own set-top cable and satellite boxes, how companies should handle data from employees’ wearable devices, whether parents should post photos of their children on social media, if companies should be required to share information about cyberattacks and more. Tensions Boil Over in Redstone’s Media Empire Stocks and Bonds Can Weather a Fed Rate Increase, Investors Say

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Today marks one month before the Brexit referendum in the U.K. But it's just five days before, as Deutsche Bank AG's Jim Reid points out, "the pre-referendum 'purdah' period kicks in." After that time anyone connected to the government is prevented from campaigning to leave or stay in the European Union. It will be interesting to see how, if at all, this self-imposed silence impacts U.K. markets, where currency traders in particular have been kept busy with constant polling and political rhetoric. In the meantime, HM Treasury looks set to deliver its own opinion just days before omerta sets in. It's due to argue in a report scheduled to be published today that the U.K. faces a year-long recession should the country opt to exit the bloc.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief