Monday June 27 Daily Market Primer

Over the weekend, European and UK politicians, the financial press, and market analysts were working overtime to make sense of the post Brexit landscape.  The lead story from the Financial Times on Sunday says it all:  “Vote to leave EU plunges UK into domestic political instability” http://bit.ly/UKInstability

Among the highlights:

·         The vote triggered political crisis in Brittan’s two main political parties.  EU leadership called for a quick exit from the block while German Prime Minster Angela Merkel exhibiting considerable statesmanship in urging calm and patience on the timing of Brexit http://bit.ly/MerkelExit.

·         Officials in Scotland are calling for a second referendum on UK independence.

·         Politicians in Denmark and France have called for referendums of their own.

·         Central banks are pledging additional market liquidity.

·         And, some people in the UK are asking for a second Brexit vote.

As markets opened Monday, stocks in Asia held up very well, and Japanese stocks jumped on hopes of government market stimulus.  In Europe, stocks followed through on Fridays drops, with the pan-European Stoxx 600 down 3%, the FTSE 100 down 2%, and the pound dropped another 2% against the dollar.  European bank stocks got hit the hardest, with RBS and Barclays down 15% and Lloyds down 9%.  The UK 10 year fell below 1%, and the US 10 year is below 1.5%.

	Friday	LAST	CHANGE	% CHG
	DJIA	17400.75	-610.32	-3.39%
	Nasdaq	4707.98	-202.06	-4.12%
	S&P 500	2037.41	-75.91	-3.59%
	Russell 2000	1127.54	-44.68	-3.81%
	Monday
	Global Dow	2230.85	-21.63	-0.96%
	Japan: Nikkei 225	15309.21	357.19	2.39%
	Stoxx Europe 600	311.84	-10.14	-3.15%
	UK: FTSE 100	6010.21	-128.48	-2.09%
	Australia: S&P/ASX 200	5137.2	24	0.47%
	China: Shanghai Composite	2895.7	41.42	1.45%
	Hong Kong: Hang Seng	20227.3	-31.83	-0.16%
	India: S&P BSE Sensex	26402.96	5.25	0.02%
	Singapore: Straits Times	2729.85	-5.54	-0.20%
	France: CAC 40	4019.89	-86.84	-2.11%
	Germany: DAX	9370.96	-186.2	-1.95%
	Italy: FTSE MIB	15325.54	-398.27	-2.53%
	Spain: IBEX 35	7682	-105.7	-1.36%
	U.S. 3 Month	0.249	0/32
	U.S. 2 Year	0.594	2/32
	U.S. 5 Year	1.011	9/32
	U.S. 10 Year	1.489	21/32
	U.S. 30 Year	2.31	2 3/32
	Crude Oil	46.68	-0.96	-2.02%
	Brent Crude	48.11	-0.93	-1.90%
	Natural Gas	2.749	0.047	1.74%
	Gasoline	1.5102	-0.0236	-1.54%
	Reuters-Jefferies CRB	188.548	-0.14	-0.07%
	S&P GSCI	366.28	-2.95	-0.80%
	E-mini S&P 500	2009	-9.5	-0.47%

Here’s the news:

Markets

Sterling continues to tumble and was at a new post-vote low of $1.3194 at 6:30 a.m. ET. London's FTSE 100 was 1.3 percent lower, with bank stocks hit hardest. Europe's Stoxx 600 Index was 2.4 percent lower at 6:20 a.m. ET. S&P 500 futures were 0.9 percent lower. Asian markets, among those most insulated from any Brexit fallout, closed the overnight session 0.5 percent higher.

Political turmoil

The fallout from the U.K. vote to leave the European Union is certainly not confined to financial markets. Over the weekend, the government of Prime Minister David Cameron, who has already announced that he will resign in the coming months, appeared rudderless while Labour, the main opposition party, took the opportunity to turn on itself. Finance Minister George Osborne attempted to reassure markets this morning that the government will be able to deal with the whatever comes next, but investors do not seem to be willing to listen.

Central banks

The Bank of England's response to the Brexit vote has been to pledge an additional 250 billion pounds ($330 billion) to support the financial system while also promising that additional measures are available, which bank analysts view as an indication that a rate cut may be coming. For the governor of the bank, Mark Carney, the politics of post-Brexit Britain may mean that his position is at risk. He was accused of favoring the 'remain' side ahead of the vote by the leaders of the 'leave' campaign and may now face one of those critics as Prime Minister following David Cameron's resignation. David Blanchflower, a former BOE policy maker now at Dartmouth College in New Hampshire, told Bloomberg Television that "Carney’s position is clearly in some question.” The European Central Bank and the Federal Reserve have both said they are willing to provide liquidity should the need arise. Market implied odds of the next Fed rate move now show it most likely to hold rates unchanged until February 2017 at least.

Bonds, commodities

The world of negative-yielding sovereign bonds continues to expand as investors rush to safety, while U.K. 10-year Gilt yields dropped below 1 percent for the first time ever this morning. It is a different story in sterling-denominated corporate debt, as a market that was already under pressure from the ECB's eurobond buying program is set to take another blow from the Brexit vote.The commodity market, which was hit in the initial reaction to the referendum outcome, could prove more resilient as the U.K.'s once powerful position in everything from tea to copper has long since passed.

Spanish election

Caretaker Prime Minister Mariano Rajoy was the surprise big winner in yesterday's Spanish general election, with his People's Party winning 137 seats in the 350-strong Spanish chamber, up from 123 in December's vote. While the path to the 176-seat majority remains complicated, Rajoy has promised to deliver a government within one month. Spanish stocks and bonds are outperforming this morning. European bank stocks are still tumbling, too. Shares of RBS and Barclays were briefly halted for about five minutes in London as they plunged 10%. A gauge of European lenders headed for its biggest two-day drop ever, according to Bloomberg. Many banks may move huge numbers of workers from their UK operations to elsewhere on the continent as the City of London's role as the region's financial hub becomes uncertain. The UK's Labor Party is in crisis after Brexit. Twelve members of the shadow cabinet resigned over the weekend. But party leader Jeremy Corbyn said he would not step down despite the revolt against him. He was one of the members of Parliament who campaigned for a Remain vote in the referendum. Corbyn has since promoted several loyal supporters into key cabinet positions; some have no experience being part of the shadow cabinet. On Sunday, Corbyn fired his shadow foreign secretary Hilary Benn following reports that Benn was staging a coup against him. John Kerry heads to Europe. The US secretary of state will meet European Union foreign-policy chief Federica Mogherini in Brussels and British Foreign Minister Philip Hammond in London on Monday, a senior State Department official said. The Chinese yuan tumbled to a 6-year low against the dollar. This happened after the People's Bank of China weakened the currency's reference rate per dollar by 0.9% to 6.6375, the steepest devaluation since August. China weakened the yuan after Friday's post-Brexit foreign-exchange action that sent the dollar flying. A select group of hedge funds made some serious money on Brexit. Crispin Odey, who manages about $10.2 billion at his macro-focused firm, told Reuters on Friday that his fund would gain 15% from the Brexit outcome, regaining some of its losses this year. The NuWave Matrix Fund was up 12% on Friday, lifting it by about 10% for the year, according to chief operating officer Craig Weynand. Another macro manager, Quadratic Capital Management, posted its best returns since it launched in May 2015, according to a person with knowledge of the matter. Multiple people were stabbed in a clash between a white-supremacist group and counterprotesters in California. Authorities said at least 10 people were injured at a rally outside the California Capitol in Sacramento on Sunday. The rally was staged by the Traditionalist Worker Party, which the Southern Poverty Law Center calls a white nationalist extremist group. Matt Parrott, a party leader, said the group called the demonstration to protest against violence outside recent rallies for Donald Trump, the presumptive Republican presidential nominee. The Waldorf Astoria hotel is reportedly becoming an apartment building. Anbang Insurance Group, which bought the landmark New York hotel from Hilton in 2014, will start converting most of the 1,400 rooms to luxury condos next year, according to The Wall Street Journal. In US economic data, the goods trade balance for May crosses at 8:30 a.m. ET, Markit's flash services PMI for June at 9:45, and the Dallas Fed manufacturing index for this month at 10:30. Federal Reserve Chair Janet Yellen and Mario Draghi, the European Central Bank president, are scheduled to speak at a three-day meeting of the world's top central bankers in Portugal. The Brexit Panic The U.K.’s vote to quit the European Union threw the country’s political establishment into a tailspin, ensnaring its two main parties in leadership battles and fostering greater uncertainty over how Britain would disentangle itself from the bloc. The ruling Conservative Party is grappling with a political vacuum in Downing Street after Prime Minister David Cameron’s decision on Friday to step down in a few months. Meanwhile, senior politicians in the opposition Labour Party led an open revolt against their leader, Jeremy Corbyn, over the weekend. The Labour Party on Monday moved quickly to announce 10 new appointments to its top team after the wave of resignations over the weekend. Lawmakers from the party are due to meet later on Monday to discuss a motion of no confidence in Mr. Corbyn. Pressure abated on the U.K. to serve swift notice of its intention to leave the EU, however, as senior European policy makers suggested Britain should be allowed time to rethink the decision. The referendum result isn’t binding on the U.K. Parliament and there has been no sign in London that it would be ignored, but political analysts say a general election is possible later this year. Meanwhile, the pound resumed its plunge this morning and broader signs of panic emerged in bond and equity markets. Europe on Edge Traders, meanwhile, are turning their sights to the eurozone, betting Britain’s decision to leave the EU could put more pressure on the fault lines running through the currency union. Investors fear that a “Brexit” not only removes Europe’s second-largest economy from the bloc, but that the precedent could lead to further fragmentation and a period of investment-sapping uncertainty. Concerns are stirring again about the integrity of the euro itself and European lenders, still wounded from the eurozone debt crisis, face new risks as investors sell off bank stocks. Meanwhile, an already grim year for U.K. mergers and acquisitions and securities sales is seen as getting worse, while the market turbulence could also threaten China’s plan to stabilize the yuan, which fell to its weakest level against the U.S. dollar since late 2010 in morning trading.

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There are so many interesting things to think about and read in the aftermath of last week's U.K. referendum, it's virtually impossible to know where to begin. Here's one suggestion: The big question everyone's asking now is when and if the U.K. will formally trigger Article 50 of the EU Treaty to begin the negotiation process to leave. David Cameron declined to do it in the immediate aftermath of the vote, saying that it made more sense to leave the decision to his successor. Most people have no idea how any of the trigger process actually works, so everybody's been reading a blog called JackOfKent.com, written by David Allen Green, a writer on law and policy. Green's been examining the intricacies of Article 50, and people are so curious about it all that his website has crashed due to too much traffic. While we wait for the site to return, you can check out his latest piece on Facebook. One of the best things about the internet, and the democratization of media, is how new experts come onto people's radar in key moments and can become instant must-reads. As for markets, the uncertainty about what happens next is what makes this such a wild story. There are so many moving parts, and so few paths to clarity, it's hard to think of any obvious parallel.

 Source: Bloomberg, BI, WSJ