Thursday June 16 Daily Market Primer

US stocks fell slightly yesterday after the Fed announced its widely anticipated decision to leave rates on hold, reversing earlier gains and marking the fifth straight daily decline.  The Fed lowered its expectations for the number of short term rate increases over the next few years, but the Fed’s dot plot is still well above market implied rates.  The US 10 year dropped to 1.594% yesterday, the lowest since December 2012, and is showing 1.56% this morning.  Asian-Pacific markets apparently didn’t like the Bank of Japan’s decision to hold rates steady, as the Nikkei 225 fell 3.1% and the HK Hang Seng dropped 2.1%.  The Bank of England also announced its decision this morning to leave rates on hold, and Brexit risks continue to rise according to the latest polls.  The BOE also issued a stern warning that Brexit will harm the global economy and the Sterling.    A Bloomberg column argues that Janet Yellen is moving toward Harvard economist Larry Summer’s view of structural stagnation for the global economy (last story).

Weekly initial jobless claims rose by 13,000 to 277,000, slightly higher than the Bloomberg consensus of 270,000. US futures are pointing to another down day.

Thursday June 16	LAST	CHANGE	% CHG
DJIA	17640.17	-34.65	-0.20%
Nasdaq	4834.93	-8.62	-0.18%
S&P 500	2071.5	-3.82	-0.18%
Russell 2000	1149.3	1.48	0.13%
Global Dow	2271.83	-16.35	-0.71%
Japan: Nikkei 225	15434.14	-485.44	-3.05%
Stoxx Europe 600	320.9	-2.73	-0.84%
UK: FTSE 100	5929	-37.8	-0.63%
CBOE Volatility	21.07	0.93	4.62%
Australia: S&P/ASX 200	5146	-1.1	-0.02%
China: Shanghai Composite	2872.82	-14.39	-0.50%
Hong Kong: Hang Seng	20038.42	-429.1	-2.10%
India: S&P BSE Sensex	26525.46	-200.88	-0.75%
Japan: Nikkei 225	15434.14	-485.44	-3.05%
Singapore: Straits Times	2751.56	-22.69	-0.82%
France: CAC 40	4145.37	-26.21	-0.63%
Germany: DAX	9525.03	-81.68	-0.85%
Italy: FTSE MIB	16242.12	-271.85	-1.65%
Spain: IBEX 35	8192	-58.8	-0.71%
U.S. 3 Month	0.262	0/32
U.S. 2 Year	0.681	-1/32
U.S. 5 Year	1.071	0/32
U.S. 10 Year	1.564	2/32
U.S. 30 Year	2.393	8/32
Crude Oil	47.3	-0.71	-1.48%
Brent Crude	48.81	-0.72	-1.45%
Natural Gas	2.656	-0.021	-0.78%
E-mini S&P 500	2053.75	-9.75	-0.47%

It’s a ride sharing cage match in China, where homegrown Uber competitor Didi has raised $7.3 billion, for a $28 billion valuation from investors including Apple.  This is about ½ of Uber’s valuation of over $60 billion, but makes Didi the number 2 worldwide ride-sharing startup in terms of valuation and capital raised.  Uber,  not satisfied with the $13 billion or so it has raised so far from private investors, is tapping the leveraged loan market for another up to $2 billion http://bit.ly/UberLeverage. 

Saudi Deputy Crown Prince Mohammed bin Salman, architect of the kingdom’s diversification away from oil, is in Washington for meetings.  Shanghai Disneyland, representing a $5.5 billion investment for the Disney, is open.  It is not without competition, as there are 300 other theme parks in China.

Here’s the news:

Central banks

The Federal Reserve held rates unchanged yesterday, the Bank of Japan held rates unchanged overnight, the Swiss National Bank held rates unchanged this morning, and the Bank of England is expected to hold rates unchanged at 7:00 a.m. ET. While all of this sounds very boring, markets are moving this morning on the comments that accompanied the decisions, particularly those made by Fed chair Janet Yellen in her press conference where she suggested that interest rates may remain lower for longer. Market-implied odds of a rate hike by the Fed at its July meeting have now dropped to 5.9 percent and do not rise higher than 50 percent at all on the forecast horizon through the January 2017 meeting.  

How low can they go?

Global developed market bonds continue to rally, with Japanese and German government bond yields falling to record lows. This morning, the Swiss 30-year bond yield flirted with negative territory, while the same tenor U.S. Treasury yield fell to the lowest in 16 months. In the U.K., with the referendum on EU membership just a week away, gilt yields reached an all-time low. One of the few places where yields are rising is in the euro periphery as risks from the Brexit vote mean investors are dusting off their euro crisis playbooks.

Brexit risks

The chances of Britain voting to leave the European Union continue to rise, with another poll published this morning putting the 'leave' side well ahead. The pound continues to slide, dropping toward a two-month low this morning as the risk of a Brexit weighs ahead of the Bank of England decision. The governor of the bank, Mark Carney has written a robust defence of his comments about the impact of a decision to leave the EU on the U.K. economy following accusations that he was breaking government rules by speaking publicly on the matter. Despite the moves in the pound and the widespread commentary on the issue, some traders are not buying into the hype.

Markets slip

Yesterday's rally in Asia was undone overnight as the MSCI Asia Pacific Index dropped 1.1 percent with Japan's Topix index sinking 2.8 percent and the yen rallying through 104 to the dollar following the Bank of Japan's decision not to add new stimulus at its meeting. In Europe, the Stoxx 600 Index was 0.6 percent lower at 6:13 a.m. ET, with banks getting hit hardest and Deutsche Bank AG dropping to a record low. S&P 500 futures were 0.7 percent lower.

Coming up...

It's Thursday, so that means it is time for weekly initial jobless claims data due to be released at 8:30 a.m. ET, with expectations for 270,000 — a small increase on last week's 264,000. Also coming today is CPI for May, also at 8:30 a.m. ET. Bank of England Governor Mark Carney speaks in London at 3:00 p.m. ET.

The Bank of Japan kept policy on hold. Japan's central bank voted 7 to 2 in favor of keeping its benchmark interest rate unchanged at -0.1%. Additionally, members voted 8 to 1 in favor of expanding the monetary base at an annual pace of about 80 trillion yen. In its statement, the BOJ said: "Global financial markets have remained volatile. Therefore, due attention still needs to be paid to the risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation may be negatively affected." The Japanese yen is stronger by 1.6% at 104.28 per dollar.
The Bank of England holds. The BOE left its benchmark interest rate unchanged at a record-low 0.50% for an 87th straight month. The central bank also held its asset-purchase program at £375 billion ($530 billion). The inaction was expected with the vote on whether to leave the European Union taking place June 23. In its statement, the BOE warned that a Brexit could have a negative economic impact and put pressure on the British pound. The pound is weaker by 0.6% at 1.4118.
Leave has surged to a 6-point lead in an important Brexit survey. A new Evening Standard newspaper poll, conducted by the reputable polling firm Ipsos MORI, shows that 53% of respondents favor Leave while 47% favor Remain. This was the first time a poll conducted by Ipsos MORI poll had favored Leave.
Foreigners sold a record amount of Treasurys. Foreign investors sold $74.6 billion worth of US Treasurys in April, according to US Treasury Department data. The outflow was "the largest since the US Treasury Department started recording Treasury debt transactions in January 1978," Reuters says. China ($1.2443 trillion) and Japan ($1.143 trillion) remained the two largest holders of US Treasury debt.
Bond yields are sinking to record lows. Money is rushing into the safety of high-quality sovereign debt amid growing fears of a British exit from the European Union, or Brexit, and uncertainty in the global economy. Thursday's buying pushed 10-year yields in Australia (1.999%), Germany (-3.6 basis points), Japan (-20.9 bps), and the UK (1.09%) to all-time lows. As money moves into safer sovereign debt it's leaving peripheral Europe. Yields in Greece, Italy, Portugal, and Spain are all higher.
Gold is surging. Gold trades up 1.5% near $1,308 an ounce after reclaiming the $1,300 level for the first time since August 2014. Thursday's gains come amid growing fears of a Brexit and after the Fed held interest rates steady at Wednesday's meeting. Silver is higher by 1.2% at $17.71 an ounce.
Disneyland debuts in Shanghai. The theme park, which cost $5.5 billion and took five years to build, opened its doors on Thursday. Disney hopes it can tap into China's growing middle class, as 330 million people live within a three-hour drive or train ride from the park. The company has called this its greatest opportunity since Walt Disney purchased land in central Florida in the 1960s, Reuters says.
Taking Their Country Back
Unease about immigration has been fueling anti-European Union sentiment in the U.K. as Britons prepare to go to the polls on June 23 to vote on the country’s membership. Britons uncomfortable with a rise in immigration blame EU membership for allowing unfettered arrivals from Europe. A string of recent opinion polls suggest support has swung in favor of those campaigning to leave and, according to one survey, more than 40% of voters backing “Brexit” said immigration was the most important factor. Meanwhile, investors are fleeing banks in the U.K. and Europe as Brexit fears mount. And in a serious challenge to Prime Minister David Cameron, nearly a fifth of lawmakers in his Conservative Party, which is divided on this issue, threatened to block the government’s plans to introduce an emergency budget in which Mr. Cameron is threatening to raise taxes and cut spending if the U.K. votes to leave.

Saudi prince, US lawmakers meet on economic matters

Prince Mohammed (Fayez Nureldine/AFP/Getty Images)

Saudi Deputy Crown Prince Mohammed bin Salman has met with members of Congress to discuss economic issues as part of a weeklong visit to the US. He is leading a large delegation of Saudi officials, including energy, foreign affairs, information and trade ministers.

The Wall Street Journal (tiered subscription model) (15 Jun.) 

Chinese ride-sharing firm Didi Chuxing raises $7.3B

Didi Chuxing, China's leading ride-sharing company and Uber Technologies' top rival in the country, has raised $7.3 billion. The funding round, with participants that include Apple, values the company at almost $28 billion, sources say.

Bloomberg (15 Jun.) 

Stock markets everywhere are lower. Japan's Nikkei (-3.1%) trailed in Asia, and Germany's DAX (-0.6%) lags in Europe. S&P 500 futures are lower by 7.25 points at 2,064.50.
Earnings reports trickle out. Kroger and Rite Aid report ahead of the opening bell, while Oracle and Smith & Wesson release their quarterly results after markets close.

US economic data is heavy. Initial claims, CPI, Philly Fed, and the current account balance will be released at 8:30 a.m. ET. Then, at 10 a.m. ET, the NAHB Housing Market Index crosses the wires. Finally, natural-gas inventories are due out at 10:30 a.m. ET. The US 10-year yield is down 1bp at 1.56%.

China is now starting to dump U.S. stocks.

For one breed of Wall Street banker, business is booming again.

Shuttered Geneva offices show impact of lost banking secrecy.

Ireland and Belgium are most exposed to a Brexit vote.

Favorability of Trump lowest in Bloomberg poll history.

World's biggest science experiment seeks more time and money.

Ships have just got too big.

U.S., India, Japan Begin to Shape New Order on Asia’s High Seas

Donald Trump Takes Risks on Guns, Gays Since Orlando Shooting

Zara Owner Inditex Stays Ahead of the Competition

China’s Yuan Shudders Despite Beijing’s Campaign to Steady the Currency

New Hedge Fund Gets the Michael Milken Touch

In a sense, yesterday's Fed decision felt similar to many previous ones. There was no hike. Dots came down. Chair Yellen expressed some hope or confidence that rates were going to go up before too long but didn't commit to anything strongly. At the same time, the decision felt interesting and consequential. As Bloomberg's Rich Miller pointed out, it sounds as though Yellen is drifting towards a view espoused by the likes of Larry Summers - among others - that there's something deeper and more structural holding back the economy and keeping interest rates low. Yellen said the phrase "new normal" to describe factors that may be depressing rates long-term. Yellen's use of the phrase was the main thing that caught the attention of Tim Duy, University of Oregon professor and Bloomberg contributor. In a TV interview after the press conference, he described this as a "sea change" suggesting that the Fed is realizing that we're entering a new era of low interest rates. So while the policy moves yesterday were somewhat predictable, the intellectual evolution at the Fed is especially interesting to watch right now.

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