Thursday June 23 Daily Market Primer

Happy Brexit Day.  Stocks dropped in the US yesterday after bouncing around during the trading day. Its 3:00pm in the UK  and voting is underway and global stock markets are rallying in anticipation of a remain win.   Going into the referendum the polls were very close with a slight lead for remain, but the betting sites approached 75% for remain, and the markets, as I mentioned yesterday, made their bet with the pound surging against the dollar and stocks rallying.   The UK does not allow exit polls, and CNBC just said that we won’t know the outcome until about 3am Eastern Friday morning.  The US 10 year is above 1.7% as money pours out of bonds and into stocks.  Oil rose 1.5% as Saudi Arabia promised to end the glut and traders focused on Brexit.  Bitcoin, which tends to rise at times of uncertainty, is down 25% in the last few days (second to last story).  The Dow opened up 150.

	LAST	CHANGE	% CHG
DJIA	17780.83	-48.9	-0.27%
Nasdaq	4833.32	-10.44	-0.22%
S&P 500	2085.45	-3.45	-0.17%
Russell 2000	1148.97	-4.9	-0.42%
Global Dow	2366	16.96	0.72%
Japan: Nikkei 225	16238.35	172.63	1.07%
Stoxx Europe 600	345.55	4.23	1.24%
UK: FTSE 100	6324.06	62.87	1.00%
Australia: S&P/ASX 200	5280.7	9.8	0.19%
China: Shanghai Composite	2891.96	-13.59	-0.47%
Hong Kong: Hang Seng	20868.34	73.22	0.35%
India: S&P BSE Sensex	27002.22	236.57	0.88%
Japan: Nikkei 225	16238.35	172.63	1.07%
Singapore: Straits Times	2793.85	7.72	0.28%
France: CAC 40	4449.67	69.64	1.59%
Germany: DAX	10199.82	128.76	1.28%
Italy: FTSE MIB	17777.05	453.78	2.62%
Spain: IBEX 35	8848.3	146.3	1.68%
U.S. 3 Month	0.281	0/32
U.S. 2 Year	0.778	-1/32
U.S. 5 Year	1.251	-8/32
U.S. 10 Year	1.737	-14/32
U.S. 30 Year	2.548	-28/32
Crude Oil	49.87	0.74	1.51%
Brent Crude	51.35	0.75	1.48%
Natural Gas	2.704	-0.02	-0.73%
Reuters-Jefferies CRB	192.639	0.831	0.43%
S&P GSCI	379.49	2.46	0.65%
E-mini S&P 500	2093.5	16.75	0.81%

Weekly initial jobless claims are in at 259K, a little better than the expected 270K.  PMI data for Europe was weak, but is dominated by the Brexit vote.  A barrage of criticism has been launched at Elon Musk and his plan to merge Tesla and SolarCity.  SF based cloud applications developer and Twilio raised $150 million in an IPO for a valuation of over $1 billion, which gave the company Unicorn status and may help thaw the IPO market.

Here’s the news:

U.K. voting

Polls in the U.K.'s referendum on membership of the European Union opened at 2 a.m. ET and will close at 5 p.m. ET. Counting of the votes will begin soon after, with the first results expected to start to come in after 7 pm ET. While full view of the likely result will take several hours, Bloomberg will be running a live blog throughout the night to keep you posted on all the developments. 

Markets rally

The MSCI Asia Pacific Index climbed 0.8 percent overnight, led by gains in Japanese stocks, with the Topix index climbing adding 1.1 percent. In Europe, the Stoxx 600 Index was rising for the fifth day, up 1.6 percent at 5:56 a.m. ET, with all 19 industry groups in the index higher. S&P 500 futures were 1 percent higher.

PMI data

A Purchasing Managers' Index for manufacturing and services in the euro area fell to 52.8 from 53.1 in May, according to Markit Economics. The number, which missed economist estimates, was hit by French manufacturing and services PMI, both of which came in below 50. German composite PMI was at 54.1, in line with estimates, indicating that Europe's largest economy is showing little sign of weakness.

Where next for oil?

West Texas Intermediate was trading at $49.90 a barrel at 6:20 a.m. ET after a week that has seen large fluctuations in the price of the commodity. Saudi Arabia's energy minister has said that the oil glut is over which would mean price rises over the longer term, while Norway's central bank this morning back-tracked on further easing as the price slump that had hit the oil-exporting economy wanes. European banks are not so bullish on the prospects for oil, however, as they have started scaling back their exposure to the industry

Coming up...

While the biggest event in markets is going to be the results of the U.K. referendum, there is still plenty of data to look forward to ahead of that. At 8:30 a.m. ET this week's initial jobless claims number is released, with expectations for 270,000, a 7,000 drop from last week. At 9:45 Markit Economics releases its U.S. manufacturing PMI with economists predicting a small expansion to 50.9. At 10 a.m., new homes sales data should also help give an idea of the health of the broader U.S. economy.

Traders prepare for post-Brexit opportunities

Traders, hedge funds and asset managers have stockpiled cash to prepare for opportunities presented by expected volatility as results of the British referendum on EU membership are reported. Swings in the 24-hour foreign exchange market could generate hundreds of millions of dollars in profit and losses, Aite Group said.

Bloomberg (22 Jun.),  Financial Times (tiered subscription model) (23 Jun.) 

Fin-tech, banks increasingly collaborate, research shows

Banks are struggling to compete with financial-technology firms' innovations and have little to offer tech-savvy talent, while fin-tech firms are struggling to lure new customers and investors. Both sides are beginning to accept collaboration as the best way to succeed, Accenture research suggests.

Institutional Investor online (19 Jun.) 

The pound is rallying. It is up 1.35% to 1.4905 against the dollar, a level last reached in December. A vote for a Brexit, or British exit from the EU, would usher in a period of uncertainty about the future of the UK and surrounding economies. Goldman Sachs analysts said the pound could fall as much as 15% if the UK leaves. Billionaire investor George Soros, who made a fortune betting against the pound on Black Wednesday in 1992, said it could drop more than 20% to below $1.15.

Most global markets are rallying. The FTSE 100 is up 1.53% in London and is on its best five-day winning streak since 2003. Dow futures are up 174 points (1%), and S&P 500 futures are up 21 points (1.05%). The Euro Stoxx 50 is up 1.63%, while Germany's DAX is up 2.27%.

Traders are gearing up for the worst. Implied one-week volatility for the pound-dollar pair rose 48.8% on Thursday, close to an all-time high, according to Bloomberg. One firm anticipates volatility that would be worse than when the Swiss National Bank unpegged its currency from the euro in January 2015. JPMorgan booked hotel rooms near its Canary Wharf offices, while Barclays is providing sleeping bags for employees, according to Bloomberg.

House Democrats staged a sit-in to force a vote on gun-control legislation. The protest began early Wednesday, led by civil-rights icon Rep. John Lewis. At night, Speaker Paul Ryan gaveled the House back into recess amid the loud chants, and a live feed from the chamber was shut down. C-SPAN used a Periscope feed to broadcast the sit-in after its cameras and microphones were turned off. Several Republicans could be heard shouting back at Democrats who continued to chant, "No fly, no buy," and "No bill, no break."

Bernie Sanders acknowledged for the first time that he may not be the Democratic nominee. "It doesn't appear that I'm going to be the nominee, so I won't be determining the scope of the convention," he told C-SPAN. The Vermont senator lags Hillary Clinton in the delegate count needed to clinch the nomination.

Twilio priced its IPO above its previously targeted range. The cloud-communications company priced at $15 a share and is now valued at $1.23 billion, more than its most recent private valuation of about $1 billion. That's an important milestone for the dozens of privately held "unicorn" startups nervously wondering whether their valuations of at least $1 billion will translate to the public markets. Twilio will begin trading Thursday on the New York Stock Exchange with the ticker "TWLO."

Palantir is buying $225 million of stock back from employees for their silence. The secretive $20 billion data-mining startup cofounded by Peter Thiel is also extending the offer to some former employees, according to BuzzFeed. The conditions are that they renew their nondisclosure agreements, do not talk to the press, and agree to not poach Palantir employees for 12 months. If they agree to these terms, they're eligible to sell 12.5% of their equity, or $500,000 worth, of shares back to the company, whichever is lower.

Bank of America is nearing a settlement with the SEC. The Wall Street Journal reports that the bank has been in discussions with regulators about paying $400 million to $450 million to settle allegations that it flouted rules to protect client accounts. The Securities and Exchange Commission is investigating whether the bank used complex trades and loans to access billions in cash for its own uses that would otherwise have been stashed away to meet regulatory requirements.

In US economic data, initial jobless claims cross at 8:30 a.m. ET. Then, Markit's preliminary manufacturing PMI for June is released at 9:45 a.m., followed by May new-home sales at 10 a.m

The Secret People
We are the people of England; And we have not spoken yet. G. K. Chesterton’s fellow countrymen get to speak loudly and clearly today as the U.K. makes its fateful and historic decision on whether to stay in the European Union. The ramifications of today’s referendum will spill through Britain’s politics, Europe’s brittle economy and the world’s restive financial markets. A frenzy of recent polls has ping-ponged a tiny lead between the “Remain” and “Leave” camps—two points here, three points there, a point here. A final poll this morning suggests the Remain camp is set to edge it. A Remain vote would, in most respects, be a return to the status quo: Financial markets would return to focusing on the pace of interest-rate rises in the U.S., growth in China and the price of oil. Some investors, economists and analysts say an exit would take the world’s stocks, bonds and currencies—especially the British pound—on a wild ride. Follow our full coverage of tonight’s results here.

Free to Frack
A federal judge in Wyoming has blocked an Interior Department rule setting stricter standards for hydraulic fracturing on public lands, the latest blow to the Obama administration environmental agenda that has drawn wide opposition from Republicans and industry officials. U.S. District Judge Scott Skavdahl said the Interior Department lacked the authority to issue the regulation because Congress hadn’t given the agency such power. The ruling highlights the limits of presidential executive reach in an era when Congress is unwilling or unable to agree on legislation addressing the environmental impact of a boom in oil and natural gas production. Analysts say, though, that a determined White House could invoke other parts of current law to regulate fracking, such as following through on a plan to regulate methane emissions from oil and natural gas wells through the EPA.

Criminal Chemistry
A vast drug-distribution network beginning in China is feeding the deadly synthetic opioid fentanyl to the U.S., Mexico and Canada. China’s sprawling chemicals industry and spotty regulation have helped foster a booming trade in the drug, which is up to 50 times as potent as heroin but easier and cheaper to produce. Legal versions of fentanyl have been sold as painkillers or anesthetics since the 1960s. Today, illicit batches of the drug and its analogs are driving a surge in overdose deaths. The global distribution network avoids efforts to stop it by trading not only in finished fentanyl but related products subject to little or no regulation internationally. Key ingredients to make the drug are unregulated in China or by U.N. conventions that police the global drug trade.

Social Security, Medicare Face Insolvency Over 20 Years, Trustees Report

Some GOP Business Leaders Are Backing Clinton

Israel Builds Railway in Hope of Boosting Commerce With Arab Neighbors

Tesla Shares Hit Hard After Offer to Buy SolarCity

Chinese Company in Patent Dispute With Apple Barely Exists

Bank of America Nearing SEC Settlement in Client-Accounts Probe

Twilio Raises More Than Expected in IPO

The 'anti-business' president who's been good for business.

Lending to poor people didn't cause the financial crisis.

Active managers start to feel the pain.

Bill Gross jumps on the Argentina bandwagon.

Europe's loan borrowers rushed to refinance before Brexit vote. 

Inside Trump's most valuable tower: Felons, dictators and girl scouts.

Bitcoin loses 25 percent in five days.

By this point, you probably know that one of the hottest things in markets right now is "low volatility" investing. People are pouring money into ETFs that concentrate on stocks with low volatility in the hopes that they'll either perform better over time or be less susceptible to drawdowns. Bloomberg Intelligence ETF analyst Eric Balchunas had a great piece on these ETFs yesterday arguing that rather than pursuing mere "safety" a lot of these ETF buyers are essentially just jumping in on a popular trade. The low volatility craze is a subset of a larger trend of so-called "factor" or "smart beta" investing. This means that instead of pure indexing, people invest in a basket of stocks that exhibit some characteristic, like low price-to-book values, or high profitability, etc. Cliff Asness of AQR Capital Management LLC has a new paper on "factor timing," and it's a wonderful read. He takes aim at the notion that one can do well by timing the richness or cheapness of (non-value) factors. In other words, he argues that it doesn't do much good to say that "momentum" or "profitability" is an expensive factor at any given moment and trade on that characterization. It's an argument is aimed squarely at Rob Arnott, the founder and chairman of Research Affiliates, who takes a very different. The paper is highly readable, informative - and pulls no punches. If you're looking for something to do today before Brexit results start coming in, then definitely read it.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, FT, II Online