Tuesday June 28 Daily Market Primer

US stocks sank yesterday in the second day of the post Brexit market recalibration, but mostly rebounded overseas on Tuesday morning.  The VIX dropped 8%, a welcome sign of near term volatility calming down.  The pound and oil are rebounding along with stocks.

	LAST	CHANGE	% CHG
DJIA	17140.24	-260.51	-1.50%
Nasdaq	4594.44	-113.54	-2.41%
S&P 500	2000.54	-36.87	-1.81%
Russell 2000	1089.65	-37.89	-3.36%
Global Dow	2217.66	19.75	0.90%
Japan: Nikkei 225	15323.14	13.93	0.09%
Stoxx Europe 600	316.99	8.24	2.67%
UK: FTSE 100	6130.31	148.11	2.48%
Australia: S&P/ASX 200	5103.3	-33.9	-0.66%
China: Shanghai Composite	2912.56	16.85	0.58%
Hong Kong: Hang Seng	20172.46	-54.84	-0.27%
India: S&P BSE Sensex	26524.55	121.59	0.46%
Japan: Nikkei 225	15323.14	13.93	0.09%
Singapore: Straits Times	2756.53	26.68	0.98%
CBOE Volatility	21.9	-1.95	-8.18%
France: CAC 40	4093.84	109.12	2.74%
Germany: DAX	9476.18	207.52	2.24%
Italy: FTSE MIB	15662.06	558.48	3.70%
Spain: IBEX 35	7864.3	218.8	2.86%
Euro (EUR/USD)	1.1073	0.0046
Yen (USD/JPY)	102.41	0.41
Pound (GBP/USD)	1.3383	0.0158
Australia $ (AUD/USD)	0.7391	0.0058
Swiss Franc (USD/CHF)	0.9796	0.0011
WSJ Dollar Index	87.08	-0.4
U.S. 3 Month	0.266	0/32
U.S. 2 Year	0.637	=-2/32
U.S. 5 Year	1.025	=-6/32
U.S. 10 Year	1.478	-13/32
U.S. 30 Year	2.293	-20/32
Germany 2 Year	-0.639	-1/32
Germany 10 Year	-0.092	-6/32
Crude Oil	47.53	1.2	2.59%
Brent Crude	49	1.23	2.57%
Natural Gas	2.823	0.079	2.88%
Reuters-Jefferies CRB	190.699	3.131	1.67%
S&P GSCI	371.38	7.31	2.01%
E-mini S&P 500	2005	20	1.01%

European Union leaders including UK PM David Cameron and Independence Party leader Nigel Farage met in Brussels in the first preliminary Brexit talks, where the mood was tense, Farage was booed by EU leaders, and Angela Merkel took a harder stance on negotiations.  EU President Jean-Claude Juncker  is catching some of the blame for Brexit and is facing pressure to step down.  S&P and Fitch both lowered the UK’s credit rating from AAA to AA (S&P) and AA+ to AA (Fitch).  This follows Moody’s putting UK debit on credit watch on Friday.   

VW reached a record $15 billion settlement on emissions cheating in the US.  Google, after buying Motorola Mobility in August 2011 for $12.5 billion and selling in it January 2014 to Lenovo for $2.9 billion, is reportedly working on a smart phone.  Go figure.

Here’s the news:

Markets, pound rise

After taking a pounding over the last two trading sessions, global markets and sterling are recovering somewhat this morning. Overnight, the MSCI Asia Pacific Index was little changed, having traded 1.2 percent lower earlier in the session. Japan's Topix index closed 0.1 percent lower with optimism over further stimulus increasing following a report in the Nikkei newspaper that the chairman of Prime Minister Abe's party proposed a 20 trillion yen package. In Europe, the Stoxx 600 Index had rallied 2.5 percent by 5:40 a.m. ET while the FTSE 100 was 2.3 percent higher. The pound also rose, gaining 1 percent to trade at $1.3350 at 6:00 a.m. ET as the record selloff following the U.K. referendum abates. S&P 500 futures were 0.7 percent higher. 

Brexit fallout

Away from today's market bounce, the fallout from the Brexit referendum continues. U.K. Prime Minister David Cameron, who has already announced his intention to resign, is due to attend a dinner with his fellow EU leaders this evening with questions over the timing of the invoking of Article 50 of the Lisbon Treaty remaining unanswered. This morning, in a speech to the German parliament, Chancellor Angela Merkel warned that there could be no "cherry-picking" by the U.K. in negotiations over the country's future relationship with the EU. Ratings agencies have also responded to the vote, with both S&P Global Ratings and Fitch Ratings downgrading the U.K. yesterday.

Draghi calls for coordination

European Central Bank President Mario Draghi has called for greater alignment of policies to address the root causes of the challenges facing the world's economies in a speech this morning that made no mention of the U.K. vote. At his introduction to the annual ECB economic forum in Portugal yesterday he said that "sadness" best described feelings over the referendum result. Federal Reserve Chair Janet Yellen, who was scheduled to attend the forum, pulled out yesterday without explanation. 

China

The Shanghai Stock Exchange is no longer top-dog in Chinese equities as Shenzhen's Small and Medium Enterprise Board is now leading it on turnover. Worryingly, the change of fortune has been mostly driven by a huge drop in volumes on the Shanghai exchange, rather than any massive increase in Shenzhen turnover. For the moment, Chinese authorities are probably more concerned about the unraveling of their yuan policy in the aftermath of the Brexit vote, with the currency slumping 1.2 percent to a five-year low versus the dollar and rallying 2.4 percent against the euro since last week's vote. Analysts at Goldman Sachs Group Inc., meanwhile, are looking at the domestic bond market for clues as to the strength of the Chinese economy.

U.S. politics gets a turn in the spotlight

Presumptive Democratic Presidential nominee Hillary Clinton may face a test today as the House Benghazi panel is set to unveil its long-awaited report later. CNN is reporting that the panel will say that she should have realized the risks involved in the mission. Polls are showing Clinton maintaining a strong lead over Republican Donald Trump ahead of the report release.

European stocks are roaring back. Stock markets across Europe are higher by more than 2%, led by a 3% gain in Spain's IBEX. Overnight, China's Shanghai Composite (+0.6%) led and Australia's ASX (-0.7%) lagged. S&P 500 futures are higher by 21.75 points at 2,006.75.
The pound is seeing a bounce. The British pound is higher by 0.8% at 1.3330 as trade repairs some of the damage caused by Thursday's Brexit decision. Over the past few sessions the currency had tumbled about 11% from its Thursday high near 1.5000.
The UK was hit with 2 downgrades S&P cut the UK's "AAA" rating to "AA," and Fitch lowered its "AA+" rating to "AA." Both rating agencies assigned a negative outlook. According to a statement released by S&P, the British vote to leave the European Union "is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the UK."
George Soros shorted Deutsche Bank. A German regulatory filing shows that Soros Fund Management sold roughly 7 million shares of Deutsche Bank stock after the Brexit was announced Friday, Bloomberg reports. The filing showed the short position amounted to 0.51% of Deutsche Bank shares but didn't have an entry price. Soros became a hedge fund legend after shorting the British pound on Black Wednesday in 1992.
Volkswagen's emissions-scandal settlement is coming. A source told Reuters the settlement was expected to total almost $15 billion. The breakdown includes about $10 billion for buybacks of polluting vehicles and about $5 billion to offset diesel emissions. An announcement is expected Tuesday.
Google is reportedly working on a smartphone. The search giant has licenses with a handful of companies including LG and Huawei but is building its own smartphone, according to The Telegraph. The report says the phones are expected to be released by the end of the year.
Lyft has hired an investment bank. The ride-hailing app has hired the investment bank Qatalyst Partners, The Wall Street Journal reports, citing people familiar with the matter. The hiring has led to some speculation the firm is looking into a sale. In its latest round of funding, which took place in January, Lyft was valued at $5.5 billion.
Pfizer is investing in China. The pharmaceutical giant is planning a $350 million biotech center in China. Reuters says the facility will be built in Hangzhou and will mark the presence of Pfizer's first biotech center in Asia. Completion is scheduled for 2018.
Money Talks
Britain’s vote to leave the European Union has set off a fresh round of currency pressures in the world’s largest economies, further complicating efforts by central banks to spur growth. The pound hit a three-decade low on Monday, and both Standard & Poor’s and Fitch Ratings cut their ratings on the U.K. and yet government bonds continued to make gains. Meanwhile, the Japanese yen, Swiss franc and U.S. dollar posted further gains, while China’s yuan dropped. The banking bloodbath continued and losses deepened in equity markets, wiping out $3 trillion from global stocks in two days. British Prime Minister David Cameron, in his first address to Parliament since announcing his intention to resign, said the government would begin implementing the decision to leave the EU, but EU leaders remain split over future reforms and how the bloc should approach U.K. exit talks. Meanwhile, U.K. Treasury chief George Osborne, once seen as a possible successor to Mr. Cameron, ruled himself out of the race to succeed him as prime minister, saying he will instead focus on the task of stabilizing the British economy following the vote to leave the EU.
The Court Rules
The Supreme Court closed its term Monday with a sweeping affirmation of abortion rights, striking down parts of a Texas law that had caused clinics to close and dimming the hopes of antiabortion forces for a wave of similar measures in other states. By a 5-3 vote, the court found Texas placed an “undue burden” on women seeking abortions by requiring that clinics meet the standards of ambulatory surgery centers, and that their physicians maintain admitting privileges at a hospital within 30 miles. There were 19 facilities offering abortion services in Texas as of February 2016, state records show, down from 39 four years earlier. It is unclear how many of the closed facilities will reopen. Also yesterday, the Supreme Court declined to loosen restrictions that prevent individuals convicted of misdemeanor counts of domestic violence from owning a gun.
Earnings reports trickle out. Carnival reports ahead of the opening bell, and Nike releases its quarterly results after markets close.

US economic data flows. GDP — Third Estimate will be released at 8:30 a.m. ET before Case-Shiller 20-city Index and consumer confidence are due out at 9 a.m. ET and 10 a.m. ET, respectively. The US 10-year yield is up 4 basis points at 1.48%.

Hoarding cash in vaults is now a pretty appealing option.

World's top fortunes have fallen $196.2 billion since Brexit bombshell.

Get ready to see this globalization 'elephant chart' over and over again.

The merging worlds of technology and cars.

Poll Finds Opening for Third-Party Candidates as Clinton, Trump Remain Unpopular

Turkey Expresses Regret Over Downing of Russian Plane

Spanish Prime Minister Works to Form Coalition Government

Brexit Aftermath: First Thing We Do, Hire All the Lawyers

What caused the U.K. to vote for Brexit? Everyone has their theories. Many are pointing to the rage of the developed world's middle class, which has seen incomes stagnate in recent decades. Meanwhile, Tyler Cowen, who writes the blog Marginal Revolution, argues that this was mostly about preserving English culture. While James Galbraith, who worked with the Syriza government in Greece, says that when Europe crushed the Greek government last summer that "laid the groundwork" for Brexit. David Beckworth, a professor at Western Kentucky University and a scholar at the Cato Institute, blamed overly tight monetary policy, for creating the economic conditions that led to the vote out. He's particularly critical of the European Central Bank (for slowing the economy of the U.K.'s largest trading partner) but also the framework that all central banks are operating under right now that he says is keeping inflation too low. Beckworth also warned that Brexit represents the biggest monetary shock since 2008. He's written about this on his blog, and the basic idea is that the post-Brexit dollar surge represents a major financial tightening not just in the U.S. but in every part of the world that either is pegged to the dollar or funds itself in dollars. He writes ominously that: "the strong dollar noose that has been choking emerging economies since mid-2014 has now been complemented by the opening of [the] trap door on the gallows via Brexit. This makes the strangulation of global economy complete."

Source: Bloomberg, BI, WSJ