Wednesday June 15 Daily Market Primer

US stocks fell for a fourth day, led by financials.  The S&P 500 has retreated from near record levels at the beginning of last week on falling sovereign bond yields, increasing Brexit risk, and concern over central bank action.  European stocks have been hit harder by Brexit, with the Stoxx Europe 600 down 7.4%over the last five trading sessions, but it broke the streak on Wednesday and rose 1.3%.  Overnight, equities were positive in Asia and Europe as investors focused on today’s Fed meeting (first story), where rates are widely expected to be maintained, and UK unemployment unexpectedly dropped. Fed fund futures indicate only a 4% chance of an increase today.  US futures are pointing…up, but just barely.  

	LAST	CHANGE	% CHG
DJIA	17674.82	-57.66	-0.33%
Nasdaq	4843.55	-4.89	-0.10%
S&P 500	2075.32	-3.74	-0.18%
Russell 2000	1147.82	-2.88	-0.25%
CBOE Volatility	19.9	-0.6	-2.93%
Australia: S&P/ASX 200	5147.1	-56.2	-1.08%
China: Shanghai Composite	2887.21	45.02	1.58%
Hong Kong: Hang Seng	20467.52	79.99	0.39%
India: S&P BSE Sensex	26726.34	330.63	1.25%
Japan: Nikkei 225	15919.58	60.58	0.38%
Singapore: Straits Times	2774.25	5.92	0.21%
France: CAC 40	4187.27	56.94	1.38%
Germany: DAX	9626.61	107.41	1.13%
Italy: FTSE MIB	16516.09	244.74	1.50%
Spain: IBEX 35	8269.3	142.6	1.75%
U.S. 3 Month	0.277	0/32
U.S. 2 Year	0.730	-0/32
U.S. 5 Year	1.143	-0/32
U.S. 10 Year	1.617	-1/32
U.S. 30 Year	2.42	3/32
Crude Oil	47.81	-0.68	-1.40%
Brent Crude	50.52	-0.83	-1.62%
Natural Gas	2.624	0.02	0.77
E-mini S&P 500	2069.25	3.25	0.16%

Global index provider MSCI did not add Chinese A shares to their emerging markets indices, as expected by many, citing transparency issues in China, but they did add Pakistan.  Chinese stock markets closed up anyway.  California passed France to become the world’s sixth largest economy, according to the Bureau of Economic Analysis.  DoubleLine chief Jeff Grundlach spoke to the CFA Society of Los Angeles and repeated his call for Trump to win the election and predicted volatile markets this summer.  Yields on the 10 year German government bund went negative yesterday.  Pollsters are ramping up ahead of the conventions this summer, and Hillary Clinton has a 12 point lead according to the latest Bloomberg poll.

And, if you’re not getting enough messaging with Facebook Messenger, WhatsApp, Viber, Hangouts, Line, Snapchat, and WeChat, Apple is beefing up its iMessage app to compete (Message Sent story).

Here’s the news:

Fed meeting

A busy two days for central bank decisions kicks off today with the Federal Reserve set to announce its monetary policy decision at 2 p.m. ET, followed by a press conference with Chair Janet Yellen. All of the 106 economists surveyed by Bloomberg expect no change in interest rates at the meeting while market probabilities of a hike remain at zero percent. The press conference will be watched closely for any guidance on the pace and timing of future rate hikes. Coming overnight is the Bank of Japan, where there are some expectations for further easing. Tomorrow the Bank of England announces its latest decision, with the minutes the last chance for policy makers to outline their Brexit concerns ahead of next week's vote.

Brexit focus

The improving 'leave' polling has U.K. Chancellor of the Exchequer George Osborne set to warn that a vote to exit the European Union could spark a fiscal crisis. Currency traders have doubled their wagers on the pound returning to levels not seen since the 1980s to $35 billion. There was some good news for the U.K. economy this morning as the unemployment rate unexpectedly fell to 5 percent, and pay growth picked up. The pound advanced after that data and was trading at $1.4202 at 6:10 a.m. ET. 

MSCI say 'not yet' to China

Chinese domestic shares were not included in MSCI Inc.’s benchmark indexes for a third time, with the company saying policy makers need to do more to improve accessibility to the A share market before those equities can be added to global indexes. Despite the news, the Shanghai Composite Index closed up 1.6 percent amid suspected intervention. There was better news from MSCI for Pakistani markets, already Asia's best performing this year, after shares listed there were added to the company's emerging-markets index. The Karachi Stock Exchange KSE100 Index rose 2.7 percent, closing at a record high, after the announcement.

Markets recover

The MSCI Asia Pacific Index rose 0.1 percent overnight, ending a slump that had seen a 4.4 percent decline over the previous four sessions. In Europe, the Stoxx 600 Index was 1.5 percent higher at 6:08 a.m. ET, with the gains led by miners as metal prices staged a recovery. S&P 500 futures were 0.2 percent lower ahead of the Fed decision.

Clinton's 12-point poll lead

Presumptive Democratic nominee Hillary Clinton has opened a 12-point lead over Republican Donald Trump in a national poll conducted by Bloomberg Politics. Clinton held talks with Bernie Sanders over the Vermont senator leaving the race for the Democratic nomination, with a statement from Sanders saying they discussed common goals and the “dangerous threat that Donald Trump poses to our nation.” Trump held a meeting in New York with GOP governors that "went very well."

Wednesday's a Fed day. Markets see a zero percent chance of a Federal Reserve interest-rate hike as a result of the disappointing May jobs report and the coming British referendum on staying in the European Union. Traders will be paying careful attention to the Fed's statement but will also take a close look at the dot plot and Federal Open Market Committee projections, which are all due out at 2 p.m. ET. Fed Chair Janet Yellen's news conference will begin at 2:30 p.m. ET.
New loans in China surged. Chinese banks lent out 985.5 billion yuan ($149.56 billion) worth of new loans in May, outpacing the 750 billion yuan that was expected. The big number comes as Beijing tries to remain accommodative amid the continued slowdown of the Chinese economy. "Bank lending beat expectations, but the drop in total social financing shows regulators are trying to push for deleveraging," Nie Wen, an economist at Hwabao Trust in Shanghai, told Reuters.
MSCI won't include China's A shares in its Emerging Markets Index. The index includes stocks from emerging markets around the world that are deemed stable enough for investors, and China believed its inclusion was a near certainty. Remy Briand, global head of research at MSCI, however, said China had made progress in "addressing the remaining accessibility issues" but still had work to do. China's A shares will have another chance at inclusion in 2017.
UK unemployment fell to an almost 11-year low. According to Office for National Statistics data, the UK's unemployment rate fell to 5% in April, its lowest level in more than 10 years. Additionally, the percentage of employed people climbed to 74.2%, matching the highest reading since record keeping began in 1971. And the good news didn't stop there, with wages climbing 2.3%, beating out the 2.0% gain that was expected. The British pound is higher by 0.6% at 1.4195.
California is the 6th-largest economy in the world. California's economy expanded at a 5.7% year-over-year rate in 2015, trailing only Oregon (5.9%) as the fastest-growing state. According to The Sacramento Bee, citing Bureau of Economic Analysis data, California's economic output totaled $2.46 trillion. California's 2016 growth moved it ahead of both France and Brazil, making it the world's sixth-largest economy.
Jeff Gundlach says we're in for a rocky summer. After Tuesday's closing bell, bond guru Jeff Gundlach gave his latest presentation on markets and the economy. Gundlach said that negative interest rates were having the opposite effect of what's intended and that interest rates would remain low. Gundlach also believes a summer sell-off is coming and Donald Trump could win the election.
Morgan Stanley has a new revenue target for its FICC unit. Speaking at Morgan Stanley's US Financials Conference in New York, CEO James Gorman said his firm was hoping to bring in $1 billion of revenue per quarter from its fixed income, currencies, and commodities trading unit, Reuters reports. Gorman said the unit was seeing growing revenue from its bond-trading business despite reducing the headcount by about 25% last year.
Playing Defense
President Barack Obama and House Speaker Paul Ryan, the nation’s leading Democratic and Republican elected officials, rebuked presumptive GOP nominee Donald Trump on Tuesday over his response to this weekend’s Orlando massacre, rejecting his call to temporarily ban Muslims from entering the U.S. The swift, bipartisan criticism illustrates the steep challenges ahead for the political newcomer as he enters the general-election phase of the presidential race. Meanwhile, investigators are scrutinizing the wife of Omar Mateen, the Orlando gunman, to determine how much she may have known about his plans for Sunday’s shooting. Investigators are also trying to determine if the gunman did, as some witnesses have claimed, use a gay dating app or have prior relationships with gay men that might have been part of his motivation for carrying out the massacre at the nightclub.
Bracing for the Exit
Yields on Germany’s 10-year government debt sank below zero Tuesday for the first time ever, a potent financial marker of Europe’s acute economic and political instability. Bond yields in Europe have been sliding for a year, weighed down by aggressive central-bank bond buying, negative short-term rates and skepticism about an economic recovery that seems persistently to falter. The catalyst for Tuesday’s drop appeared to be a mounting concern among investors that Britain might leave the European Union. Some analysts believe that bund yields could go even lower if there is more uncertainty ahead of the “Brexit” vote. Meanwhile, the drop is one of several reasons why the U.S. Fed is unlikely to announce a rate increase today. I invite you to watch Fed Chairwoman Janet Yellen’s press conference live at 2:30 p.m. ET at WSJ.com.
Strained Relations
Wal-Mart and P&G’s $10 billion alliance is under strain. The world’s largest retailer and the world’s biggest consumer-goods company are increasingly butting heads as both try to wring more revenue out of their slow-growing businesses. Their efforts, which at times have come at the expense of the other, risk harming a partnership that has been a foundation of the companies. Last year alone, P&G sold roughly $10 billion worth of goods through the retailer. Wal-Mart is spending billions on e-commerce and higher store employee wages, and pressuring suppliers to reduce the price of best sellers as it tries to keep pace with Amazon and a slate of discount chains. P&G, conversely, wants the retailer to accelerate sales of its products and preserve higher prices on some items
Message Sent
After falling behind Facebook Messenger and WhatsApp, Apple has become laser-focused on improving Messages. The changes go deeper than just emoji and sticker fun, writes our Personal Technology columnist Joanna Stern. Messaging apps have emerged as the darling of the technology world because they’re becoming the glue that connects us to the most important people and services in our lives, much like an operating system. When iOS 10 comes this fall to iPhones and iPads, you’ll be able to enhance your private messages with stickers, make emojis bigger and even use apps such as DoorDash to order lunch with friends, without ever leaving the chat. Meanwhile, Siri is growing up, and moving to the center of Apple’s universe, writes columnist Geoffrey A. Fowler.
Stock markets everywhere are higher. Spain's IBEX (+2.0%) leads in Europe after China's Shanghai Composite (+1.6%) paced the advance in Asia. S&P 500 futures are up 4.75 points at 2,079.25.
Earnings reports trickle out. Ctrip and Jabil Circuit will report after markets close.

US economic data is heavy. PPI and Empire manufacturing will cross the wires at 8:30 a.m ET. Then industrial production and capacity utilization will be released at 9:15 a.m. ET before crude-oil inventories are announced at 10:30 a.m. ET. Last but not least, net long-term TIC flows are due out at 4 p.m. ET. The US 10-year yield is up 2 basis points at 1.63%.

Lawmaker takes issue with White's SEC leadership

Warren (Astrid Riecken/Getty Images)

US Sen. Elizabeth Warren has criticized the record of Mary Jo White, head of the Securities and Exchange Commission. "A year ago, I called your leadership at the SEC extremely disappointing," Warren told White at a hearing of the Senate banking committee. "Today, I am more disappointed than ever."

The Wall Street Journal (tiered subscription model) (14 Jun.) 

Will the U.K. vote against Europe? Markets say no.

Machines beat humans: Hedge fund edition.

Kirchner official caught burying millions outside convent.

Putin's once-mighty bank for pet projects is now on chopping block.

India's space program takes on Elon Musk.

The yield curve should be flatter, according to BNP Paribas.

Retail Strength Gives Fed Some Clarity on Growth Outlook

DNC Says Computers Breached by Russian Government-Linked Hackers

Asean Members Walk Back Statement on South China Sea

Upstart IEX Poised for Approval as New Stock Exchange

FCC’s Net-Neutrality Rules Upheld by Appeals Court

Sumner Redstone Makes Rare Appearances at CBS, Paramount

Brexit continues to be the number one story driving markets right now. For proof, just pull up a chart of GBPCHF and S&P 500 futures, and you'll see the two moving in lockstep since late last week. Nonetheless, today is Fed day, so for the moment that's the big story. There will obviously be a ton to look for when the decision is made, so there's no reason to reiterate it all here. But one thing worth emphasizing is the 'dot plot' of where participants see Fed policy going this year and beyond. In their preview of today's decision, Bloomberg Intelligence Economists Carl Riccadonna and Yelena Shulyatheva offer some advice as to what to look for in the dots department: "There were seven participants projecting three or four rate increases before year-end at the time of the last update in March, but this seems impractical with only four meetings remaining after June. At least some of these dots are likely to retreat to the two-hike camp. The number of dots falling into the one-hike camp will provide a compelling signal on the degree to which policy makers are holding onto the notion of a mid-year move. If the clustering remains tight around two hikes, the probability of a July hike will increase considerably."

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