Wednesday June 29 Daily Market Primer

Stocks recovered in the US Tuesday and around the world for the second day on Wednesday, as markets adjust to the new reality of Brexit.  Oil moved up and US bond yields rose slightly.  The pound rose for a second day and is now 2.2% off the bottom, with a long way to go to get back to pre-Brexit values.  US equity futures are pointing to a strong opening of up .8%

ECB President Mario Draghi gave a speech to the EU leadership saying he expects Brexit to cut Eurozone growth by .5% per year for three years http://bit.ly/DraghiEuroZone.  French President Francois Hollande called for an end to clearing Euro denominated trades in the UK, which would be a blow to London and the UK economy.    UK PM David Cameron asked EU leadership for flexibility of “freedom of movement” and did not get it, and likewise did not yield to pressure to execute Article 50 of the Lisbon treaty and begin the EU withdrawal process right away.

	LAST	CHANGE	% CHG
DJIA	17409.72	269.48	1.57%
Nasdaq	4691.87	97.42	2.12%
S&P 500	2036.09	35.55	1.78%
Russell 2000	1107.3	17.65	1.62%
Global Dow	2260.54	28.91	1.30%
Japan: Nikkei 225	15566.83	243.69	1.59%
Stoxx Europe 600	323.53	6.83	2.16%
UK: FTSE 100	6271.85	131.46	2.14%
CBOE Volatility	17.65	-1.1	-5.87%
DJ Asia-Pacific TSM	1352.08	21.9	1.65%
Australia: S&P/ASX 200	5142.4	39.1	0.77%
China: Shanghai Composite	2931.59	19.03	0.65%
Hong Kong: Hang Seng	20436.12	263.66	1.31%
India: S&P BSE Sensex	26740.39	215.84	0.81%
France: CAC 40	4183.08	94.23	2.30%
Germany: DAX	9585.84	138.56	1.47%
Italy: FTSE MIB	15836.83	235.21	1.51%
Spain: IBEX 35	8057.3	222.3	2.84%
U.S. 3 Month	0.264	0/32
U.S. 2 Year	0.629	-1/32
U.S. 5 Year	1.025	-2/32
U.S. 10 Year	1.474	-2/32
U.S. 30 Year	2.265	6/32
Crude Oil	48.36	6/32	1.07%
Brent Crude	49.7	0.44	0.89%
Natural Gas	2.969	0.079	2.73%
Reuters-Jefferies CRB	192.991	1.446	0.75%
S&P GSCI	375.07	2.97	0.80%
E-mini S&P 500	2044.5	16	0.79%

Donald Trump gave a speech outlining a protectionist presidency that according to the WSJ repudiates decades of Republican trade policy http://bit.ly/TrumpsTrade.   The 800 page GOP report on Benghazi which took two years to write did not give the Trump campaign any additional ammo against Hillary Clinton, spreading the blame broadly to the CIA and the US government.   Islamic State hit Istanbul airport with a very severe terrorist attach that killed 40 and injured hundreds more, contributing to the instability of the region.  Dallas based pipeline operator Energy Transfer Equity is spiking its $33 billion takeover of Williams Companies, siting “failure of merger conditions”. 

Here’s the news:

Brexit political fallout

British Prime Minister David Cameron attended what promises to be his last meeting of the leaders of all 28 European Union member states yesterday. German Chancellor Angela Merkel said afterwards that she sees no way back from Brexit for the U.K., while French President Francois Hollande warned of the threat to London's financial market following an exit. In Britain, survey data show that economists are divided on whether the country will fall into a recession in 2016 or 2017.

Markets rally

The MSCI Asia Pacific Index advanced 1.8 percent overnight as the global stock rally continues and volatility falls. In Europe the Stoxx 600 Index was 2.1 percent higher at 5:55 a.m. ET while in London the FTSE 100 was 2.2 percent higher — in local currency. The pound climbed 0.5 percent to $1.3400. S&P futures were 0.7 percent higher.

Bond rally continues

This morning Ireland became the latest country to set a new all-time record low 10-year bond yield when it dropped to 0.613 percent. In Japan, negative yields on government bonds seem to have become self-reinforcing, which could soon see every maturity of the country's debt yielding below zero. Treasuries are heading for their biggest rally since 2011, which has economists warning that the gains can't continue into next year. There was some good news in the corporate-debt market this morning too as Molson Coors Brewing Co. is selling euro-denominated bonds, the first offering in Europe since the Brexit referendum.

Turkey attack

Islamic State is being blamed for coordinated suicide attacks at Istanbul's international airport that left at least 40 people dead — 13 of them said to be foreign nationals. Turkey’s Borsa Istanbul 100 Index was 0.2 percent lower at 6:00 a.m. ET with airline stocks hit hardest. The attacks are a further blow to President Recep Tayyip Erdogan who has moved to heal rifts with Israel and Russia in recent days in a bid to boost the economy.

Fed rate rise a long way off

'One and done' seems to be the tale of the current Fed hike cycle. Money market derivatives now point to the next rate rise not coming until Jan 31, 2018. Federal Reserve Governor Jerome Powell warned yesterday that global risks have shifted further to the downside since the U.K. voted to leave the European Union. The shift in Fed expectations can be clearly seen in the fact that money markets are now pricing in a greater chance of a cut, rather than a hike, for the rest of this year.

Target Turkey
Suicide bombers struck Turkey’s busiest airport on Tuesday, killing at least 41 people and injuring scores more in the deadliest of a string of attacks in Istanbul this year. Three bomb blasts shook the arrivals area of the international terminal at Istanbul Atatürk Airport at around 9:22 p.m. One assailant set off a bomb after being shot by police near a checkpoint just inside the terminal, and two other attackers blew themselves up outside—one near the entrance and one in a parking lot across the street, according to a Turkish official. No group had claimed responsibility hours after the attack. However, Prime Minister Binali Yildirim said initial findings of an investigation suggested Islamic State carried out the assault. Passengers and workers at the airport described the chaos after the attack.

With or Without You
British Prime Minister David Cameron began the knotty process of extricating his country from the European Union on Tuesday at his last summit with leaders of the other 27 member states, who told him there would be no special deals for ex-members. He urged the EU to be flexible on the treaty rule that grants EU citizens the right to live and work in other member countries if it wanted to maintain close economic ties with the U.K., but European leaders spurned that call—at least for now. The race to replace Mr. Cameron is under way, with the front-runners widely seen as Boris Johnson, former mayor of London, and Theresa May, the home secretary. Meanwhile, Wall Street is tallying up the winners and losers after the wild market reaction to last week’s vote. One theme has emerged early—the computers got it right and the humans got it wrong.

Trading Places
Donald Trump offered a starkly protectionist view on trade in an unusually detailed speech on Tuesday, pledging to scrap the current North American Free Trade Agreement, kill America’s involvement in the Trans-Pacific Partnership and label China a currency manipulator. The presumptive Republican nominee’s trade proposals amount to a wholesale rejection of longstanding Republican orthodoxy and leave the party with a candidate arguing against the very policies that most GOP leaders have enacted and supported. Mr. Trump’s speech put him closer ideologically to recent Democratic presidential candidates than to Republicans, and drew condemnation from both Democrats allied with Hillary Clinton and Republicans who have long sought to boost U.S. trade. Meanwhile, Mrs. Clinton promised to democratize technology, including the goal to connect every U.S. home to high-speed internet.

Britain probably won't leave the EU until 2019. Citi says Article 50 — the mechanism under the Lisbon Treaty in which a country tells the European Union it is leaving the bloc and thereby gives a two-year notice period — isn't likely to be triggered anytime soon. The bank believes the ruling Conservative Party will first find a new prime minister, and then political conferences are likely to be held before a potential general election. After all that happens, the new government could trigger Article 50 upon entering office, Citi says.
Mario Draghi says Brexit could reduce eurozone GDP. Speaking in front of EU leaders on Tuesday, European Central Bank head Mario Draghi said the British exit from the EU, or Brexit, could shave 0.3 to 0.5 percent off eurozone growth over the next three years. Reuters reports, citing an EU official, that Draghi said the slowdown in growth was likely to come from a softening in the British economy and a slump in UK trade. Additionally, Draghi reportedly told leaders lower stock prices could lead to a higher cost of capital, which could weigh on growth.
The British pound is higher. The pound continues to claw its way back after its steep slide in response to the Brexit. Sterling dropped about 11% from its high on Thursday into Monday's trade. Wednesday's 0.5% gain has the pound up to 1.3410, 2.2% off its recent low.
A huge energy deal is being terminated. Energy Transfer has terminated its $33 billion merger with Williams because of a "failure of conditions under the merger agreement." According to Bloomberg, Energy Transfer was able to back out of the deal after it was discovered that a combination wouldn't free investors from their tax liabilities. Williams shareholders approved the deal Monday and are appealing.
Nike's futures sales disappointed. The athletic-apparel giant reported adjusted earnings per share of $0.49, beating the Bloomberg consensus by a penny. Revenue rose 6% to $8.2 billion but was a bit shy of the $8.28 billion that was expected. The closely followed worldwide futures orders jumped 11%, missing the 13% increase that analysts were anticipating. Shares of Nike were down by as much as 6% in after-hours trade.
Sony cut its 2017 revenue target. The electronics company lowered its fiscal-year 2017 revenue target to a range of 1 trillion to 1.05 trillion yen ($9.76 billion to $10.25 billion) for the year starting April 2017, citing slowing global demand for smartphones. The new target is down from Sony's estimate of 1.3 trillion to 1.5 trillion yen.
Global Markets Steady After Brexit-Related Rout
Fidelity Just Made Buying an Index Fund Vanguard-Cheap
Fed "stress tests" results are coming. Last week, the first part of the Fed's stress tests were released, showing that all of the big banks met their capital requirements. At 4:30 p.m. ET, the second-round results of the tests will be released. The results will show whether the banks can proceed with their plans to return capital to shareholders through dividends or buybacks.
Global markets continue to rally. Spain's IBEX (+3%) leads the gains in Europe after Japan's Nikkei (+1.6%) paced the advance in Asia. S&P 500 futures are up 12.75 points at 2,041.25.
Earnings reports trickle out. General Mills and Monsanto report ahead of the opening bell.

US economic data picks up. Personal income and spending will be released at 8:30 a.m. ET, and pending home sales will be announced at 10 a.m. ET. Then, at 10:30 a.m. ET, US crude-oil inventories are due out. The US 10-year yield is down 1 basis point at 1.46%.

$291M flows into BlackRock's high-yield bond ETF

BlackRock's high-yield bond exchange-traded fund brought in $291 million Friday, capitalizing on investors' thirst for yield after the UK decided to leave the EU.

Bloomberg (28 Jun.) 

France's Hollande calls for London to stop euro clearing

Euro-denominated trades must no longer be cleared in London, French President Francois Hollande says. The call had been expected, given Britain's decision to leave the EU.

Bloomberg (29 Jun.),  Financial Times (tiered subscription model) (29 Jun.) 

Victims of Brexit's real-time recession already feeling the pain.

Bitter Scotland weighs its own divorce.

Benghazi report has no major revelations about Clinton's role.

European banks spend billions to get U.S. units fit for the Fed.

Hong Kong’s richest man isn’t worried about the survival of his $80 billion empire. 

Lehman Brothers said to sell one of its last property holdings.

Pro-‘Brexit’ city of Sunderland glad to poke establishment in the eye.

If there's one strategy that's worked well for U.S. investors since the financial crisis, it's "buy the dip." Every time it's appeared as though this big bull market will come to an end, stocks have ended up defying those predictions. With markets around the world plunging in the immediate aftermath of last Thursday's referendum, the question obviously arises of when the strategy will stop working. In an interview yesterday on BloombergTV, BlackRock Inc.'s head of asset allocation Russ Koesterich expressed skepticism about whether investors will continue have it so easy. He argued that "buy the dip" has worked because each time there's been a downturn, there's been a policy response from a major central bank. But that dynamic could change if people perceive central bank stimulus as losing its efficacy. "If we're going to see stocks move higher, it has to be on the basis of better fundamentals, which have to come from a better global economy," he said. Of course, there are more important things in the world than coming up with policies that make investors happy... There's the broader issue of why voters appear to be turning against consensus political and economic views. In a conversation with BloombergTV yesterday, Mohamed El-Erian, chief economic adviser at Allianz SE, said the good news is that there's a growing recognition of the need for a new "inclusive" growth model in the developed world that doesn't leave so many behind. The bad news: He doesn't see the Brexit vote as being a big enough catalyst to get the political class to try a new approach. It's going to take something more dramatic.

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