Friday July 1 Daily Market Primer

Happy Forth of July!  Did somebody say low for long?  US Treasuries jumped, driving yields to historic lows, with the US 10 year at 1.42% and the 30 year at 2.21% as the VIX continued to fall.  Stocks had another good day in the US, with the S&P and Dow both up 1.3%, and were followed up markets in Asia and Europe, as it seems like the equity market is trying to put the hit from Brexit behind it.  Oil is down slightly below $50.  US stocks have opened up about ¼%.

Things seem to be settling down in the UK political arena after a chaotic day, with Boris Johnson sidelined and five candidates in the running for PM.  Barclays and HSBC said they would stay in the UK despite the Brexit, not surprising given their British roots and the costs and uncertainties of moving major bank headquarters.

BOE Governor Mark Carney talked about additional monetary easing this summer, which may be what is fueling stock gains in Europe.  European Banking giant Deutsche Bank shares got blistered since last week on Brexit worries, the IMF calling it the riskiest financial institution in the world (ouch), and the failure of its relatively tiny US arm to pass the Fed’s stress test for the second consecutive year.  DB is the new poster child for wider Euro banking sector woes which have effected the UK and Swiss banks, and the stock is down 45% this year http://bit.ly/DBDrop.

	LAST	CHANGE	% CHG
DJIA	17929.99	235.31	1.33%
Nasdaq	4842.67	63.43	1.33%
S&P 500	2098.86	28.09	1.36%
Russell 2000	1151.92	20.31	1.79%
Global Dow	2320.79	9.28	0.40%
Japan: Nikkei 225	15682.48	106.56	0.68%
Stoxx Europe 600	331.92	2.04	0.62%
UK: FTSE 100	6554.79	50.46	0.78%
CBOE Volatility	15.3	-0.33	-2.11%
Australia: S&P/ASX 200	5246.6	13.2	0.25%
China: Shanghai Composite	2932.48	2.87	0.10%
Hong Kong: Hang Seng	20794.37	358.25	1.75%
India: S&P BSE Sensex	27144.91	145.19	0.54%
France: CAC 40	4274.87	37.39	0.88%
Germany: DAX	9769.8	89.71	0.93%
Italy: FTSE MIB	16238.95	41.17	0.25%
Spain: IBEX 35	8270.8	107.5	1.32%
U.S. 3 Month	0.264	0/32
U.S. 2 Year	0.574	0/32
U.S. 5 Year	0.972	5/32
U.S. 10 Year	1.424	14/32
U.S. 30 Year	2.215	1 17/32
Crude Oil	48.15	-0.18	-0.37%
Brent Crude	49.49	-0.22	-0.44%
Natural Gas	2.89	-0.028	-0.96%
Reuters-Jefferies CRB	192.562	-0.012	-0.01%
S&P GSCI	372.99	-1.05	-0.28%
E-mini S&P 500	2089	-1.25	-0.06%

Puerto Rico is defaulting on its municipal bonds, which was widely anticipated by the market.  Here is a quick summary:

•  Puerto Rico –defaulting today, including G/O’s
•  Obama signs oversight bill, no money just management…keys
•   No lawsuits allowed until next Feb
•   Puerto Rico G/O’s rally 2 pts on news
•   Puerto Rico Electric Power Authority did cut last minute deal, avoiding default on $415mm due today – that was a pleasant surprise for bondholders

Tesla is facing its first autopilot related death, and Apple may buy the music streaming company you’ve never heard of, Jay Z’s Tidal, to curry favor with more high profile musicians.  Tidal has about 4.5 million subscribers to Apple Music’s 15 million.

Apologies for dropping the newsletter so late this morning, and hopefully you haven’t already read all these stories, so here’s the news:

Treasury yields

Yields on U.S. 10- and 30-year Treasuries hit new historic lows this morning, as bonds across the world surged. In Europe, Spanish yields also hit a record low while Italian bonds rose. The European Central Bank is said to be looking at changing the rules of its asset-purchase program to increase the securities it's eligible to buy as rising bonds push more yields below the bank's deposit rate.

U.K. Conservative Party's leadership contest

Yesterday, U.K. politics progressed at breakneck speed with Justice Secretary Michael Gove — formerly a trusty ally to "Leave" campaign figurehead Boris Johnson — declaring his own candidacy and forcing Boris to back out of the race by noon. With all five candidates for Tory party leadership now clear, Friday looks to be calmer. All of them including the favorite, the formerly "Remain"-inclined Theresa May, have emphasized that they'll work toward an orderly divorce from the European Union, dimming financial markets' hopes that a Brexit can be averted. Sell any sterling rally because "Brexit is for real," Bank of America Corp. strategists have said, targeting a GBP/USD rate of 1.25 sooner rather than later. There's also an election to look forward to in Australia on Tuesday.

Carney signals easing

“Some monetary-policy easing will likely be needed over the summer,” Bank of England Governor Mark Carney said in a televised address Thursday, a statement that is fueling bets of a rate cut and quashing the rally in the pound. As some of his key defenders in government rule themselves out of a Tory leadership bid, he took the opportunity to rebuke those who said he'd overstepped the line in warning of economic distress ahead of the vote. “What we said in terms of the risks to the economic outlook, in terms of the risks to financial stability — does anyone in this room not think that those risks have begun to manifest?,” he asked.

Euro area unemployment falls, manufacturing rises

Unemployment in the euro area dropped to 10.1 percent, the lowest level in almost five years, with Spanish unemployment falling below 20 percent for the fist time in six years. Manufacturing PMI for the currency zone increased to 52.8 according to London-based Markit Economics. Manufacturing in the U.K. rose to 52.1, its fastest pace in five months, with all survey responses received before the U.K. vote to leave the European Union.

Markets on the rise

Global equities continue their ascent this morning as central bank easing expectations increase. The MSCI Asia Pacific Index rose 0.6 percent overnight, with Japan's Topix index gaining 0.7 percent for its biggest weekly gain since April. In Europe, the Stoxx 600 Index was 0.2 percent higher at 5:05 a.m. New York time, with London's FTSE 100 Index gaining 0.3 percent. S&P 500 futures were down 0.4 percent.

Puerto Rico is set to default. Puerto Rico is expected to miss its bond payments due on Friday. On Wednesday, the governor of the commonwealth, Alejandro García-Padilla, wrote an article for CNBC saying Puerto Rico would miss more than $1 billion in general obligation bonds. The commonwealth is estimated to have defaulted on $562 million of debt service payments since August, according to Moody's data. The default will come despite President Obama signing the Puerto Rico Oversight, Management, and Economic Stability Act, or Promesa, into law on Thursday. Promesa will help Puerto Rico restructure its $70 billion of debt.
Tesla's Autopilot system is being investigated. Federal authorities are looking into the connection between Tesla's Autopilot system and a fatal crash. Tesla has confirmed that its Autopilot system was active during a fatal crash that took place on May 7 in Williston, Florida. In an emailed statement to Business Insider, National Highway Traffic Safety Administration spokesman Bryan Thomas wrote, "NHTSA's Office of Defects Investigation will examine the design and performance of the automated driving systems in use at the time of the crash."
Phil Knight is stepping down from Nike's board. Nike cofounder and chairman of the board Phil Knight says he plans to step down at some point during 2016, the AP reports. Knight reportedly wants Nike president and CEO Mark Parker to slide into the role of chairman upon his own departure. Knight has been a director for Nike since 1968, the AP says.
Apple is reportedly in talks to buy Tidal. People familiar with the matter told The Wall Street Journal that Apple is in talks to buy rap mogul Jay Z's music-streaming service. The amount of money was not revealed. An acquisition would help Apple further penetrate the music-streaming business, as Tidal has a catalog of 40 million songs and a subscription base of 4.2 million users, according to The Journal. Jay Z purchased Tidal back in March 2015 for $56 million.
China's manufacturing sector is contracting. China's Caixin manufacturing PMI fell to 48.6 in June, down from 49.2 in May. The decline pushed China's manufacturing sector further into contraction and made for the weakest reading since January. Additionally, China's manufacturing PMI slipped to 50.0 from 50.1, suggesting the sector is neither expanding nor contracting. Notably, China's yuan settled down 0.2% at 6.6603 and is near its weakest level since 2010.
Japan's deflation is intensifying. Consumer prices in Japan fell 0.4% in May, a bit faster than the 0.3% decline experienced in April. The May reading was the third straight monthly decline, and it marked the biggest single-day drop since May 2013. Additionally, prices in Tokyo fell 0.5%, matching the previous month's decline. The inability to lift pricing pressure has many expecting that the Bank of Japan will increase its already massive stimulus program at its next meeting on July 16. The Japanese yen is stronger by 0.5% at 102.69 per dollar.
2 of the UK's biggest banks say they will stay in the UK despite Brexit. HSBC and Barclays say they will keep their headquarters in the UK despite the outcome of Brexit vote. The Financial Times reports that HSBC chairman Doug Flint told attendees at an event on Thursday that moving the company's headquarters wasn't subject to a review. Likewise, Barclays CEO Jes Staley told the BBC that Barclays would stay "anchored in Great Britain."
Apple is reportedly in talks to buy Tidal. People familiar with the matter told The Wall Street Journal that Apple is in talks to buy rap mogul Jay Z's music-streaming service. The amount of money was not revealed. An acquisition would help Apple further penetrate the music-streaming business, as Tidal has a catalog of 40 million songs and a subscription base of 4.2 million users, according to The Journal. Jay Z purchased Tidal back in March 2015 for $56 million.

Sweet Happenings
Mondelez made a roughly $23 billion bid for Hershey, but the snack giant’s effort to create the world’s largest candy maker at a time when both companies’ sales are under pressure was promptly rebuffed on Thursday. Still, Hershey shares surged 17% on news of the offer and remained elevated even after the company rejected the bid, indicating investors believe Mondelez won’t be discouraged. But a takeover of Hershey would face obstacles. Any deal would require the approval of the Hershey Trust, which holds 81% of the company’s voting power and has a history of vetoing deals. A shake-up in the trust’s board, a need for diversification and a state investigation could change things. Meanwhile, some analysts espouse a theory that Mondelez’s bid was a defensive move, designed to fend off a bidder of its own.

Shakespearean Drama
The British political drama turned ally against ally on Thursday. In a tumultuous turnabout, U.K. Justice Secretary Michael Gove threw his hat in the ring to become the country’s next prime minister, blindsiding former London mayor Boris Johnson, who announced he won't be running. The move throws into question the political future of Mr. Johnson, the figurehead of the Brexit campaign. Home Secretary Theresa May, who had backed staying in the European Union, also entered the fray to succeed Prime Minister David Cameron and is considered a front-runner now, along with Mr. Gove. While markets have largely recovered their losses since last week’s vote, the pound is still well below its previous levels. Bank of England chief Mark Carney warned the economy would soon feel the strain and said that further interest-rate cuts will be needed. Meanwhile, following the U.K.’s vote to leave the EU, London’s position as the continent’s premier financial center is under threat, and officials in Paris, Frankfurt and Dublin aren’t wasting time in trying to hasten its downturn.
Stock markets around the world are mostly higher. Japan's Nikkei (+0.7%) led the advance in Asia and Britain's FTSE (+0.3%) paces the gains in Europe. S&P 500 futures are down 5.25 points at 2,085.00.

US economic data flows. Markit US manufacturing PMI will be released at 9:45 a.m. ET, while both ISM manufacturing and construction spending will cross the wires at 10 a.m. ET. US auto sales will be released throughout the day.

Regulators open investigation into fatal crash in Tesla involving autopilot.

Hedge funds set for worst first half since 2011.

Brexit forces stretched central banks to do more with less.

Spain has 5 million unemployed and is running out of workers.

Venezuela mess prods China to reassess Africa lending spree.

Libor conspicuously stable as Brexit roils global markets.

ECB research says euro area output gap is 6 percent.

Donald Trump Faces Rocky Terrain in Colorado

Woes Confound Rio in Run-Up to Olympic Games

Istanbul Airport Bombers Were From the Former Soviet Union, Turkey Says

Deutsche Bank Shares Hit Over 30-Year Low After Fed, IMF Rebuke

Tidjane Thiam’s One-Year Anniversary Gift at Credit Suisse: Brexit Upheaval

It looks like the world might get a break from the non-stop Brexit talk today. At the time of writing there have been no new dramatic plot developments in U.K. politics. So instead let's talk about the U.S. economy, which really hasn't been that bad. The Atlanta Fed's GDPNow forecast shows growth tracking at 2.7 percent. Yesterday's initial jobless claims report came in below 270,000 for the week, which is rock solid. And the Chicago Purchasing Manager's Index surged in June, from 49.3 to 56.8. Today we get a bunch of data: Markit U.S. PMI, ISM Manufacturing, Construction Spending, and Vehicle Sales. And then of course next Friday we get the big one, the June jobs report. Thanks to Brexit and the May jobs report, the markets are pricing the next Fed hike far out into the distance. But if you clear away the smoke, it may turn out that the actual conditions on the ground aren't that bad.

Source: Bloomberg, BI, WSJ,