Saturday, June 25, 2016

Today's Headlines

  • Watershed Vote Ruins S&P 500 Week. After futures plunged more than 5 percent in the darkest hours of Brexit drama early Friday, the S&P 500 Index reverted, erasing nearly half of its losses by the time exchanges opened. Because it rallied 2 percent in the four days leading into the vote, the index finished the week down just 1.6 percent, compared with losses double those in other developed-world markets. The pound fell the most on record, Japanese stocks lost the most since 2011 and the Euro Stoxx 50 Index tumbled the most since at least 1987. In the U.S., Treasuries rallied, sending yields on the benchmark 10-year down the most in more than seven years. Still, even after a drop of 3.6 percent on Friday, the S&P 500 stayed near the roughly 80-point range between 2,040 and 2,120, in which it has been locked since late March. It closed Friday at 2,037.3. 
  • Spanish Bonds Set for Volatility With Repeat Election Looming. Spanish government bonds may see more volatility next week after voters go to the polls Sunday to try to break a six-month political deadlock over who will govern the euro region’s fourth-largest economy. The nation’s securities plunged on Friday, with the 10-year yield jumping the most this year, after Britain voted to quit the European Union. Riskier assets suffered as the decision threw uncertainty onto the political future of Europe, bolstering speculation other nations will move to hold similar referendums. “Brexit basically exacerbates all political risk within Europe,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London. “The protest vote just got more momentum, and we think there will be more inclination to vote against the established parties in the near term. This should be a boon for Podemos, and we would approach the weekend with caution. ”Spain’s 10-year bond yield jumped 17 basis points, or 0.17 percentage point, to 1.63 percent as of the 5 p.m. London close.
  • U.K. Must Leave EU as Soon as Possible, EU Foreign Ministers Say. The European Union’s founding members increased pressure on the U.K. to leave the bloc as soon as possible following this week’s stunning referendum as Scotland accelerated plans to take another run at independence. Six EU foreign ministers said in Berlin that the bloc needs to move on and avoid a political vacuum. While EU Commission President Jean-Claude Juncker said he doesn’t expect “an amicable divorce,” German Chancellor Angela Merkel repeated her desire today to avoid “ugly negotiations.”
  • Scotland Starts Toward Independence Vote to Keep EU Ties. Scottish First Minister Nicola Sturgeon said her government started work on legislation for a new referendum on independence after the U.K. as a whole decided to quit the European Union while Scotland voted to remain. Speaking after an emergency meeting of her cabinet in Edinburgh on Saturday, Sturgeon said she will also be seeking talks with European leaders and the institutions of the EU about ways of continuing Scotland’s relationship with the bloc. The semi-autonomous government will appoint a panel of advisers in coming weeks and convene a meeting of consuls from EU member states. “A second independence referendum is clearly an option that requires to be on the table, and it is very much on the table; to ensure that option is a deliverable one in the required timetable, steps will be taken now to ensure the necessary legislation is in place,” Sturgeon said in a televised statement outside her official Bute House residence. “We are determined to act decisively, but in a way that builds unity across Scotland about the way forward.”
  • Shock Waves Ripple Through Credit Markets After U.K. Brexit Vote. Shock waves reverberated through credit markets after the U.K. voted to quit the European Union. Measures of risk for corporate bonds and money markets surged. The Markit iTraxx Europe Index of credit-default swaps insuring investment-grade corporate bonds rose by the most since 2008, according to prices compiled by Bloomberg. A gauge of where bank borrowing costs will be in the months ahead, known as the FRA/OIS spread, hit the most extreme level since 2012 and a key rate of the cost for banks to convert euro cash flows into dollars increased. More than $19.7 billion of protection on the investment-grade benchmark changed hands on Friday, almost five times an average full day, Bloomberg data show. Traders have bought and sold $55 billion of swaps on the index so far this week. The investment-grade derivatives index jumped 18 basis points to 92 basis points as of 3 p.m. in London, according to data compiled by Bloomberg. The three-month FRA/OIS spread widened to as much as 0.34 percentage point, from 0.27 on Thursday. The measure indicates where traders expect the gap between the three-month dollar London interbank offered rate, or Libor, and the Fed Funds Effective Rate -- dubbed Libor/OIS -- will be in the future. The three-month euro-dollar cross-currency swap rate widened to 43 basis points below Euribor from a spread of minus 36 basis points on Thursday, the biggest increase since December 2015.
  • U.K. Rating at Risk of Downgrade by Moody’s, S&P on Brexit. Moody’s Investors Service and S&P Global Ratings may lower the U.K.’s credit grade after the country voted to leave the European Union. S&P will give the country 24-hours notice, including one working day, to lower the rating “at least one notch” from AAA, Moritz Kraemer, S&P’s global sovereign chief ratings officer, said in an interview on Bloomberg Television on Friday. Moody’s in a report later Friday lowered its outlook on the country to negative from stable, a move toward a downgrade. It has the U.K. one step lower than S&P, at Aa1.
  • Brexit Aftershocks Rattle Markets as Cameron Quits. (video) Britain’s stunning vote to leave the European Union spread turmoil across the world’s financial markets and dismay through Europe’s capitals, where EU leaders gave an early warning that the looming divorce talks may prove bitter. The pound plunged to the lowest since 1985, global stocks tumbled and bonds and gold rallied after U.K. voters backed Brexit by 52 percent to 48. Prime Minister David Cameron resigned after the defeat of his Remain campaign, saying he will serve a few more months before making way for a successor who’ll negotiate the details of departure. Boris Johnson, a leading Brexiter and the early favorite to replace Cameron, also said there’s no rush to get the official separation process under way. But EU leaders signaled they have a different timetable in mind. “The U.K. will no longer be part of the EU, and the procedures dealing with its departure will be enacted quickly,” French President Francois Hollande said. In Brussels, a trio of top officials said the U.K.’s government must “give effect to this decision of the British people as soon as possible, however painful that process may be.
  • Germany, France Struggle to Hold EU Center as Brexit Storm Blows. (video) Within hours of Britain’s vote to leave the European Union, nationalist parties across the bloc were clamoring for their own exit referendums, including in France, one half of the two-nation engine that has driven the EU project since its beginnings as a lowly coal and steel union in 1951. That laid bare the challenge facing German Chancellor Angela Merkel and French President Francois Hollande as they try to hold the rest of the 27 nations of the EU together, as for the first time a full member has decided it would be better off alone.
  • Japan Considers Unilateral Yen Intervention Post Brexit: Nikkei. Japan’s government and central bank are considering measures, including unilateral intervention in the currency market, to counter any abrupt gains in the yen, the Nikkei newspaper reported. Intervention may take place if yen demand jumps abruptly following U.K.’s vote to leave the European Union, and there is enough pressure on the economy and inflation, the newspaper reported Saturday. It cited an unnamed Finance Ministry official as saying action is possible even without U.S. approval in a “fight’’ to protect ‘‘national interests.” Calls to the ministry and the Bank of Japan outside business hours weren’t answered.
  • For U.S. Exporters Who Profited From One Europe, New Uncertainty. For U.S. exporters already dealing with multiple sets of regulations, duties and tariffs across the globe, the post-Brexit world is a mess that will take years to sort out. In the decades since the European Union was created, American exporters have, with some exceptions, been able to count on a uniform set of regulations and standards. That could end now as Britain will be freed from EU rules and could begin the years-long process of replacing them with its own, impacting companies ranging from behemoths such as Boeing Co. and Caterpillar Inc. -- as well as smaller ones fighting for a toehold in the vast market.
  • They Got It Wrong: Swarms of Global Chatterers Misread Brexit. A global cohort said before Thursday’s Brexit vote that Britain was unlikely to pull out of the European Union, the post-World War II international project that brought an unprecedented era of prosperity and peace. Yet some were led astray by the belief that free trade’s money and material goods outweighed nationalism and the tug of nostalgia. Among those who were wrong about Brexit before the vote:
  • World’s 400 Richest People Lose $127 Billion on Brexit: Chart.
  • Brexit Winners Emerge in Hedge-Fund Community Amid Market Chaos. Hours after Britain’s decision to leave the European Union sparked mayhem across global financial markets, a handful of prescient investors began to emerge as big winners. Hedge fund manager Crispin Odey, an advocate of a British exit, gained more than 15 percent in his flagship fund on Friday, according to a person familiar with the situation. Several hedge funds that use computers to follow trends, including David Harding’s Winton Capital Management, also reported gains. Shares of a Canadian insurer that was betting on deflation rallied. They were among the few -- or, at least, the known few -- who profited as the pound plunged to the lowest since 1985, global stocks tumbled and bonds and gold rallied.  
  • China Tightens Internet Rules for Baidu and Other Search Engines. Chinese authorities will require Baidu Inc. and other search engines to report banned content and verify advertisers’ qualifications in its latest attempt at Internet regulation. Under rules to take effect Aug. 1, search engines operating in the country will be prohibited from providing banned information in various formats including links, summaries, cached pages, associative words, related searches and relevant recommendations, the Cyberspace Administration of China said in a statement. They will also be required to report websites and applications that contain prohibited content when spotted, the regulator said.
  • China Halts Taiwan Liaison Link on Lack of One-China Support. China has halted a communications channel with Taiwan because the island’s new government has failed to affirm the "one-China" principle. Taiwan’s president, sworn in on May 20, failed to declare support for the principle that Taiwan is part of China and as a result the mechanism for the two sides to liaise has been suspended, the official Xinhua News Agency reported, citing An Fengshan, a spokesman for China’s Taiwan Affairs Office.
Wall Street Journal:
  • Had bullish commentary on (GS).
Fox News:
Business Insider:
Fiscal Times:
  • Why 'Brexit' Is the Biggest Threat Yet to This Bull Market. If central bankers support markets here — keeping stocks in the low-volatility sideways crawl of the last three months, capping a three-year consolidation near Dow 18,000 — it will prove all the pre-Brexit fearmongering hollow and will encourage pro-independence votes in Italy and elsewhere. But if they let markets fall, volatility will beget volatility as one of the few bright spots in the global economy darkens. Years of central bank intervention and easy gains have encouraged risk-taking and leverage accumulation. The collapse could be swift and severe.

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