Monday, June 27, 2016

Today's Headlines

  • Germany, France Rule Out EU Talks Until U.K. Files to Leave Bloc. Germany, France and Italy said the European Union won’t hold talks with the U.K. on its future relationship with the EU until the government in London formally asks to leave the bloc. “We agree that there won’t be any informal -- or formal -- talks about Britain’s exit before the European Council has received the exit application,” German Chancellor Angela Merkel said Monday at a news conference with French President Francois Hollande and Italian Prime Minister Matteo Renzi in Berlin. “It’s surely not a matter of days, but we have to see to it that there’s no limbo. Britain has to take the first step.
  • Cameron Rejects Repeat Brexit Vote as U.K. Bank Stocks Plummet. (video) Prime Minister David Cameron rejected calls for a do-over vote on leaving the European Union and assigned a team of officials to prepare for withdrawal following the referendum last week that stunned the world and triggered financial-market turmoil. The pound extended its drop to touch the lowest against the dollar since 1985 and shares of some of Britain’s biggest banks plummeted after a weekend in which Cameron’s administration appeared rudderless. Scotland’s government also floated a referendum on its own independence, leaving the U.K. under the threat of breakup as well as the EU. While Brexit won’t be “plain sailing” as the country adjusts, “Britain is ready to confront what the future holds for us from a position of strength,” Cameron, who announced his intention to resign in the wake of the vote, told the U.K. Parliament on Monday. “Britain will be leaving the European Union but we must not turn our back on Europe or the rest of the world.”
  • Pound’s Fresh Low Shows Market Meltdown Goes Beyond Mere Panic. (video) Traders have had three days to digest the Brexit vote, and the pound’s slide just keeps getting steeper. Sterling dropped 3.8 percent to $1.3160 at 4:02 p.m. in London on Monday, after reaching a three-decade low of $1.3121 that surpassed its weakest levels during the panicked selling on Friday that followed the U.K.’s decision to leave the European Union. The turmoil extended that day’s unprecedented 8.1 percent tumble and showed that Chancellor of the Exchequer George Osborne’s attempts to calm markets failed to cancel out the effects of the paralysis spreading through U.K. politics.
  • Brexit Adds $380 Billion to Global Negative-Yielding Bond Pile. (video) A flight to safer assets by global investors after Britain’s decision to the quit the European Union has added $380 billion to the pile of negative-yielding government bonds. There are now $8.73 trillion of securities with yields below zero globally, according to the Bloomberg World Sovereign Bond Indexes, up from $8.35 trillion before the vote. In the euro-area, German benchmark bonds with maturities out to 10 years are negative, while Japanese 10-year yields reached a record-low of minus 0.215 percent on Friday.
  • Credit Risk Climbs on Brexit for Second Day as Market Shuts Down. Corporate-credit risk soared for a second day as investors grappled with uncertainty following the U.K.’s vote to leave the European Union. The cost of insuring corporate debt against default climbed to the highest in about four months in Europe, amid heavy trading volumes, and the riskiest bank bonds fell. In the U.S., indexes of credit-default swaps extended Friday’s gains to reach the highest since March. No company offered bonds in Europe on Monday, as financial markets were rattled by the Brexit vote, the subsequent resignation of Prime Minister David Cameron and a lack of clarity about how and when the U.K. will leave the EU. There may be no bond sales of any type this week in Europe, according to a third of market participants surveyed by Bloomberg. “There is still a lot of uncertainty over what’s going to happen,” said Juan Esteban Valencia, a credit strategist at Societe Generale SA in Paris. “It’s not quite panic but people are concerned. We need to see how the situation shakes out.” The Markit iTraxx Crossover Index, which tracks credit-default swaps on mostly junk-rated companies, jumped 22 basis points to 411 basis points, the highest since Feb. 26, according to data compiled by Bloomberg. Gauges of swaps tied to investment-grade corporate debt and subordinated financial bonds also climbed to the highest since February. The risk premium on the Markit CDX North America Investment Grade Index, a credit-default swaps benchmark tied to investment-grade companies, jumped as much as two basis points to 89 basis points. It gained about 11 basis points on Friday, the biggest jump since October 2014. A similar gauge for high-yield bonds gained 10 basis points to 470 after surging 38 basis points Friday.
  • EU Commission’s Juncker Faces Calls to Resign After Brexit Vote. Jean-Claude Juncker faced calls to resign as president of the European Union’s executive arm after the U.K. voted to quit the EU. Some EU governments believe the European Commission bears responsibility for the outcome of last week’s referendum in which 52 percent of U.K. voters supported an exit from the 28-nation bloc. Germany’s newspaper of record, the Frankfurter Allgemeine Zeitung, published an op-ed on Monday saying Juncker should stand down. Czech Foreign Minister Lubomir Zaoralek said that Juncker should have done more to persuade Britain to remain in the EU.
  • HSBC, Nomura Fall in Asia as Brexit May Force Costly London Move. HSBC Holdings Plc and Nomura Holdings Inc. extended declines in Asian trading Monday on concern that Britain’s vote to leave the European Union may force banks with a large presence in the U.K. to undergo costly relocations. Nomura tumbled 6.3 percent at the close in Tokyo after losing 11 percent Friday, the biggest two-day slump since the aftermath of the nation’s March 2011 tsunami. London-based HSBC dropped as much as 2.6 percent in Hong Kong after sliding 6.6 percent Friday. Shares in Asian banks with less exposure to Europe generally held up better on Monday. HSBC’s Stuart Gulliver is among bank chiefs who have warned that they may have to shift jobs from the U.K. to elsewhere in Europe in the event of a Brexit vote. The U.K. quitting the EU raises the prospect of financial firms operating out of London losing so-called passporting rights that allow access to the region’s single market.
  • Evercore, Lazard Post Worst 2-Day Fall Since 2008 on Brexit. Lazard Ltd. and Evercore Partners Inc. posted their biggest two-day declines since 2008, leading a slump of independent investment banks after the U.K. vote to leave the European Union. Lazard, run by Chief Executive Officer Ken Jacobs, plunged 12 percent to $27.56 at 12:29 p.m. in New York. Evercore dropped 13 percent. Both firms are down more than 20 percent since Thursday. Rivals including Moelis & Co., Greenhill & Co. and PJT Partners Inc. also extended declines on Monday.
  • Investment Banks Face Hit From Brexit-Era Turmoil, Few Deals. Brexit is the last thing investment banks needed. Friday’s currency swoons and stock rout -- triggered by U.K. voters’ surprise decision to withdraw from the European Union -- herald even harder times for securities firms already struggling to improve earnings. While some desks made money in the initial turmoil, continued market volatility in the months ahead poses a threat to trading profits. And companies that hire banks to advise on takeovers and raise money face years of uncertainty as Britain negotiates new international ties. Analysts on both sides of the Atlantic cut earnings estimates for the biggest investment banks on the expectation that securities sales and major deals will be thwarted by economic and political uncertainty and currency swings. Fees from that business are likely to “tank,” dropping more than 30 percent this year at European banks, Sanford C. Bernstein analyst Chirantan Barua wrote. Analysts at Citigroup Inc. and JPMorgan Chase & Co. estimated lower underwriting volumes in the U.K. and Europe. “In light of such uncertainty, a lot of primary deals will be put on hold in equity and debt,” said Joseph Dickerson, an analyst at Jefferies International Ltd. in London. On the bright side, “the next week is going to be OK in terms of trading volumes.”
  • Rajoy’s First Appeal for Support Stonewalled by Spanish Rivals. Caretaker Prime Minister Mariano Rajoy’s opening bid for support was rejected across the board as he began to try to piece together a governing majority in Spain. While Rajoy told Spaniards that he’ll have the foundations in place for a new government within a month, all three of his main rivals pledged to vote against him. Rajoy’s People’s Party established itself as the most powerful force in Spain after increasing its representation to 137 seats in Sunday’s general election, but he’s still 39 votes short of a majority in the 350-strong parliament. The Socialists, Podemos and Ciudadanos have 188 between them, enough to keep Rajoy out if they can hold their line. “My hand is still outstretched to guarantee the stability that Spain needs,” Rajoy said in a televised press conference Monday. “We need a government and we need it now.”
  • Billionaire Soros Was ‘Long’ on Pound Before Vote on Brexit. (video) George Soros, the billionaire whose 1992 wager against the pound made hedge fund history, didn’t repeat the bet ahead of sterling’s record tumble on Friday. Soros was “long” the currency before Britain’s vote to leave the European Union on Friday, and didn’t “speculate against sterling while he was arguing for Britain to remain,” a spokesman said in an e-mailed statement Monday. “Because of his generally bearish outlook on world markets,” Soros did profit from other investments, according to the statement. “Now the catastrophic scenario that many feared has materialized, making the disintegration of the EU practically irreversible,” Soros wrote in a June 25 essay reflecting on the U.K. vote for Project Syndicate. “The consequences for the real economy will be comparable only to the financial crisis of 2007-2008.”
  • China Weakens Yuan Fixing by Most Since August as Dollar Surges. (video) China weakened its currency fixing by the most since last August as global market turmoil spurred by Britain’s vote to leave the European Union sent the dollar surging. The People’s Bank of China set the reference rate 0.9 percent weaker at 6.6375 a dollar. A gauge of the greenback’s strength jumped 2.4 percent in the past two days, the most since 2011, as the British pound and the euro tumbled. The yuan dropped 0.3 percent to 6.6473 as of 6:44 p.m. in Shanghai, heading for its weakest close since December 2010.
  • The Corner of Russia’s Economy Where Crisis Rages Unabated. As Russia’s government counts the months to an economic rebound, a bellwether of investment is nearing levels of distress last seen during the throes of a recession seven years ago. The value of construction works plunged 9 percent from a year earlier in May, the worst showing since October, even as industrial production grew for a second month and consumer indicators from real wages to unemployment improved. A gauge of business confidence in construction dropped to minus 19 last quarter, only two points above the trough reached in 2009, according to a report by an institute at the Higher School of Economics in Moscow. 
  • Brexit Burns Mexico as Peso Plunge Spurs Wagers on Rate Increase. The U.K.’s vote to leave the European Union is reverberating loudly in Mexico. The peso tumbled the most since 2011 on Friday, hitting a record low in the wake of the results of the Brexit referendum. After weakening further Monday, it’s now down 10.2 percent this year, the biggest plunge among the world’s major currencies after the British pound. The U.K. vote and the peso drop prompted BNP Paribas SA to bring forward its forecast for an interest-rate increase in Mexico by six months to this week, and swaps traders to boost bets for higher borrowing costs by the most in a month. With the currency’s deepening slide threatening to fan inflation in Latin America’s second-biggest economy, central-bank officials led by Governor Agustin Carstens will probably lift the 3.75 percent benchmark as a “preventive move” when they meet Thursday, said Credit Suisse Group AG’s Alonso Cervera.
  • Stock Pickers See Brexit Hurting India Tech to Mexico Cement. As investors sized up the shadow cast by Britain’s Brexit vote over emerging markets, everything from Turkish carmakers to Indian technology companies and a South African platinum producer came under the spotlight. Top of the at-risk list following Friday’s referendum result are companies and industries with the strongest ties to the U.K. and Europe, where demand for consumer products may slow in the aftermath of the trading bloc’s fracture. Here are some of the industries and stocks most exposed to Brexit based on their dependence on sales in Britain, as well as how much they will suffer from currency depreciation, according to analysts from JPMorgan Chase & Co. and other institutions.
  • European Stocks Slide as Brexit Fallout Concern Spurs Bank Rout. (video) European stocks slid for a second day, extending losses as investors continued to speculate on the fallout from Britain’s shock vote to leave the European Union. U.K. banks led a gauge of European lenders to its lowest level since 2011, with Royal Bank of Scotland Group Plc tumbling 15 percent, while Barclays Plc slid 17 percent. Close Brothers Group Plc and Schroders Plc paced financial-services stocks to the worst performance of the 19 industry groups on Stoxx Europe 600 Index. EasyJet Plc dragged travel-and-leisure companies lower, sliding 22 percent after warning that a drop-off in travel demand arising from a Brexit will pare earnings over the rest of summer period. The Stoxx 600 slipped 4.1 percent to 308.75 at the close of trading. Shares tumbled the most since 2008 on Friday as the Brexit win set the stage for months of uncertainty while the U.K. negotiates its exit from the bloc. The FTSE 100 lost 2.6 percent even as Chancellor of the Exchequer George Osborne sought to reassure financial markets by saying that a contingency plan is in place to shore up the U.K. economy. The volume of European shares changing hands today was two-and-a-half times the 30-day average, while for British equities, it was threefold.
  • Brexit Brings New Headache to U.S. Retailers Struggling at Home. The U.K.’s vote to leave the European Union sent shares of U.S. retailers tumbling for a second day on concern that overseas woes will compound the companies’ sluggish sales. The Brexit vote threatens to hurt a top source of visitors to the U.S. and further strengthen the dollar, worsening two of the main headwinds that have been affecting U.S. retailers. Those concerns only exacerbate the companies’ domestic challenges, which include restrained consumer spending, a shift to online retailing, and declining mall traffic. Shares of PVH Corp., Tiffany & Co. and Ralph Lauren Corp. have been among the hardest hit by the last two trading days of Brexit fallout.
  • Trump Embraces Executive Orders to Avoid Congressional Gridlock. Here are 13 policies Trump has proposed that he could accomplish without help from Congress.
Wall Street Journal:
  • Dining Out Falls Victim to Economy. Growth has slowed in last three months, a sign of jitters over economic uncertainties. Restaurant visit growth has completely stalled in the last three months, signaling that consumers, jittery over economic uncertainties, are retrenching. Visits to fast-food restaurants had been growing at a quarterly clip of 2% since September 2015, but haven't grown at all in March, April or May, according to as-yet-unpublished..
Zero Hedge:

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