Tuesday, June 28, 2016

Today's Headlines

  • Merkel Tells Cameron Before EU Summit: Don’t Delude Yourself. (video) German Chancellor Angela Merkel warned the U.K. to have no illusions about life outside the European Union, hardening her stance ahead of Prime Minister David Cameron’s first meeting with fellow EU leaders since triggering the political earthquake that’s shaken the bloc’s foundations. Merkel, in her toughest response yet to last week’s British vote to quit the 28-nation EU, said that the U.K. can’t expect favored treatment once it leaves and that there will be no informal talks on a new relationship before the government in London files its application for divorce. “There shouldn’t be the slightest misunderstanding about the conditions laid out in the European treaties for a case like this,” Merkel said in a speech to Germany’s parliament in Berlin on Tuesday. “My only advice to our British friends is: Don’t delude yourself about the necessary decisions that need to be taken.
  • Draghi Wishes for a New World Order Populists Will Love to Hate. Mario Draghi has just pushed the boundaries of central banking further into the realm of globalization, at a time when globalization is on the run. Following the work of Reserve Bank of India Raghuram Rajan and others, the European Central Bank president on Tuesday became the most senior global central banker so far to call for more explicit policy cooperation between jurisdictions. Draghi’s aim is to mitigate the damaging cross-border side-effects brought on by the combination of monetary activism and tighter global financial links. “We have to think not just about whether our domestic monetary policies are appropriate, but whether they are properly aligned across jurisdictions,” Draghi said at the ECB’s annual policy forum in Sintra, Portugal. “In a globalized world, the global policy mix matters.” He made no explicit reference in the speech to the U.K.’s June 23 decision to quit the European Union, a powerful rejection by voters of globalization.
  • There’s Risk of a ‘Buyer’s Strike’ in Stocks, Barclays Says. The selloff following the U.K.’s secession vote, the deepest two-day rout since 2008, may herald an extended period of risk aversion in the global stock market, says Barclays Plc. Active managers increased their exposure to risk assets in the week ahead of the U.K. vote on European Union membership, according to Keith Parker, the firm’s U.S. head of asset allocation. The result was an increase in equity positioning, a drop in cash levels and a surge in buying of cyclical stocks -- all of which signals stock mutual funds may be unprepared for a period of outflows, he said.
  • Europe Bank Profits May Drop $35 Billion on Brexit, Goldman Says. Brexit may shave 32 billion euros ($35 billion) off European bank earnings through 2018, a 11 percent decline from what profits would have been without the economic shock, according to Goldman Sachs Group Inc. U.K. banks will be hurt the most as Britain’s vote to leave the European Union erases 10 billion euros of potential net income, Goldman Sachs analysts said in a note to clients on Tuesday. Banks in the Benelux and Nordic countries will suffer the least, they said. “We forecast a weaker outlook owing to lower volumes, margins and fees,” as well as higher credit risks, the group of analysts, led by Jernej Omahen, said in the note. “We also expect lower activity levels for capital markets and wholesale businesses, as well as lower asset values and flows in the asset-gathering business.”
  • Japan Yields All Drop Below 0.1% First Time in Global Bond Surge. Japan’s benchmark bonds are now all yielding less than 0.1 percent for the first time, leading a global surge in sovereign debt, as the U.K.’s decision to leave the European Union threatened to slow growth and keep the Federal Reserve from raising interest rates. The rally in Japan pushed yields on the nation’s longest debt, the 40-year bond, to 0.065 percent. Australia’s and South Korea’s 10-year yields dropped to unprecedented levels.  Treasury prices slipped after yields approached records last week.
  • South Korea Plans Supplementary Budget, Cuts Growth Forecast. South Korea plans a fiscal stimulus package of more than 20 trillion won ($17 billion) to cushion risks from corporate restructuring as external uncertainties grow with the U.K. ’s vote to leave the European Union. The package will include an extra budget of about 10 trillion won that mainly would be used to create jobs and support regional economies that would be hurt by corporate restructuring, according to government statements on policy outlook for the second half. The growth outlook for 2016 was reduced to 2.8 percent from 3.1 percent, while the government’s inflation projection was cut to 1.1 percent from 1.5 percent. About 10 trillion won in extra budget will be financed by funds left over from 2015 -- about 1.2 trillion won -- and excess tax revenue expected for this year, according to Lee Ho Seung, a director general of economic policy at the finance ministry. No government debt will be issued, he said. The other spending of more than 10 trillion won in the stimulus package will come from public funds and investments from state-owned companies.
  • European Stocks Rebound as Investors Speculate on Policy Help. (video) European stocks advanced, snapping their worst two-day losing streak since 2008, as investors speculated that policy makers may take action to shore up markets after the post-Brexit rout. The Stoxx Europe 600 Index rose 2.6 percent to 316.7 at the close of trading. European stocks extended their two-day loss to 11 percent yesterday amid growing uncertainty surrounding the fallout from Britain’s shock vote to leave the European Union. The FTSE 100, which lost 5.6 percent over the same period, also recovered 2.6 percent today. The volume of European shares changing hands was 60 percent greater than the 30-day average, while for British equities, it was 74 percent higher.
  • Gold Veteran Says Brexit May Be Start of ‘Major Bull Market’. Gold may stand at the start of a major bull market should the U.K.’s Brexit vote prove to be a forerunner of greater political and financial instability around the world, according to Evolution Mining Ltd.’s Jake Klein, a veteran of more than 20 years in the industry.
  • Brexit Steamrolls Fed Model for Stock Bulls as Bond Yields Drop. The dangers of relying on valuation as a tool for market timing are on display right now in U.S. equities. At issue is something known as the Fed Model, a comparison of stock and bond yields that has been pointing bulls to equities for three months. As bond yields fell from their March highs, an investor guided by the theory would have bought shares, betting they’d rally as money flowed into them from fixed-income. As the last two days have shown, signals like this don’t always work. Stocks have plunged following the U.K. vote to secede, while bonds rallied and yields reached an almost four-year low. Stocks that were cheap in comparison to Treasuries have gotten significantly cheaper, a lesson that cost U.S. investors billions of dollars in lost market value.
Wall Street Journal:
Fox News: 
  • House Benghazi report slams administration response to attacks. (video) A damning report authored by the Republican-led House committee probing the Benghazi terror attacks faulted the Obama administration for a range of missteps before, during and after the fatal 2012 attacks – saying top administration officials huddled to craft their public response while military assets waited hours to deploy to Libya. The report released Tuesday pointedly blamed a “rusty bureaucratic process” for the slow-moving response the night of the attack. The report said despite orders from President Obama and then-Defense Secretary Leon Panetta to deploy, the first military force did not do so until more than 13 hours after the attack started. The report said one anti-terrorism security team known as the FAST unit sat waiting for three hours in Rota, Spain, as Marines changed “in and out of their uniforms four times,” and even debated whether they should carry personal weapons, according to one witness. All together, the report said, “it would take nearly 18 hours” for that team to move.
Zero Hedge:
The Irish News:
  • Fine Gael MEP Brian Hayes warns of ‘Irexit' if EU clamps down on the Republic's corporation tax regime. AN influential Fine Gael figure has warned that EU efforts to dilute the Republic's generous corporation tax regime could see the south following the UK out of the EU. In an intervention that is unlikely not to have been sanctioned by the Dublin government, MEP Brian Hayes described EU demands for tax harmonisation as an "absolute red line issue". The Republic's business tax breaks have come in for scrutiny since it emerged that Apple, which has a large plant in Cork, enjoyed favourable rates.

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