Traders are still stunned by the dramatic move in risk assets during yesterday’s US session. As a reminder, at the lows for the day in the mid-morning Eastern Time, we saw the DAX at -1.81%, FTSE -1.13%, S&P500 -1.03%, US 10y yield 1.516% (lowest since August 2012) and GBPUSD 1.401. By the various closes these rallied to -0.59%, -0.27%, +0.31%, 1.580% and 1.420 respectively!
What changed?
Unfortunately it had everything to do with the death of Jo Cox, which as even Deutsche Bank admits, “while it seems insensitive to talk about markets in relation to this event, unfortunately this story heavily influenced them yesterday. Before this news came out the two phone polls that the market had been waiting for both came out in favour of ‘leave’ (Ipsos-Mori 53%/47% and Survation 45%/42%).” The reason: BBC eyewitness reports (later questioned) suggesting the killer shouted ‘put Britain first’. As a result, campaigning has been suspended for now and it’s unclear when it will get going again. As we first noted, the immediate outcome of the shooting was a rumor that the Brexit vote next Thursday will be postponed, which in turn boosted “Remains” odds.
And, as Bloomberg also puts it, “Sterling rebounded from a two-month low as an opinion poll on voter intentions in next week’s referendum was delayed.“
Odds on the U.K. leaving the EU slid to 38 percent after hitting a record 44 percent on Thursday, according to Oddschecker calculations based on bookmakers’ quotes. “If you do see uncertainty, that typically will drive voters to the status quo,” said Karl Schamotta, director of foreign-exchange research and strategy in Toronto at Cambridge Global Payments, which hedges currencies for companies. “We’re seeing a trade that’s entirely too crowded — at the end of the day, the market expectation remains that we will see a stay vote.”
In short, as Bloomberg, DB and Reuters all admit, the tragic death of Jo Cox had a morbidly levitating effect on all risk assets. “The halt in campaigning may just take Brexit off the headlines momentarily, and that may have given an opportunity to just to see a little bit of a retracement in a comparatively quieter environment,” said Orlando Green, a rates strategist at Credit Agricole SA’s corporate and investment-banking unit in London. “We’ll see a choppy environment as we head toward the referendum.”
Ten-year bonds in Japan and the U.K. declined for the first time in more than a week. Global stocks rebounded from a four-week low and commodities advanced with the pound as campaigning in Britain’s referendum on European Union membership was suspended for a second day. Oil rose, paring its biggest weekly decline in more than two months.
German bonds fell for the first time in four days, ending a three-day rally that pushed the yield into negative territory for the first time. The yield was near-zero, from minus 0.02 percent on Thursday. Similar-maturity U.K. debt snapped an eight-day run of gains. Spanish and Italian debt rallied as investors snapped up higher-yielding assets.
Japan’s 10-year bonds fell for the first time in seven days, lifting their yield by five basis points to minus 0.15 percent. It sank to a record minus 0.21 percent in the last session as the BOJ said inflation in the nation may be zero or negative. The rate on similar-maturity bonds in Australia climbed eight basis points to 2.09 percent, after slipping below 2 percent for the first time on Thursday. U.S. Treasuries due in a decade fell, lifting their yield by two basis points to 1.60 percent. It touched 1.52 percent in the last session, the lowest intraday level since August 2012, after the Fed on Wednesday lowered its projections for the path of policy tightening.
As a reminder, it is not just sterling: “With Brexit risks an important driver of currencies in the near term, dollar-yen can track lower next week,” said Joseph Capurso, a senior currency strategist in Sydney at Commonwealth Bank of Australia. “That raises the risk the Ministry of Finance may intervene to stem the recent rapid gains in the yen.” As Shunichi Otsuka, general manager of research and strategy at Ichiyoshi Securities, added “The dollar-yen market has calmed somewhat,” said “We’ll probably see a rebound from the steep fall yesterday. The fact that U.S. shares have risen is also a tailwind for Japanese equities.”
Meanwhile, while it may very well not last and all of yesterday’s gains could evaporate instantly if David Cameron announces that the Brexit vote will take place as scheduled, while polling remains unchanged from before Jo Cox’s tragic death, all 10 industry groups in the MSCI All-Country World Index advanced, with the index of global equities rising 0.7% trimming the week’s drop 1.6%. The Stoxx Europe 600 Index rose 1.4%. European lenders rallied the most, buoyed by Italian banks. Futures on the S&P 500 were little changed, after equities Thursday snapped their longest losing streak since February.
Meanwhile, the biggest event earlier in the week, the FOMC rate hike decision, is now all but ancient history: the odds of a move on borrowing costs have fallen to 4 percent for July and less than 40 percent for as late as February 2017, after the Federal Reserve this week scaled back its projections for increases.
Global Market Snapshot
- S&P 500 futures down less than 0.1% to 2070
- Stoxx 600 up 1.7% to 327
- FTSE 100 up 1.5% to 6039
- DAX up 1.3% to 9679
- S&P GSCI Index up 0.9% to 371.2
- MSCI Asia Pacific up 0.6% to 126
- Nikkei 225 up 1.1% to 15600
- Hang Seng up 0.7% to 20170
- Shanghai Composite up 0.4% to 2885
- S&P/ASX 200 up 0.3% to 5163
- US 10-yr yield up 3bps to 1.61%
- German 10Yr yield up 3bps to 0.01%
- Italian 10Yr yield down 3bps to 1.51%
- Spanish 10Yr yield down 3bps to 1.57%
- Dollar Index down 0.16% to 94.42
- WTI Crude futures up 1.1% to $46.71
- Brent Futures up 1.6% to $47.93
- Gold spot up 0.5% to $1,285
- Silver spot up 1.1% to $17.39
Top Headline News
- Brexit Campaign on Hold for Second Day After Lawmaker Murder: Labour’s Jo Cox was shot dead in northern England on Thursday
- Oracle’s Revenue Exceeds Estimates on Strength of Cloud Products: rev. in cloud forecast to increase 75%-80% in quarter
- Revlon Seeks to Revive Cosmetics Clout With Elizabeth Arden Deal: the $14-a-share deal values Elizabeth Arden at ~$870m when debt is included
- Redstone Family Reclaims Control of Viacom in Slow Motion: Redstone’s holding co. replaced 5 Viacom board members; Delaware court to decide on move’s legality in coming months
- Found to Have Violated Chinese Rival’s Patent: Apple may have to halt sales of its latest iPhones in Beijing, the city’s intellectual property authority ruled.
- Salesforce Said to Have Been Rival Suitor for LinkedIn: Microsoft agreed to buy networking website for $26.2b
- Lumber Liquidators Settles With Regulator; No Product Recall: CPSC says testing showed no unsafe levels of formaldehyde
- Allianz Sees Pimco Hiring in Pivot From Bill Gross’s Former Fund: board member Theis cites potential in alternative investments; insurer’s U.S. unit cut jobs Thursday after decline in assets
- UFC Said to Get Bids of ~$4.1b From WME/IMG, CMC Groups: ESPN
Looking at regional markets, Asia equity markets traded higher following the positive lead from the S&P500 in which US equities snapped its 5-consecutive day of declines. Nikkei 225 (+1.1) outperformed on bargain-buying following yesterday’s BoJ-triggered 3% drop, with a rebound in USD/JPY from its lowest level since August 2014 underpinning exporter sentiment. ASX 200 (+0.3%) was led by Financials after reports ANZ is considering the sale of its wealth and life units, although gains were capped by commodity weakness. Elsewhere, Chinese markets conformed to the positive picture in the region with the Hang Seng (+0.7%) & Shanghai Comp (+0.4%) both positive after the PBoC returned to a net weekly injection in its interbank liquidity operations. Finally, 10yr JGBs traded firmly in negative territory amid the improvement in sentiment in riskier assets in Japan, while today’s enhanced liquidity auction printed a lower b/c. The yield on Japan’s 20-yr govt bond rose as much as 8.5 bps to 0.175%, while 30-yr yield climbs 5.5 bps to 0.205%. The reason: the FinMin extra auction with remaining maturities of 15.5-39.0 yrs drew bid-to-cover ratio of 1.88, the lowest for any maturities since 2012.
Top Asian News
- Japan’s Aso Invokes G-7, Seeks Coordination After Yen Jump: Any post-Brexit turmoil seen as potential yen-sales trigger
- China Probes Brokerages’ Futures Units Amid Frenzies in Trading: Guotai Junan, Orient Securities say regulator investigating
- 1MDB Confident of Legal Position in Debt Dispute With Abu Dhabi: Co. hires law firm Weil Gotshal & Manges to represent case
- India Woos Explorers of Rare Earths Used in Missiles and Lasers: Govt to issue a new policy for private cos.
- Mass Deportation Threat Raises Stakes in U.S.-Pakistan Spat: Pakistan seeks to send back 1.5 million Afghan refugees
In Europe, the session has seen a quiet start as is usually the case as the week draws to a close. As such, equities continue to be on the mend led by financials. Of note, today does mark quadruple witching which sometimes is associated with increased volatility — particularly in the DAX. Alongside this, the risk on sentiment has seen global yields also recover with the German 10-yr pulling off their near record lows while the curve has seen an unwind of the bull flattening earlier in the week, with price action seeing Bunds back below the 165 level. Additionally, peripheral bond yields have been outperformed relative to the German 10-yr benchmark.
Top European News
- Stoxx 600 up 1.7% to 327
- FTSE 100 up 1.5% to 6039
- DAX up 1.3% to 9679
- German 10Yr yield up 3bps to 0.01%
- Italian 10Yr yield down 3bps to 1.51%
- Spanish 10Yr yield down 3bps to 1.57%
- S&P GSCI Index up 0.9% to 371.2
In commodities, the Bloomberg Commodity Index gained 0.6%, ending three days of losses, as a retreat in the dollar increased the appeal of commodities priced in the U.S. currency. Oil rose, paring its biggest weekly decline in more than two months. West Texas Intermediate added 0.8 percent to $46.60 a barrel and Brent climbed 1.3 percent to $47.79. There’s no need for Russia and Saudi Arabia to cooperate on influencing crude markets now and low prices may persist for 10 to 15 years, Russian Oil Minister Alexander Novak said in a Bloomberg television interview. Zinc and copper led industrial metals higher, gaining 1.6 percent and 0.9 percent respectively. Gold headed for a third weekly advance. Bullion for immediate delivery rose 0.4 percent to $1,283.75 an ounce. The metal touched $1,315.71 on Thursday, the highest since August 2014. Silver advanced 1 percent.
In FX, in addition to the volatile Yen, it remains all about the British pound which strengthened 0.5%, after erasing a slump of more than 1.3 % in the last session. Odds on the U.K. leaving the EU slid to 38 percent after hitting a record 44 percent on Thursday, according to Oddschecker calculations based on bookmakers’ quotes. “If you do see uncertainty, that typically will drive voters to the status quo,” said Karl Schamotta, director of foreign-exchange research and strategy in Toronto at Cambridge Global Payments, which hedges currencies for companies. “We’re seeing a trade that’s entirely too crowded — at the end of the day, the market expectation remains that we will see a stay vote.”
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, slipped 0.2 percent in a third day of losses. Currencies of Australia, Canada, South Africa and Russia climbed 0.4 percent or more, rallying with metals and crude. The yen was little changed at 104.34 per dollar, after earlier weakening as much as 0.6 percent. Japanese Finance Minister Aso told reporters Friday that he was very concerned about one-sided, abrupt and speculative currency movements, speaking after the currency jumped 1.7 percent in the last session as the Bank of Japan refrained from expanding its record monetary stimulus. The yen climbed as high as 103.55 on Thursday, the strongest level in almost two years. “With Brexit risks an important driver of currencies in the near term, dollar-yen can track lower next week,” said Joseph Capurso, a senior currency strategist in Sydney at Commonwealth Bank of Australia. “That raises the risk the Ministry of Finance may intervene to stem the recent rapid gains in the yen.”
On today’s US calendar, we’ll get the May housing starts and building permits data. The former in particular is expected to fall -1.9% mom however permits are expected to have risen modestly. More interest perhaps could come from comments from ECB President Draghi who is set to speak at 4pm BST in Munich. Its unclear what the topic is but clearly any comments around the UK referendum will be closely watched but given yesterday’s events he may chose to pass on the subject. The ECB’s Coeure is also due to speak around lunchtime.
Bulletin Headline Summary From RanSquawk and Bloomberg
- A more upbeat sentiment today has seen European and Asian equities pare some of the losses from earlier in the week, with Bunds falling away from their record highs
- FX markets remain subdued by recent standards during European trade, with GBP/USD above 1.4250
- Highlights today include US housing starts, building permits, Canadian CPI as well as comments from ECB’s Draghi, Constancio and Couere
- Treasuries lower in overnight trading as global equities and commodities rally and Brexit campaigns on hold until this weekend; housing starts today, forecast 1150k.
- Debt investors rushed to hedge against the risk that Britain votes to exit the European Union this week as polls show a departure has become a real possibility
- Amid all the murk surrounding Britain’s vote on leaving the European Union, one thing is certain: a lot of cash is piling up just outside the equity market, and having it all come flowing back has the potential to put a charge in stocks
- Local elections in Italy on June 19 will prefigure votes in Europe over the next 18 months that could see populist politicians translate their increasing support into real power
- Japan’s sovereign debt rally will push yields on the nation’s 40-year bonds, its longest maturity, below zero in about two months if it keeps up at the current pace
- From the immediate possibility of Britain leaving the European Union to the longer-term consequences of aging populations, the world’s major central banks this week just aren’t sure what to do next
- $375m IG Credit priced yday, $5.725b WTD, $60.13b MTD, YTD $863.095b
- No HY priced yday, 26 deal for $19.925b MTD
- BofAML Corporate Master Index OAS +1bp yday at +161bp, +9bp MTD, -10bp YTD; T1Y range 221/129
- BofAML High Yield Master II OAS +14bp yesterday at +632bp, +35bp MTD, -63bp YTD; T1Y range 887/438
- Sovereign 10Y yields mixed, Greece ~16bp lower; European, Asian equities rise; U.S. equity- index futures mixed; WTI crude oil, precious metals rally
* * *
US Event Calendar
- 8:30am: Housing Starts, May, est. 1.150m (prior 1.172m)
- Housing Starts m/m, May, est. -1.9% (prior 6.6%)
- Building Permits, May, est. 1.145m (prior 1.116m, revised 1.130m)
- Building Permits m/m, May, est. 1.3% (prior 3.6%, revised 4.9%)
Central Banks
- 11:30am: ECB’s Draghi speaks in Munich
* * *
DB’s Jim Reid concludes the overnight wrap
The U.K. EU referendum was put into some perspective yesterday by the tragic death of a Labour Member of Parliament with eyewitness reports to the BBC suggesting the killer shouted ‘put Britain first’. Campaigning has been suspended for now and it’s unclear when it will get going again. While it seems insensitive to talk about markets in relation to this event, unfortunately this story heavily influenced them yesterday. Before this news came out the two phone polls that the market had been waiting for both came out in favour of ‘leave’ (Ipsos-Mori 53%/47% and Survation 45%/42%). At the lows for the day we saw the DAX at -1.81%, FTSE -1.13%, S&P500 -1.03%, US 10y yield 1.516% (lowest since August 2012) and GBPUSD 1.401. By the various closes these rallied to -0.59%, -0.27%, +0.31%, 1.580% and 1.420 respectively. The political bookmakers odds started the day close to predicting a 66% chance for remain, then fell to 61% following the polls. They then climbed back to 66% by the end of the day with thoughts that the tragic events may change the shape of the last stages of the campaign. Odds had peaked at 85% on May 23rd.
Even before this, it was interesting to see such two important phone polls go in favour of ‘leave’ without the political bookmaker odds moving even more towards ‘leave’. One wonders whether there is still a view that ‘leave’ needs an even bigger lead in the polls to get victory at the ballot box.
With markets swinging back positively in the late afternoon yesterday, bourses in Asia this morning are continuing that positive momentum and paring back slightly what has been a rough week for risk assets in the region. Leading the way is Japan where the Nikkei and Topix are currently +1.63% and +1.36% respectively as the relentless rally for the Yen (-0.20%) seems to be taking a bit of a pause for breath. Those markets are still down well over 5% this week however which will mark the biggest five-day declines since February. Meanwhile, the Hang Seng (+1.01%), Shanghai Comp (+0.82%), Kospi (+0.34%) and ASX (+0.21%) are also higher, while bond yields have edged higher generally in the region. US equity index futures are pointing towards a modestly firmer start too.
Moving on. As a result of yesterday’s tragic turn of events, BoE Governor Carney cancelled his planned Mansion House speech which was scheduled for last night, with a talk by Chancellor of the Exchequer George Osborne also scrapped. As we noted at the start referendum campaigning has been suspended for a second day today with events planned by the UKIP party, Economists for Brexit and Labour Leave all cancelled. Bloomberg is also suggesting that a planned release of an IMF report on the implications of the UK leaving the EU is also to be postponed as well as a referendum poll run by polling company BMG being delayed 24 hours.
Prior to the event the BoE announced no change to its current policy as had been widely expected with the minutes unsurprisingly pointing towards the outcome of the vote next week as being ‘the largest immediate risk facing UK financial markets, and possibly global financial markets’.
The SNB also stayed put at their meeting yesterday while at the same time joined the growing chorus of concern over next week’s vote, highlighting in particular the ‘uncertainty’ and potential increase in market ‘turbulence’. SNB President Jordan confirmed that ‘we intend to stabilize the market in case such a situation arises’.
Meanwhile, it certainly wasn’t just those assets we mention at the top which were subject to big swings yesterday. Indeed Gold peaked at $1316/oz in the afternoon which was close to +2% on the day and the highest since August 2014 before dipping into the close to finish back below $1300/oz again. That was the trend for most precious metals while energy markets had a day to forget. WTI tumbled -3.75% yesterday to $46.21/bbl, the sixth consecutive day it’s fallen and it means, a modest rebound this morning aside, that prices are now nearly $5.50/bbl off the highs of just a week ago as focus turns to the restart of production in the Canada oil sands region.
Credit markets were unsurprisingly volatile throughout yesterday also. After opening around 373bps, the iTraxx Crossover got as wide as 394bps before rallying back into the close to finish at 379bps. The iTraxx Main also traded in a near 5bp range while over in the Bund market our daily 10y Bund yield watch saw yields dip another 1.4bps to close at -0.025%. They did however reach a low of -0.039% in the afternoon. Finally, while its perhaps becoming less of an extraordinary event, yesterday also marked the day that the Swiss 2058 maturity Government Bond went into negative territory on the ask side. It now means that there is only one outstanding Swiss govie trading with a positive yield, that being the 2064 bond which is currently yielding just 0.041%. Incredible.
Away from the obvious focus on the UK Referendum newsflow it was actually another fairly busy day for economic data, although once again this is not getting much attention at present. The highlight yesterday was the May inflation report for the US where headline CPI gained +0.2% mom last month, coming in a tad under the +0.3% expected. As a result the YoY rate dipped one-tenth to +1.0%. The core did come in in-line however at +0.2% mom which has had the effect of nudging up the YoY rate by one-tenth to +2.2% which means it’s been running above 2% now for seven months on the trot. This is clearly in contrast to what we’re seeing in implied inflation expectations, both through the Fed’s 5y forward breakeven and also the University of Michigan survey. As our US economists note also, YoY core PCE inflation – the Fed’s favoured metric of price pressures – is running at just 1.6%.
Away from this, initial jobless claims were reported as rising 13k last week to 277k (vs. 270k expected), while the NAHB housing market index reading for June rose 2pts to 60 (vs. 59 expected). Meanwhile the Philadelphia Fed’s headline manufacturing index reading made for a positive read-through this month after printing at +4.7 (vs. +1.0 expected) which is 6.5pt improvement from May and the best reading since March.
Elsewhere, there was also some data to mention in Europe yesterday. Headline CPI for the Euro area came in at +0.4% mom in May which was a tenth better than expected. The YoY rate was confirmed at -0.1% which marks a one-tenth increase. Also released were the latest retail sales numbers for the UK in May which were up a bumper +1.0% mom (vs. +0.3% expected) excluding fuel and +0.9% mom (+0.2% expected) including fuel.
Finally this morning before the day ahead, Michal Jezek in my team has published notes on the DB Insurance Capital Forum held in London yesterday. Deutsche Bank’s inaugural Insurance Capital Forum has brought together regulators, issuers and investors to exchange views and offer insights about the insurance industry. The key theme of the conference was the Solvency II regulation that entered into force this year, having being in the making for over a decade. This comes at a time when the sector has faced an unprecedented pressure from the low-rate environment. Indeed, on the day of the conference European nominal interest rates reached their all-time lows. The keynote address was delivered by Gabriel Bernardino, Chairman of EIOPA. It was then followed by a regulatory and rating agency panel, an issuer panel and a credit investor panel. See his email just published for more on this.
Looking at the day ahead, the calendar is fairly sparse with little in the way of notable releases in Europe this morning while over in the US we’ll get the May housing starts and building permits data. The former in particular is expected to fall -1.9% mom however permits are expected to have risen modestly. More interest perhaps could come from comments from ECB President Draghi who is set to speak at 4pm BST in Munich. Its unclear what the topic is but clearly any comments around the UK referendum will be closely watched but given yesterday’s events he may chose to pass on the subject. The ECB’s Coeure is also due to speak around lunchtime.
What a week!!
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