Tuesday’s overnight price action has been a continuation of yesterday’s Brexit relief rally, as investors focused on the two latest polls favorable to Remain in Thursday’s referendum (while ignoring the YouGov poll which gave Leave a small lead), and hoping the doom and gloom by George Soros will convince the undecideds to vote against Leaving. As a result, global stocks continued their advance while pound extending the biggest rally since 2008, rising to the highest level since the announcement of the EU referendum, and just 20 pips shy of what Citi had forecast would be the “extreme” print should a Remain outcome be confirmed, suggesting a Remain vote has been largely priced in.
The latest UK referendum polls are summarized below:
- ORB/Daily Telegraph poll showed 53% would vote to Remain and 46% to Leave.
- YouGov/Times poll showed 42% to Remain and 44% to Leave.
- NatCen Brexit poll showed 53% would vote to Remain and 47% would vote to Leave.
- The latest Survation poll is expected at 1330BST/0730BST.
However, today it’s not just about Brexit, polling and bookie odds: at 10am Eastern, Janet Yellen will speaking before the Senate Banking Committee for her semiannual monetary policy testimony. Tomorrow, Yellen will return to the Hill on Wednesday for round two before the House Financial Services Committee. The timing of these so-called Humphrey-Hawkins hearings is of note. They come just days after the Fed’s latest policy meeting and before a U.K. referendum on whether to the leave the European Union. They also are the last scheduled chance lawmakers, many of whom face re-election, will have to publicly question the Fed chief before voters head to the polls in November. That could make it an especially uncomfortable visit to Capitol Hill for Ms. Yellen, who likely will face grilling on a range of issues, such as the economic effects of increasingly stringent bank regulation, the Fed’s cybersecurity controls and its focus on global developments in setting U.S. monetary policy.
Then again, even Yellen will be relegated to second place behind headlines about the upcoming UK referendum, which however the market is increasingly seeing as no longer a risk factor: the MSCI All-Country World Index rose to the highest level in more than a week while gold fell with the yen as haven demand eased. A gauge of the dollar declined for a fifth day in the longest run of losses since the start of April.
Some remain cautiously optimistic: “Sterling is supported by the recent rise in support for the ‘Remain’ camp, but if you look at an average of recent polls they still suggest it is neck and neck,” said Steven Barrow, head of Group-of-10 strategy at Standard Bank Group Ltd. in London. “It’s hard for traders or investors to go into Thursday with any strong conviction — or large position.”
Others, such as Citi equity strategist Jonathan Stubbs, have already largely assumed a positive outcome: “the U.K. referendum brings significant uncertainty and has contributed alongside macro uncertainty more generally to push many investors to ‘sit on their hands’. Citi’s house view retains a 60-70% probability that a ‘remain’ outcome will prevail. We see this as supporting a return of risk appetite across the U.K. and the rest of Europe and helping to drive share prices higher during 2H 2016.”
Yet others are even more euphoric: “People are starting to take risks again,” said Karl Goody, a private wealth manager at Shaw and Partners Ltd. in Sydney, which oversees about A$10 billion ($7.5 billion). “We saw a bit of an overreaction and you often need that to get people back into the market. It had got a bit overdone.”
While global market remain very illiquid, and prone to sudden gaps and dislocations, as of this morning the MSCI AC World Index rose 0.2% after climbing 2.3% in the previous two days. The Stoxx Europe 600 Index added 0.1% , with banks rising for a third day, while miners followed commodity prices lower, while the MSCI world index advanced 0.2 percent. Futures on the S&P 500 climbed 0.5%, indicating U.S. equities will extend gains for a second day, after the index rose the most in almost four weeks on Monday.
Market Snapshot
- S&P 500 futures up 0.5% to 2085
- Stoxx 600 up 0.1% to 338
- FTSE 100 down 0.2% to 6192
- DAX up less than 0.1% to 9969
- S&P GSCI Index down 0.7% to 380.2
- MSCI Asia Pacific up 0.9% to 130
- Nikkei 225 up 1.3% to 16169
- Hang Seng up 0.8% to 20668
- Shanghai Composite down 0.4% to 2879
- S&P/ASX 200 up 0.3% to 5274
- US 10-yr yield down 2bps to 1.67%
- German 10Yr yield up 1bp to 0.06%
- Italian 10Yr yield up 2bps to 1.45%
- Spanish 10Yr yield up 2bps to 1.5%
- Dollar Index down 0.14% to 93.48
- WTI Crude futures down 0.9% to $48.91
- Brent Futures down 1% to $50.12
- Gold spot down 0.6% to $1,282
- Silver spot down 0.4% to $17.44
Top Global Headlines
- Brexit Vote in Balance as Polls Differ Over Which Side Leads: Soros warns of 20% slump in Pound if U.K. votes to leave EU
- Treasuries Halt Decline Before Brexit Vote as Polls Show Split: Benchmark Treasuries halt a three-day decline
- Draghi Gets Reluctant Backing From German Court for OMT Plan: OMT program underpins Draghi vow to do ‘whatever it takes’
- Oi Files for Brazilian Record $19 Billion Bankruptcy Protection: Major creditors include BNDES, Caixa Economica, Itau
- Fund Manager Franklin Templeton Bets on Higher Oil Prices: Current price of $50 a barrel isn’t enough to boost supply
- Brookfield, State Bank Said to Mull India Stressed Asset Venture: Canadian asset manager discusses $1 billion investment
- Post-Orlando Limits on Gun Purchases Blocked in U.S. Senate: Four Republicans are unveiling a compromise proposal Tuesday
- BofA Faces High Stress as Fed Test Verdict Hits With Brexit Vote: BofA seen raising payouts most if Fed approves
- Amplats Sees Profit Falling on Platinum Drop, Tax Adjustment: Platinum prices have almost halved since high reached in 2011
- Iran Air Signs Agreement to Buy Boeing 737, 777 Airplanes: Contract is Boeing’s first since sanctions against Iran lifted
- Apple’s Cook Plans Ryan Fundraiser Amid Reported Doubts on Trump: Co. said to withhold sponsorship of party convention
- Netflix Said to Near CW Deal With Shorter Wait Times: L.A. Times: New deal would have episodes available within 2 weeks
- KKR Raises $739 Million for First European Real Estate Fund: Fund plans to focus on investments in western Europe
- BHP CEO Says Iron to Take Longer to Balance Than Oil, Copper: Prices now ‘more realistic’ on basis of fundamentals, CEO says
Asian equity markets picked up on the momentum from the positive Wall Street close, following continued gains in energy and after the latest Brexit polls provided reassurance to the market. Nikkei 225 (+1.3%) erased its earlier losses to trade higher as a rebound in USD/JPY boosted exporter sentiment, while the ASX 200 (+0.2%) is led higher by defensive stocks. Elsewhere, Chinese markets conformed to the positive tone with the Shanghai Comp (+0.2%) higher after the PBoC continued to inject a respectable amount of funds into the inter-bank market. Finally, 10yr JGBs traded lower as the risk-on sentiment in Japan dampened demand for safe-haven assets, while today’s enhanced liquidity auction for long-end JGBs saw a lower than prior b/c. BoJ Minutes from the April 27th-28th meeting stated Japan’s economy is continuing to recover gradually and that underlying trend in inflation is showing steady improvement. In addition, several BoJ members were more cautious for the outlook on inflation and stated that NIRP impairs financial market function and JGB market stability, while 1 member stated the impact of QQE is diminishing and that the side-effects are greater.
Asia Top News
- PBOC Discusses Opening Offshore Yuan Trading to Onshore Banks: Chinese banks have need for better integration, PBOC says
- RBA Sees Positive Economic Data Outweighing CPI for Now: Higher Aussie dollar could complicate economy’s adjustment
- LVMH-Backed Asia Private Equity Fund Sued by Fired Executive: Mehra seeks at least $37.5m in claims for dismissal
- Tesla Said to Target Shanghai as Front-Runner for Production: Tesla, Jinqiao may invest $9b in Shanghai project
- Billionaire Li Ka-Shing Warns Against Brexit as Referendum Looms: As one of the U.K.’s largest investors, Li has much at stake
This morning has seen European stocks rather steady after their largest one-day rally since August, inspired by increasing expectations that the UK will remain in the EU. As such, equities have traded in choppy fashion with the upside in defensive stocks (Healthcare) offset the softness in energy stocks, with news flow fairly light thus far ahead of Fed Chair Yellen’s Testimony. In credit markets, the German 10-yr benchmark has also seen price action relatively muted, with spreads widening and the yield curve bear steepening yet again. Also, of note the top German court have rejected the challenge against the ECB’s OMT which saw little reaction given the fact that the decision had been widely expected.
European Top News
- German Investor Sentiment Unexpectedly Rises Ahead of U.K. Vote: ZEW expectations index climbs to 19.2 in June from 6.4
- Axa Targets $2.4b Cost Cuts by 2020, Weighs Acquisitions: Underlying EPS expected to rise 3%-7% annually over the period
- Kion Buys Dematic for $2.1 Billion to Move Into Warehouse Robots: Co. says acquisition to bolster position in automation
- Nordea Bank Rejects Speculation It Lacks Billions in Capital: Swedish regulator says Nordea meets capital requirements
- BMW Seeks Partners in Race to Build Self-Driving Car’s Brain: BMW expects talks on more HERE partners to finish by end-2016
- Spain’s Grand Compromise Emerging With Just One Sticking Point: Socialists, Ciudadanos may be ready to back PP-led govt
In FX, the star attraction continues to be the pound, which strengthened another 0.5% to $1.477, having surged 3.5% in the previous two days. Billionaire investor George Soros said sterling may slump more than 20 percent if British voters choose to leave the EU, a devaluation that would be bigger and more disruptive than when he profited by betting against the currency in 1992. “There’s quite a lot of volatility in the pound now with investors repositioning after the massive rally,” said Angus Nicholson, a market analyst at IG Ltd in Melbourne. “There is a lot of uncertainty with the Brexit vote and Remain is not a given yet.” The Bloomberg Dollar Spot Index declined 0.2 percent, falling to its lowest in more than a month. The gauge has weakened every day since the Fed left interest rates unchanged last week and Yellen said Brexit was a factor in the decision. The euro strengthened for a third day versus the greenback, its longest winning streak in seven weeks. European Central Bank President Mario Draghi will be speaking Tuesday in Brussels. The yen weakened 0.5%, after surging 3 percent over the last seven trading sessions, as a technical indicator — the relative strength index — reached a level that indicated a reversal was likely. Finance Minister Taro Aso signaled that Japan’s government won’t intervene to stem the yen’s strength without due consideration
In commodities, gold declined 0.7%, extending Monday’s retreat from its highest close since January 2015. West Texas Intermediate crude dropped as much as 1 percent to $48.87 a barrel in New York, after rallying 6.8 percent in the last two sessions. U.S. inventories probably fell by 1.5 million barrels last week, according to a Bloomberg survey before an Energy Information Administration report Wednesday.Copper slid from a two-week high in London and nickel dropped 1 percent, after ending the last session at a six-week high. U.S. natural gas futures fell as much as 1.4 percent after settling Monday at a nine-month amid forecasts for unusually hot weather across the country through next week. The deadly heat hitting the Southwest states is set to ease from Tuesday.
There’s again no data due out in the US however that should give the market a chance to focus on Fed Chair Yellen’s testimony to the Senate at 10am ET. It’s more than likely that the tone of the prepared remarks are a bit of a rehash of those comments post the FOMC last week. Also of potential interest today will be comments from the ECB’s Draghi who is due to speak at the European Parliament today.
Bulletin Headline Summary from RanSquawk and Bloomberg
- GBP/USD remains bid to reach its highest level since before the announcement of the EU referendum date as polls continue to lean to the remain camp.
- Equities have been somewhat tepid this morning following yesterday’s largest advance since August.
- Highlights include Fed Chair Yellen’s Semi Annual Testimony as well as comments from Fed’s Powell and ECB’s Draghi.
- Treasuries little changed in overnight trading, global equities mixed as Yellen’s semi-annual testimony begins today before the Senate Banking Committee at 10am ET; Treasury auctions continue with sale of $34b 5Y notes, WI 1.20%; last sold at 1.395% in May, first 5Y auction since Feb. to stop through.
- Britain’s referendum on EU membership remained too close to call two days before the vote, with separate polls showing leads for both sides and George Soros warning of a slump in the pound should voters back a so-called Brexit
- German judges reluctantly rejected challenges against one of the European Central Bank’s most powerful tools just two days before a potential Brexit vote could unleash economic turmoil across the euro area
- The ECB is about to find out how attractive its offer to pay lenders to lend really is. Starting tomorrow, euro-area banks can bid for a four-year loan from the ECB at an interest rate that begins at zero and could ultimately be negative
- The Bank of England allotted less to banks in the second of its extra liquidity operations being held to assure sufficient funding around Britain’s referendum on EU membership
- There have been no substantial corporate sterling deals since May and issuance in euros has slowed to a trickle as markets are roiled by uncertainty over whether the U.K. will vote on Thursday to leave or remain in the European Union
- German investor confidence unexpectedly improved in June after polls on Britain’s future in the European Union showed the ‘Remain’ camp gaining ground
US Event Calendar
- No major events scheduled
- 10:00am: Fed’s Yellen testifies to Senate Banking Committee
- 1:00pm: U.S. to auction $34b 5Y notes
DB’s Jim Reid concludes the overnight wrap
It felt like the longest day watching England last night but as the match ended and we saw the last flickers of twilight, 3 new Brexit opinion polls were released after a Monday surge in risk that included the largest single day gain for Sterling (+2.37%) since December 2008. The first from the National Centre for Social Research polled at 53/47% in favour of ‘remain’. The second from ORB/Telegraph (phone) showed a 53/46% lead in favour of ‘remain’ for decided voters and 49/47% including undecided. The previous ORB/Telegraph poll covering June 8th-12th was split 49/48% in favour of ‘leave’ when accounting for those certain to vote. Finally YouGov bucked the trend to see a 44/42% lead for ‘leave’ with a poll out late last night. That included the don’t knows although the trend was similar when you exclude these at 51/49% in favour of ‘leave’. That’s a swing from the last YouGov/Times survey on June 16th-17th when the split was 44/43% in favour of ‘remain’ including don’t knows and 51/49% in favour of ‘remain’ excluding don’t know’s.
It’s worth noting that the fieldwork for the NatCen poll covered a wide period of between May 16th and June 12th with 65% of the interviews coming between May 16th and 26th and interestingly it was said to be an ‘experimental phone/online survey’. However considering the ebbs and flows in polls we’ve seen over the last month or so this poll looks a little less reliable as a gauge of current expectations given the timeframe. Meanwhile, fieldwork for the YouGov poll covered June 17th-19th and while the dates for the Telegraph Poll weren’t provided, much of the article pointed towards last Thursday’s tragedy as being a swing factor so we assume at least the majority of the survey period came after this date and so it’s probably fair to rule out any survey date biases with these two latest polls.
Interestingly the Telegraph poll also ran a survey on expected turnout numbers. It revealed that turnout among ‘remain’ voters has increased 9 points over the last week to 69% now, while turnout for ‘leave’ voters has fallen 4 points to 64% with the article going on to suggest that a complacency factor could be in play among the ‘leave’ camp.
The last 24 hours has also seen the Telegraph join the support for the ‘leave’ camp and so joining the Sunday Times in the process. In the mean time some comments from investor George Soros are also getting some airtime. In an op-ed in today’s Guardian newspaper, Soros said that a reasonable assumption under a ‘leave’ outcome would be for a drop in the pound by ‘at least 15% and possibly more than 20% to below $1.15’.
Following that huge rally for the pound yesterday to just shy of $1.470, it weakened a touch following that last YouGov poll and is currently down about -0.27% in trading this morning as we go to print. Sentiment in Asia generally is relatively positive. The Nikkei (+0.51%), Hang Seng (+0.42%), Shanghai Comp (+0.27%) and ASX (+0.10%) are all higher, although the Kospi (-0.36%) is struggling a little. EM currencies are generally posting modest gains too, while US equity index futures are showing small gains at present of less than half a percent.
The moves this morning come after risk assets surged yesterday having got the green light from the off as markets reacted to the latest sharp re-pricing in referendum odds. The implied probability based on political bookmaker odds of a ‘remain’ outcome closed at 79.8% (and touched 80.6% intraday) after starting the day around 74.0%. We’re sitting at 79.7% as we type now. European equity markets surged out of the gates and consolidated mid-morning without ever really looking back. Led by banks and Lloyds (+7.61%) and Barclays (+6.70%) in particular, the Stoxx 600 closed +3.65% for the largest one-day gain since August 25th last year. The FTSE 100 closed up +3.04% – the most since February – and there were big moves also for the DAX (+3.43%), CAC (+3.50%), IBEX (+3.41%) and FTSE MIB (+2.54%). Credit indices were in similar full blown rally mode too with the iTraxx Main and Crossover indices finishing 7bps and 28bps tighter respectively. Rates markets also reflected the hugely positive tone. Peripherals rallied with 10y yields in Italy, Spain and Portugal 8bps, 8bps and 17bps tighter respectively. Greek 10y yields were even 34bps tighter. On the flip side 10y Bund yields had a rare move higher, closing just over 3bps higher on the day at 0.050%.
As the US session kicked in it looked initially like risk assets across the pond might be in for similar magnitude gains although the early big gains were trimmed back as the session wore on. The S&P 500 still closed +0.58% after touching the 2100 level intraday early doors which was perhaps a signal for some profit taking. CDX IG finished just over 2.5bps tighter and the US Dollar eased with the Dollar index (-0.63%) closing lower for a fourth consecutive session. 10y Treasury yields also closed 8.1bps higher yesterday at 1.689% and the highest in ten days. Unsurprisingly commodities ex Gold rallied with the greatly improved sentiment. Copper closed up over 2%, while Brent climbed 3% and back above $50/bbl for the first time in a week. Gold pared back -0.67%.
So while we are all understandably fixated by Brexit, yesterday we mentioned the 5SM successes in Sunday’s local Italian elections. Further to this, DB’s Marco Stringa has published a note delving deeper. He suggests that the anti-establishment 5SM’s success was mainly at the expense of PM Renzi’s PD. Indeed, part of the centre-right seems to be willing to support the 5SM to antagonise Renzi. This increases the probability of a rejection of the crucial Senate reform in the October referendum. Marco now thinks that it is a 50-50 call. If the referendum is rejected, he would expect the fall of Renzi’s government. Forming a stable government majority either before or after a new election could become extremely challenging even by Italian standards. Marco thinks the 5SM has a real chance to beat the PD in a second round in the general election (2018). Much can change before then but the political momentum is not currently with Renzi. As he concludes, Italy’s political situation has the potential to pose a greater long-term challenge to the euro area’s stability than the election in Spain this weekend or even Brexit.
While we’re in Europe and on another non-Brexit related theme, yesterday saw the ECB release their official CSPP holdings figures following the first full week of purchases to last Friday. Current holdings amount to €2.25bn of corporate purchases since buying first started on June 8th. Bloomberg is reporting that purchases last week amounted to €1.9bn which would imply a slightly better than expected run rate on our roughly >€5bn monthly expectation for now. As we’ve highlighted in previous reports though it could be that we see certain months’ purchases coming in well above others depending on liquidity, upcoming holiday months and so forth. In any case it appears to be a strong early statement of intent.
Meanwhile there was also some commentary out of the Fed to mention yesterday. Minneapolis Fed President Kashkari said that the effect of a potential ‘Brexit’ is likely to have only ‘moderate direct effects on the US economy in the near term’. He confirmed that all policy options would be on that table in response should a ‘leave’ outcome be the case.
Before we move onto the day ahead, the latest The House View titled “Brexit: Decision time” came out overnight. The June 23rd UK referendum has been the dominant theme for markets, with shifts in opinion polls and betting odds leading to sharp swings in asset prices. The team note that the outcome of the referendum remains too close to call. But regardless of the result, political uncertainty is unlikely to subside for some time. This comes against a global growth backdrop that remains sluggish but overall little changed since the start of the year. Markets will take their near-term cues from the UK referendum: A material shock would trigger a forceful central bank response; absent a shock, attention should shift back to fundamentals.
Looking at today’s calendar, the day kicks off this morning with the German Constitutional court ruling on the legality of the ECB OMT, which should be worth keeping an eye on. Data wise this morning in Europe we’re kicking off in the UK with the latest public sector net borrowing data for May. Shortly following this we’re over to Germany with the June ZEW survey where the consensus is for little change in the current situations index, but a slight decline in the expectations component. Following that it’s back to the UK again with the June CBI orders data. There’s again no data due out in the US however that should give the market a chance to focus on Fed Chair Yellen’s testimony to the Senate at 3pm BST. That said it’s more than likely that the tone of the prepared remarks are a bit of a rehash of those comments post the FOMC last week. Away from this we’ll also hear from the Fed’s Powell at 7.30pm BST. Also of potential interest today will be comments from the ECB’s Draghi who is due to speak at European Parliament at 2.00pm BST. As usual, it’s more than likely that any more UK EU referendum polls dominate the tone for markets again today.
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