TradeTheNews.com Weekly
Market Update: UK Voters Fancy a Brexit, Global Markets Left in the Lurch
Fri, 24 Jun 2016 16:08 PM EST
On Friday, the UK voted to quit the European Union after more than four decades
of membership, upending global markets and sending the pound to its weakest
levels since the mid 1980s. The stunning rejection of Europe's political and
economic order prompted Prime Minister Cameron to resign, and global central
banks were scrambling to ensure markets continue functioning normally. Asian
equity markets cratered, with the Nikkei closing down nearly 8% on Friday and
the yen surged, with USD/JPY briefly dipping below 100 for the first time in
three years. The CAC fell nearly 8% and the DAX declined nearly 7%, while in
the UK the FTSE was only off 2.2% as the surge in gold prices helped hold up
the index - where many of the largest global gold miners trade. Gold surged to
two-year highs around $1,325. The 10-year Bund yield dipped as low as -0.17%,
while the German 30-year yield nearly went negative. The reaction in the States
was a bit less harsh, but nonetheless share prices plunged and Treasury prices
surged along with the US Dollar. For the week the Dow closed down 1.6%, Nasdaq
-1.9%, and the S&P lost 1.6% to finish at a three month low.
The final results of the UK referendum show 51.9% voted to leave the EU versus
48.1% to stay in the union, with London and urban areas strongly favoring
'stay' and northern and more rural areas voting 'leave'. PM Cameron will step
down within three months, saying the UK needs fresh leadership. "We should
have a new prime minister in place by the Conservative party conference in October,"
said Cameron. Boris Johnson, former Conservative mayor of London and a leader
of the 'leave' camp, appears to be in the front running to lead a new
government. The framework of the UK's new relationship with the EU, including
trade agreements, will be negotiated over a period of years. Scottish
nationalist leader Nicola Sturgeon has said that the Scottish National Party
will begin to prepare legislation to allow a new Scotland referendum to take
place before the UK leaves the EU. Scotland decisively voted to remain in the
EU with 62% voting for 'stay' compared to 38% for 'leave'.
Leading central banks firmly repeated their commitments to strongly support the
normal functioning of financial markets. The Fed and other said they would
activate existing swap lines to provide adequate liquidity in all cases. Bank
of England Governor Carney said the BoE was ready to provide up to £250B of
extra funds and foreign currency to stabilize markets and would consider
additional policy action in coming weeks. The ECB warned of contagion risks and
loss of confidence, with a potential spread to the banking system. The Fed and
BoJ both face involuntary policy tightening as funds flee to the greenback and
the yen. There is little hope that the Fed will be able to raise rates more
than once this year, with a September hike looking less possible and even
December a real question. With the yen dropping to parity with the dollar, the
Bank of Japan will likely intervene in FX markets ahead of new monetary easing
measures, even after Japan Finance Minister Aso said the threshold for an
intervention remains very high.
There was little market-moving news beyond the Brexit vote this week. Fed Chair
Yellen gave her semi-annual monetary policy testimony before Congress. Yellen
offered very cautious remarks, warning that considerable uncertainty about
economic outlook remains and that the Fed is concerned that slower productivity
growth could continue for some time. Some analysts detect an even softer tone
in Yellen's remarks, noting that she seemed to suggest the Fed is looking to
see whether there is more improvement in the US economy, not when improvement
may arrive. "Proceeding cautiously in raising the federal funds rate will
allow us to keep the monetary support to economic growth in place while we
assess whether growth is returning to a moderate pace, whether the labor market
will strengthen further, and whether inflation will continue to make progress
toward our 2 percent objective," Yellen said.
In the US, the June Markit Manufacturing PMI report suggested the healing has
begun for the manufacturing industry. The May reading of 50.7 was the lowest in
6.5 years, making June's relatively anemic figure of 51.4 look pretty good. The
annualized rate of May existing home sales rose to the highest level in nearly
a decade. Strong sales contrasted with lower inventories and higher prices. May
new home sales were slightly below the April rate, which was revised lower.
Nevertheless, both the April and May reports show rapid growth in sales, with
the latest three-month average of 553K up at an annual rate of +19% from the
previous three months (Dec through Feb) and up 11% from the same period a year
ago.
A spectrum of transport names offered guidance ahead of the June quarter
earnings season. Canadian Pacific warned that revenue had declined 12% y/y in
its second quarter due to lower-than-anticipated volumes in bulk commodities,
such as grain and potash, the unexpected and devastating wildfires in northern
Alberta and a strengthening Canadian dollar. United Airlines slightly improved
its passenger unit revenue outlook for its second quarter. Executives also
hinted that prior capacity reductions had reduced the airline's market share.
Southwest reaffirmed its outlook for very modest RASM growth in its second
quarter, but warned that RASM would face challenges in the second half of the
year. Trucking names Werner Enterprises and Covenant Transportation both
offered very soft earnings guidance, citing sluggish demand and higher labor
costs.
Elon Musk confounded Wall Street once again and launched a bid for Tesla to
acquire SolarCity. Tesla offered to buy SolarCity for 0.122-0.131 shares per
share, in a deal valued at $26.50-28.50/shr or $2.5-3.0B in total. The premium
was 20-30% over SolarCity's closing price, although it's worth keeping in mind
that shares of SCTY have plummeted by 60% over the last year. Musk said he
would like to build Tesla into a one-stop shop for electric cars, solar panels
and home batteries. The rationale behind the deal would be for SolarCity to
save big on sales and marketing costs, and gain access to new customers as part
of Tesla, although analysts suggest the plan is nothing more than a bailout of
SolarCity's sinking fortunes. Citron Research's Andrew Left warned that if the
Tesla deal doesn't go through than shares of SolarCity would go to zero.
Investors will scrutinize the deal very closely: Solar City CEO Lyndon Rive and
Musk are cousins, and Musk is the biggest shareholder in both SolarCity (22.2%
stake) and Tesla (26.5% stake).