Friday, June 17, 2016

Will They Stay or Will They Brexit? Weekly Market Update: Will They Stay or Will They Brexit?
Fri, 17 Jun 2016 16:04 PM EST

Brexit fever gripped global markets this week, as uncertainty about the June 23rd referendum on the UK's continued membership in the European Union inspired a big rotation into safer sovereign paper. Four major central banks - US Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank - left policy unchanged at meetings this week, however their most impactful moves appeared to be jawboning about Brexit, largely via warnings about the chaos that would follow the UK seceding from the EU. Meanwhile, the US presidential campaign and the nation at large was rocked by the worst mass shooting incident in US history at an Orlando, Florida gay nightclub a lone-wolf terrorist, with a death toll of over four dozen people. Brexit fears eased temporarily in the latter half of the week after another shooting death: the murder of a British MP by a nationalistic extremist led to a three-day suspension in campaigning on the referendum and delayed the release of new polls. Sovereign bond yields see-sawed through the week, with European benchmark paper dipping into and then out of negative territory, while the 10-year UST yield tested three-and-a-half year lows below 1.60%. Gold hit its highest mark since August 2014 and then pulled back on Friday. Stocks mostly trended lower, and for the week the DJIA lost 1.1%, the S&P500 dipped 1.2%, and the Nasdaq fell 1.9%.

Citing uneven economic data and the potential uncertainty surrounding next week's UK referendum, the FOMC left rates unchanged and also lowered its median forecast for the Fed funds rate in 2017, 2018 and over the long run. The number of members who saw only one rate hike in 2016 jumped to six from one at the last meeting. At her post-decision press conference, Fed Chair Yellen warned economic headwinds could persist for some time and confirmed the committee was worried about a potential Brexit.

The BoJ largely sustained its policy stance with a bit of tinkering. It upgraded its view of housing investment and public spending, and revised its outlook for inflation to allow for "slightly negative" CPI from the prior view of "about 0%." The strengthening yen is an obvious concern, but Japanese officials were skittish about discussing the potential for FX intervention. Finance Minister Aso refused to say whether another round of intervention was being considered, only reiterating that abrupt, one-sided FX moves were still very undesirable. The Finance Ministry, the BoJ and the FSA met this week to discuss the international situation, although the only details that emerged were that officials agreed volatility was on the rise. Some analysts said that Tokyo would be forced to intervene if USD/JPY broke below 100 in the event of Brexit.

With rates on hold, the BoE took the opportunity to ring emergency bells over the EU referendum. The BoE warned that big economic decisions were already being delayed by uncertainty over the vote, slowing economic growth and sending shockwaves through the global economy, and called the referendum the biggest immediate risk to UK markets. "On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling's exchange rate would fall further, perhaps sharply," read the BoE statement. Cable tested below 1.4050 after the decision, for fresh 10-week lows.

Before the Brexit campaign was violently interrupted by the murder of Labour MP Jo Cox on Thursday, market participants were increasingly unnerved by each subsequent poll on the UK referendum. The 'leave' camp continued to maintain its narrow lead in polls last weekend and in the first days of this week. ORB/Independent and Sky News polls had 'leave' support in the mid 50% range, while others had the two camps a few points apart in the mid 40s - although the undecided respondents continued to be in the double digits in nearly every poll. Fears were amplified as major UK tabloid newspaper The Sun backed the 'leave' camp, becoming the first major UK newspaper with a formal endorsement. By Thursday, cable was plummeting toward 1.4000 and funds were pouring into safer assets. On that day, Jo Cox was shot and stabbed to death in Yorkshire, by a suspect with links to a far-right group that has long advocated for Britain to leave the EU. Both 'stay' and 'leave' camps suspending campaigning, further polling was delayed and market participants shifted their attention to bookmakers, where odds were favoring the UK to vote to remain in the EU. By Friday, GBP/USD was rebounding above the 100-day moving average around 1.4350 in the absence of Brexit campaign rhetoric.

The Swiss National Bank kept its negative interest rate policy unchanged despite safe-haven trading that has further strengthened the franc, raising fears that it was running out of policy options to cope with an overvalued currency. The SNB warned it was keeping a close watch on the UK's EU referendum, and reiterated its familiar mantra that the franc remains "significantly overvalued." Switzerland's 30-year yield dipped into negative territory for the first time after the decision, meaning almost the entire market for Swiss government debt now trades below zero.

Two June regional Fed factory surveys suggested there has been something of a recovery in the US manufacturing. Both the Empire State and Philly Fed manufacturing indexes were much, much better than expected. The new orders and shipments components of the New York Fed's Empire survey rose from negative territory to +10.9 and +9.3, respectively. The weak components of the Philly Fed survey contrasted sharply with the very strong headline. Both orders and shipments were slightly more negative than in May. Advance retail sales were stronger than expected in May, although not nearly as good as the April sales. Retail sales increased 0.5% last month after surging by an unrevised 1.3% in April. Core sales, used for calculating GDP, were up 0.4% after a revised 1.0% gain in April. The good report could see economists raising their Q2 GDP growth estimates, which are currently around a 2.5% annualized rate.

China's May economic data were generally in line or softer than expected. Most notably, fixed urban investment growth slowed to multi-year low as property sales value and construction activity saw the most pronounced declines. China industrial output was more mixed - power generation recovered from last month's decline and crude steel output showed slightly higher growth, even though the headline numbers were as expected. The China Stats Bureau noted overall employment is steady and investment is growing, though the economy is still faced with uncertainties. The IMF warned markets about the deterioration in China's credit markets, stating "mounting corporate debt is a key fault line in the economy" particularly with many SOEs already "on life support."

For the third year in a row, stock index firm MSCI declined to add China mainland A-shares to its emerging market index. Among the reason behind the decision, MSCI cited insufficient reforms of financial markets on the mainland, including continued monthly repatriation limits that impede redemptions as well as pre-approval restrictions on launching financial products. However, MSCI suggested an off-cycle announcement on A-shares could not be ruled out. Currently, shares from China listed in the MSCI emerging market index are all traded in either Hong Kong or the US. Chinese officials were not happy with the decision, and suggested there would not be many more reforms in financial markets given the remaining downside risks in markets over the near term.

Shares of Apple were weighing on broader indices, down more than 3% on the week, after series of iPhone setbacks. First there were press reports that annual sales of iPhones would decline for the first time ever in 2016 due to lukewarm demand, with shipments seen around 210-220M. Over the last six months, Nikkei had reported that Apple could lower its production of iPhone 6 in the first two quarters of the year, based on significantly lower component orders among Taiwan tech suppliers. Then on Friday, a Beijing patent court ruled that Apple violated a competitor's IP and ordered the company to halt sales of the iPhone 6 in China. Apple downplayed the ruling and filed an appeal, saying it continues to sell smartphones in the China market.

In M&A news, Microsoft announced a $26.2 billion cash deal to acquire LinkedIn, priced at $196/share, in one of the most expensive tech acquisitions in history. Jeff Weiner will stay on as CEO of LinkedIn and will report to Microsoft CEO Satya Nadella. Symantec announced a deal to buy Blue Coat Systems for $4.65B amid further consolidation in security space. Ariad Pharmaceuticals announced it had completed a three-month long strategic review for creating shareholder value, opting to undertake more cost cutting with no mention of possible M&A.