TradeTheNews.com 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.
