Like It Never Happened
DOW + 284 = 17,694
SPX + 34 = 2070
NAS + 87 = 4779
10 Y + .04 = 1.51%
OIL – .30 = 49.58
GOLD + 6.80 = 1319.30
Stocks rallied for a second day, and it was a global rally. The dollar weakened. The yield on 10-year Treasuries rose four basis points to 1.51 percent after falling Monday to the lowest in almost four years. The MSCI All-Country World Index had its biggest two-day gain since August. The S&P 500 moved from negative year to date to slightly positive. The Dow Jones Industrial Average stretched its rebound to 553 points since Monday’s close.
Britain’s FTSE 100 Index erased its post-Brexit losses with a 6.3 percent surge over two days. The Stoxx Europe 600 Index climbed 3.1 percent. The gauge has recovered 4.7 percent after tumbling 11 percent over two days. It is still heading for a second consecutive quarterly decline. Emerging-market shares climbed. Maybe cooler heads prevailed; maybe it is a short squeeze. Goldman’s basket of the most shorted shares in the Russell 3000 Index rose the most since 2009. Doesn’t matter. Prices moved higher.
And so this raises the question of whether all the fear over Brexit was justified, or if this is just the calm before the storm. The fall in the pound sterling is a blessing for the British economy, and a headache for the Eurozone. The exchange rate is acting as a shock-absorber. The FTSE 100 index of equities in London is back to where it was on the eve of the vote, compared to falls of roughly 6% in Germany and France, 10% in Spain, 11% in Italy, 13% in Ireland, and 14% in Greece.
The UK was stripped of its AAA credit rating but there has been no sign of systemic meltdown. Britain’s Brexiteers must come up with a coherent policy on trade very fast, and the EU must come off their ideological high-horse and face the reality that they have absolutely no margin for economic error.
US Secretary of State John Kerry warned in stark terms on his post-Brexit swoop into Europe that nobody should lose their head, or go off half-cocked, or “start ginning up scatter-brained or revengeful premises.” Nobody seemed to heed his words at the EU’s summit in Brussels, but the situation still carries the potential for significant economic damage, even if it plays out in slower motion.
European Union leaders wrapped up a two-day conference in Brussels and called for an orderly British withdrawal from the bloc to minimize instability. They also spelled out conditions for a new relationship with a departing Britain, warning that if British business wants to continue to enjoy the seamless single market after its departure, it would also have to accept that EU citizens can continue to enter Britain.
Francois Hollande, the French President, has warned London that it will no longer be the center of euro-denominated clearing following the Brexit vote, dealing a blow to one of the City’s biggest markets and casting further doubt on the London Stock Exchange’s merger plans. Mr. Hollande, speaking after a tense meeting of European Union leaders last night, said: “The UK has said it doesn’t want any more freedom of movement. Now it won’t have access to the single market anymore.”
Scottish minister Nicola Sturgeon, spoke before the European Commission in Brussels, trying to make the case for Scotland to stay in the EU. In last week’s referendum, Scottish voters backed staying in the EU by a nearly 2-1 majority. Mrs. Sturgeon argued that Scotland must not be dragged out of the EU against its will. She wants to negotiate directly with Brussels to protect membership rights of Scots and is open to a new independence referendum, splitting from the UK, if that is the only way to keep Scotland in the bloc. Sturgeon drew a mixed response from EU leaders. Spanish Prime Minister Rajoy said flatly, “If the United Kingdom leaves, Scotland leaves.”
Moody’s has cut its outlook on the British banking system from stable to negative following last week’s referendum, saying: “We expect lower economic growth and heightened uncertainty over the U.K.’s future trade relationship with the EU to lead to reduced demand for credit, higher credit losses and more volatile wholesale funding conditions.”
The Federal Reserve delivered a report card on the largest banks in their annual stress tests. US units of Deutsche Bank and Banco Santander were the only firms to fail the tests in 2015, and they failed the tests again this year. The Fed gave Morgan Stanley only a conditional pass, saying that the bank also had to resolve weaknesses in its processes. Morgan Stanley has until Dec. 29 to resubmit its capital plan for approval. The stress test results, known as CCAR (or Comprehensive Capital Analysis and Review), are particularly important because they determine how much capital big U.S. banks can put toward dividends, stock buybacks, acquisitions or investments.
General Electric has won approval to drop its designation as a too-big-to-fail financial institution, capping a transformation that has included the sale of almost all of its lending business. The Financial Stability Oversight Council determined that GE no longer poses a threat to U.S. financial stability. The decision marks the first time a company has been granted formal release by the council.
The Commerce Department reports consumer spending increased 0.4 percent last month, on increased demand for automobiles and other goods. Consumer spending in April was revised up to show it advancing 1.1 percent instead of the previously reported 1.0 percent jump. Consumer spending rose at a 1.5 percent annual rate in the first quarter, holding down gross domestic product growth to a 1.1 percent pace. Personal income rose 0.2 percent after advancing 0.5 percent in April. Wages and salaries gained 0.2 percent. Savings slipped to $730.6 billion last month from $753.7 billion in April.
A gauge of pending home sales slid 3.7% in May, a step back following several months of strong sales. The National Association of Realtors’ index fell to 110.8 in May from a downwardly-revised 115.0 in April. Even with that revision, April figures were the highest since February 2006 – but May marked the first year-over-year decline since August 2014.
The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed. Last week the NAR reported sales of previously-owned homes rose to the highest level in more than nine years in May. So, it appears demand is still strong but there is a shortage of inventory.
Congress has been thinking about doing something about the debt problem in Puerto Rico. Of course, Congress hasn’t actually done anything yet. They did table further debate on a bill, which means a vote could come later this evening or tomorrow on a measure to allow Puerto Rico to restructure its total debt and establish an oversight board to impose big cuts in spending. And it probably doesn’t matter.
Puerto Rico will default on more than $1 billion in general obligation bonds on Friday. The default will mark the first time the U.S. territory has failed to pay what it owes on general-obligation debt, a $13 billion swath that its constitution says has the top claim to the government’s funds. Puerto Rico had already defaulted on debt issued by three agencies, but creditors were left with little recourse because the securities were backed by weaker legal safeguards.
Governor Garcia Padilla previously said the commonwealth couldn’t raise enough to cover what’s owed to bondholders even if he shut down the government. The island has about $2 billion in principal and interest payments due Friday, and total debt of around $70 billion. Without the ability to file for bankruptcy protection as cities including Detroit have done, Puerto Rico pushed Congress to give it legal tools to force creditors to the bargaining table and prevent an onslaught of lawsuits. Instead, it looks like they will be headed to court.
Energy Transfer Equity has terminated its merger agreement with Williams Cos. after a court ruled that it can walk away from the deal since it was unable to deliver a required tax opinion by June 28. Williams published a statement saying it is committed to completing the merger and will “enforce its rights” under the terms of its agreement. The deal had been valued at nearly $33 billion when it was signed last year.
Toyota announced another massive recall. The Japanese carmaker said it needed to recall 2.8 million cars over a possible fault in emissions control units, after it announced on Tuesday that 1.4 million Prius and Lexus models had to be brought in to have their air bag inflators fixed.
Coca-Cola expects to pull some of its beverages from Vermont stores this week as the state imposes a new law requiring all products made with genetically modified organisms to include warning labels. Although its top beverages will stay on shelves, including Coca-Cola, Diet Coke and Coke Zero, some smaller brands or configurations may temporarily disappear. Kellogg, Campbell Soup and Mars previously announced they would comply with the Vermont law and begin labeling their products for GMOs.
Nike’s futures sales disappointed. Nike reported adjusted earnings per share of $0.49, beating the consensus by a penny. Revenue rose 6% to $8.2 billion but was a bit shy of estimates. The closely followed worldwide futures orders jumped 11%, missing the 13% increase that analysts were anticipating.