*Still a lot of uncertainty surrounding Brexit vote:
Brexit sentiment dominated headlines ahead of tomorrow’s vote. What UK Thinks “Poll of Polls”, based on average of six most recent polls between 14-Jun and 20-Jun, showed "Remain" at 51% vs “Leave” at 49%. However, FT poll tracker put “Leave” at 44%, just ahead of “Remain” at 43%. Latest poll by Opinium out this morning showed "Leave" at 45% vs "Remain" at 44%. Poll this afternoon from TNS had "Leave" at 51% vs 49% for "Remain". Press reports continue to highlight the well above 70% probability of a “Remain” vote implied by betting markets. However, also talk probability elevated by outsized "Remain" bets (in terms of number of bets, “Leave” has dominated) and embedded expectations for usual late shift towards status quo. Bad weather mentioned as a possible headwind on turnout.
*Sector performance bunched:
Healthcare outperformed with help from biotech (and pockets of pharma) rebound on news IPAB will not be triggered this year. Group ended well off highs. A few managed care names, including ANTM-US, hit by Democratic pushback against &A. Materials boosted by precious metals strength (some renewed concerns into Brexit vote). Defensives mixed. Utilities lagged. Oil weakness easy excuse for energy sector underperformance. DOE data disappointed (following earlier tailwind from API). Tech a laggard on corporate updates from ADBE-US (software mostly weaker) and HPQ-US. Industrials weaker with some drag from FDX-US. Several moving pieces with its results/guidance, but analysts disappointed with lack of color on TNT guidance. ATU also guided lower. Rails bounced on sell-side commentary. Consumer discretionary in line. No real help for builders from another round of better earnings (KBH-US). Restaurants mixed. Several downgraded at Nomura, including MCD-US. Banks narrowly mixed into DFAST tomorrow.
*Asymmetric risks for markets into Brexit vote:
Big topic over last couple of days has been the asymmetric risks into Thursday’s Brexit vote. WSJ latest to discuss. Focus has largely revolved around rebound in global risk assets on dampened fears Britain will leave EU that many believe limits upside if status quo prevails. In addition, even if Britain stays, markets still have to deal with slower global growth backdrop, concerns about monetary policy fatigue, lack of fiscal stimulus, peaking profit margins and host of other political risks. At the same time, there continue to be thoughts markets are too complacent on Brexit risks. Focus has revolved around contagion concerns from increasingly interconnected global markets. While central bank cooperation may dampen some near-term damage, longer-term political fallout seen as bigger risk.
Morgan Stanley says Brexit spillover may be determined by political reaction:
Morgan Stanley recently said Brexit would likely deliver a global macro shock. Noted extent of spillover effects more about longer-term political reaction (and voter backlash) than short-term central bank response. Like others, pointed out that depending on how Europe responds politically, euro breakup concerns could creep back into market, driving a meaningful tightening in financial conditions. Added that if sterling weakness spills over to euro, excessive dollar strength could not only depress US growth and inflation outlook, but also pressure yuan exchange rate regime. Recall meaningful yuan depreciation widely seen as one of biggest tail risks for global markets. Some analysts have also highlighted the directional signals for US stocks from the yuan.
*Credit Suisse outlines market response to Brexit:
Credit Suisse outlines market response to Brexit in latest strategy note. Upon Article 50 immediately activated, sees BoE potentially restarting QE and gilt yield potentially falling below 100bps. Forecasts GBPUSD falling to 1.20-1.30 and EURUSD weakening to 1.05-1.10. Notes FTSE 100 year-end target would fall to 6,200 vs 6,600, STOXX 50 to 2,950 vs 3,350 and S&P 500 to 2,000 vs 2,150. UK sector-wise, based on correlations with gilt yields, sterling and PMIs, says worst performers would likely be financials, real estate and transport. On growth, estimates UK GDP contraction of 1% in 2017 and Eurozone growth off by ~0.2% in 2016 and ~1.0% in 2017 (to 1.5% and 1.0% GDP growth, respectively). Adds knock-on impact would see Italian bond spreads rise above Spain, CHFEUR appreciating close to parity and German office REITs outperforming.
*Mostly disappointing takeaways from corporate updates:
ADBE-US a laggard as most key metrics in line to slightly below consensus, leaving elevated expectations/recent outperformance as an overhang. However, no shift in sell-side sentiment surrounding stock and Street still seemed fairly upbeat on cloud transition. HPQ-US hit after it guided for better fiscal Q3 EPS to reflect marketing automation business divestiture. However, proceeds to be invested to drive strategy shift in printing (cut inventories), leaving FY guidance unchanged. FDX-US also weaker. Beat on revenue and EPS. Guidance captured consensus, but midpoint lower. Some concerns about lack of color on TNT outlook. ATU-US sold off after cutting guidance (O&G and ag the headwinds). KBH-US a standout. Beat with help from stronger deliveries. Orders also better. Boosted F16 housing revenue guidance.
*Biotech rebound drives healthcare outperformance:
Biotech drove outperformance in healthcare today after coming under recent pressure. However, ended well off best levels (as did pharma). Relief rally chalked up to news that the Independent Advisory Board, or IPAB, will not be triggered this year. IPAB is an independent executive committee established as part of the ACA to propose (and implement) cuts to Medicare payments if a certain spending threshold is met. Had been worries that IPAB could specifically target Part D drug spending, though some analysts downplayed concerns. Trigger still forecasted to be hit in 2017, which Bernstein noted could give Hillary Clinton leverage to seek concessions from drug industry if she becomes next president. Evercore ISI also pointed out that if IPAB implemented next year, 2019 would still be earliest we could see reforms. Goldman noted IPAB may be non-issue for several years.
*Tesla offers to acquire Solar City:
TSLA-US offered to acquire SCTY-US in an all-stock deal valued at $26.50-$28.50 a share, or as much as $2.8B. Represents a 25-35% premium over prior SCTY close. TSLA said deal would create world’s only vertically integrated company offering end-to-end clean energy products to customers. TSLA CEO Elon Musk, who is also the largest shareholder in SCTY and its chairman, called deal a no-brainer. However, initial reaction has been extremely negative. Reuters noted the 13% plunge in TSLA stock after hours amounted to a loss in value of $4.3Bm more than the offer for SCTY. WSJ Heard column said proposal “stretches the bounds of industrial logic”. Added it also stretches some ethical limits. Initial sell-side commentary has also flagged concerns about fundamental change to TSLA business model (Oppenheimer downgraded).
*Existing home sales in line; housing prices miss; ABI better:
Existing home sales increased 1.8% m/m to a 5.53M SAAR in May. Consensus was 5.55M, Third straight monthly increase. Sales now up 4.5% y/y to 5.79M, the highest level since February 2007. Supply at 4.7 months, unchanged from April. NAR flagged support from low rates and accumulated equity (driving trade-ups). FHFA house price index up 0.2% m/m in April following an upwardly revised 0.8% gain in March. Index up 5.9% y/y.Architectural Billings Index (ABI), a leading indicator for non-residential construction, increased to 53.1 in May from 50.6 in April. Strongest reading since July 2015. Index has been in expansionary territory in eight of the last nine months. New projects inquiry index rebounded to 60.1 from 56.9. Report noted solid demand across sectors.
*“Remain” vote may do little to dampen yen strength:
While a vote by Britain to remain in EU widely expected to drive a pickup in risk appetite, there has been talk that may not do much to dampen yen strength. Nikkei discussed this dynamic. Cited recent support from real money buying despite the signs of renewed momentum for the “Remain” camp. Pointed out that exporters still issuing buy orders, while funds that failed to capitalize on earlier yen strength also getting involved. Added waning US rate hike expectations and skepticism about Japan’s capacity to implement effective policies also likely to continue to underpin yen. Separately, some sell-side firms, including SocGen, have focused on the growing significance of real rate differentials in driving yen strength vs the dollar (this partly gets back to dampened confidence in BoJ).
*Japan unlikely to pursue unilateral intervention if Brexit vote exacerbates yen strength:
Yen seen as one of biggest beneficiaries if Britain votes to leave EU on Thursday. While Japanese officials have repeatedly expressed concerns about a stronger currency by focusing on the G7/G20 mantra that excessive volatility is undesirable, Bloomberg said Tokyo unlikely to pursue unilateral intervention in the wake of a Brexit vote. Highlighted concerns about likely G7 pushback and said preference would be for joint intervention by the G7 to stabilize FX markets. Article pointed out that G7’s last joint currency intervention was in wake of 2011 Japan quake. Noted that G7 confirmed that intervention via a public statement, something it would likely do again if it did decide to move in the wake of a Brexit vote.
*RIO TINTO LIMITED(RIO):
Could Rio Tinto’s sweeping restructure set the stage for a spin-off of its unwanted assets, similar to BHP Billiton’s demerger of South32? That’s the view of Alliance Bernstein analyst Paul Gait, who says the creation of a new division called ‘‘energy and minerals’’ under the leadership of Alan Davies could be a signal that a spin-off could be under consideration.The division will include Rio’s uranium, salt, borate and titanium assets, as well as its Canadian iron ore business. Mr Gait also seized on the fact the company’s coal assets have been included in the division. Outgoing chief executive Sam Walsh has previously flagged that the assets were up for sale at the right price. ‘‘We know that Rio has been deprioritising the coal assets for quite some time and we think they are looking to exit coal mining, just at a time when BHP and Glencore expressed their interest in building their coal exposure at the bottom of the cycle,’’ Mr Gait said. He pointed to BHP’s coal briefing on Tuesday when it left the door open to bolt-on acquisitions at the right price.
Brexit sentiment dominated headlines ahead of tomorrow’s vote. What UK Thinks “Poll of Polls”, based on average of six most recent polls between 14-Jun and 20-Jun, showed "Remain" at 51% vs “Leave” at 49%. However, FT poll tracker put “Leave” at 44%, just ahead of “Remain” at 43%. Latest poll by Opinium out this morning showed "Leave" at 45% vs "Remain" at 44%. Poll this afternoon from TNS had "Leave" at 51% vs 49% for "Remain". Press reports continue to highlight the well above 70% probability of a “Remain” vote implied by betting markets. However, also talk probability elevated by outsized "Remain" bets (in terms of number of bets, “Leave” has dominated) and embedded expectations for usual late shift towards status quo. Bad weather mentioned as a possible headwind on turnout.
*Sector performance bunched:
Healthcare outperformed with help from biotech (and pockets of pharma) rebound on news IPAB will not be triggered this year. Group ended well off highs. A few managed care names, including ANTM-US, hit by Democratic pushback against &A. Materials boosted by precious metals strength (some renewed concerns into Brexit vote). Defensives mixed. Utilities lagged. Oil weakness easy excuse for energy sector underperformance. DOE data disappointed (following earlier tailwind from API). Tech a laggard on corporate updates from ADBE-US (software mostly weaker) and HPQ-US. Industrials weaker with some drag from FDX-US. Several moving pieces with its results/guidance, but analysts disappointed with lack of color on TNT guidance. ATU also guided lower. Rails bounced on sell-side commentary. Consumer discretionary in line. No real help for builders from another round of better earnings (KBH-US). Restaurants mixed. Several downgraded at Nomura, including MCD-US. Banks narrowly mixed into DFAST tomorrow.
*Asymmetric risks for markets into Brexit vote:
Big topic over last couple of days has been the asymmetric risks into Thursday’s Brexit vote. WSJ latest to discuss. Focus has largely revolved around rebound in global risk assets on dampened fears Britain will leave EU that many believe limits upside if status quo prevails. In addition, even if Britain stays, markets still have to deal with slower global growth backdrop, concerns about monetary policy fatigue, lack of fiscal stimulus, peaking profit margins and host of other political risks. At the same time, there continue to be thoughts markets are too complacent on Brexit risks. Focus has revolved around contagion concerns from increasingly interconnected global markets. While central bank cooperation may dampen some near-term damage, longer-term political fallout seen as bigger risk.
Morgan Stanley says Brexit spillover may be determined by political reaction:
Morgan Stanley recently said Brexit would likely deliver a global macro shock. Noted extent of spillover effects more about longer-term political reaction (and voter backlash) than short-term central bank response. Like others, pointed out that depending on how Europe responds politically, euro breakup concerns could creep back into market, driving a meaningful tightening in financial conditions. Added that if sterling weakness spills over to euro, excessive dollar strength could not only depress US growth and inflation outlook, but also pressure yuan exchange rate regime. Recall meaningful yuan depreciation widely seen as one of biggest tail risks for global markets. Some analysts have also highlighted the directional signals for US stocks from the yuan.
*Credit Suisse outlines market response to Brexit:
Credit Suisse outlines market response to Brexit in latest strategy note. Upon Article 50 immediately activated, sees BoE potentially restarting QE and gilt yield potentially falling below 100bps. Forecasts GBPUSD falling to 1.20-1.30 and EURUSD weakening to 1.05-1.10. Notes FTSE 100 year-end target would fall to 6,200 vs 6,600, STOXX 50 to 2,950 vs 3,350 and S&P 500 to 2,000 vs 2,150. UK sector-wise, based on correlations with gilt yields, sterling and PMIs, says worst performers would likely be financials, real estate and transport. On growth, estimates UK GDP contraction of 1% in 2017 and Eurozone growth off by ~0.2% in 2016 and ~1.0% in 2017 (to 1.5% and 1.0% GDP growth, respectively). Adds knock-on impact would see Italian bond spreads rise above Spain, CHFEUR appreciating close to parity and German office REITs outperforming.
*Mostly disappointing takeaways from corporate updates:
ADBE-US a laggard as most key metrics in line to slightly below consensus, leaving elevated expectations/recent outperformance as an overhang. However, no shift in sell-side sentiment surrounding stock and Street still seemed fairly upbeat on cloud transition. HPQ-US hit after it guided for better fiscal Q3 EPS to reflect marketing automation business divestiture. However, proceeds to be invested to drive strategy shift in printing (cut inventories), leaving FY guidance unchanged. FDX-US also weaker. Beat on revenue and EPS. Guidance captured consensus, but midpoint lower. Some concerns about lack of color on TNT outlook. ATU-US sold off after cutting guidance (O&G and ag the headwinds). KBH-US a standout. Beat with help from stronger deliveries. Orders also better. Boosted F16 housing revenue guidance.
*Biotech rebound drives healthcare outperformance:
Biotech drove outperformance in healthcare today after coming under recent pressure. However, ended well off best levels (as did pharma). Relief rally chalked up to news that the Independent Advisory Board, or IPAB, will not be triggered this year. IPAB is an independent executive committee established as part of the ACA to propose (and implement) cuts to Medicare payments if a certain spending threshold is met. Had been worries that IPAB could specifically target Part D drug spending, though some analysts downplayed concerns. Trigger still forecasted to be hit in 2017, which Bernstein noted could give Hillary Clinton leverage to seek concessions from drug industry if she becomes next president. Evercore ISI also pointed out that if IPAB implemented next year, 2019 would still be earliest we could see reforms. Goldman noted IPAB may be non-issue for several years.
*Tesla offers to acquire Solar City:
TSLA-US offered to acquire SCTY-US in an all-stock deal valued at $26.50-$28.50 a share, or as much as $2.8B. Represents a 25-35% premium over prior SCTY close. TSLA said deal would create world’s only vertically integrated company offering end-to-end clean energy products to customers. TSLA CEO Elon Musk, who is also the largest shareholder in SCTY and its chairman, called deal a no-brainer. However, initial reaction has been extremely negative. Reuters noted the 13% plunge in TSLA stock after hours amounted to a loss in value of $4.3Bm more than the offer for SCTY. WSJ Heard column said proposal “stretches the bounds of industrial logic”. Added it also stretches some ethical limits. Initial sell-side commentary has also flagged concerns about fundamental change to TSLA business model (Oppenheimer downgraded).
*Existing home sales in line; housing prices miss; ABI better:
Existing home sales increased 1.8% m/m to a 5.53M SAAR in May. Consensus was 5.55M, Third straight monthly increase. Sales now up 4.5% y/y to 5.79M, the highest level since February 2007. Supply at 4.7 months, unchanged from April. NAR flagged support from low rates and accumulated equity (driving trade-ups). FHFA house price index up 0.2% m/m in April following an upwardly revised 0.8% gain in March. Index up 5.9% y/y.Architectural Billings Index (ABI), a leading indicator for non-residential construction, increased to 53.1 in May from 50.6 in April. Strongest reading since July 2015. Index has been in expansionary territory in eight of the last nine months. New projects inquiry index rebounded to 60.1 from 56.9. Report noted solid demand across sectors.
*“Remain” vote may do little to dampen yen strength:
While a vote by Britain to remain in EU widely expected to drive a pickup in risk appetite, there has been talk that may not do much to dampen yen strength. Nikkei discussed this dynamic. Cited recent support from real money buying despite the signs of renewed momentum for the “Remain” camp. Pointed out that exporters still issuing buy orders, while funds that failed to capitalize on earlier yen strength also getting involved. Added waning US rate hike expectations and skepticism about Japan’s capacity to implement effective policies also likely to continue to underpin yen. Separately, some sell-side firms, including SocGen, have focused on the growing significance of real rate differentials in driving yen strength vs the dollar (this partly gets back to dampened confidence in BoJ).
*Japan unlikely to pursue unilateral intervention if Brexit vote exacerbates yen strength:
Yen seen as one of biggest beneficiaries if Britain votes to leave EU on Thursday. While Japanese officials have repeatedly expressed concerns about a stronger currency by focusing on the G7/G20 mantra that excessive volatility is undesirable, Bloomberg said Tokyo unlikely to pursue unilateral intervention in the wake of a Brexit vote. Highlighted concerns about likely G7 pushback and said preference would be for joint intervention by the G7 to stabilize FX markets. Article pointed out that G7’s last joint currency intervention was in wake of 2011 Japan quake. Noted that G7 confirmed that intervention via a public statement, something it would likely do again if it did decide to move in the wake of a Brexit vote.
*RIO TINTO LIMITED(RIO):
Could Rio Tinto’s sweeping restructure set the stage for a spin-off of its unwanted assets, similar to BHP Billiton’s demerger of South32? That’s the view of Alliance Bernstein analyst Paul Gait, who says the creation of a new division called ‘‘energy and minerals’’ under the leadership of Alan Davies could be a signal that a spin-off could be under consideration.The division will include Rio’s uranium, salt, borate and titanium assets, as well as its Canadian iron ore business. Mr Gait also seized on the fact the company’s coal assets have been included in the division. Outgoing chief executive Sam Walsh has previously flagged that the assets were up for sale at the right price. ‘‘We know that Rio has been deprioritising the coal assets for quite some time and we think they are looking to exit coal mining, just at a time when BHP and Glencore expressed their interest in building their coal exposure at the bottom of the cycle,’’ Mr Gait said. He pointed to BHP’s coal briefing on Tuesday when it left the door open to bolt-on acquisitions at the right price.
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