*Market not pricing in any Fed rate hikes until 2018:
Unexpected Brexit vote latest in a long line of policy normalization headwinds for Fed. Futures markets have rallied to such an extreme they are no longer pricing in any rate hikes in 2016 or 2017. Even pricing in possibility that funds rate could be lower in December. Several economists out this morning pushing back their expectations, though not as aggressively as markets. WSJ (Hilsenrath article) noted most important to development to emerge from Brexit vote is stronger dollar, given that it drives a tightening of financial conditions. Earlier this year, stronger dollar at center of a number of intertwined negative feedback loops that wreaked havoc on global economy and markets. Stronger dollar a headwind for corporate profitability, commodity prices, ability of foreign companies to service and repay debt. Also puts pressure on China to devalue yuan.
*Risk off as Britain votes to leave EU:
Global risk assets under meaningful pressure, but well off their worst levels, after Britain voted to leave the EU by 51.9% to 48.1%. Outcome was unexpected given some of the recent traction in polls for “Remain”, along with the 80%+ probability implied by the betting markets going into the vote. Selloff exacerbated by risk-on sentiment over last few sessions. Sell-side takeaways fairly consistent. Focus has been on protracted political and economic uncertainty in UK, contagion risks for EU and potential shock for global growth. Lot of discussion about political contagion. Anti-EU politicians from likes of Italy, France and Netherlands already out today calling for referendums. Street also looking for further downside in UK and European equities, sterling and core bond yields.
*Most sectors lower; defensives outperform:
Most sectors closed significantly lower in the wake of Brexit referendum, with companies generating the lion's share of revenues domestically markedly outperforming those with international exposure. On a sector basis,financials worst performer, with banks hit hard on expectations Fed tightening may be pushed out. Group lagging despite positive DFAST results released post-market yesterday. Industrial metals weighed onmaterials, but precious metals caught a bid in the risk-off atmosphere. All key groups weaker in tech. Machinerytrailed in industrials. Consumer discretionary largely in line. Retailers and restaurants relative outperformers while autos weaker. Healthcare broadly lower but beat the tape. Defensive sectors led. Utilities the only positive sector. Group a big beneficiary of risk-off/low-rate backdrop and hitting new record high today. Still concerns about overbought conditions, though sector had lagged this week with better sentiment going into Brexit vote.
*BoE ready to take additional measures; £250B liquidity available:
BoE Governor Carney said central bank will monitor economy in the coming weeks and decide whether to take more action. Added BoE has plenty of liquidity measures in sterling and foreign currency to ensure smooth functioning of markets. Importantly, Carney said BoE ready to provide an additional liquidity of £250B if needed. Noted there will be a period of uncertainty, but no initial change in way people operate. Also talked up how BoE is well prepared for this outcome given extensive contingency planning. Added that capital requirements of banks ten times higher than global financial crisis. Pointed out that BoE has stress tested banks and they are able operate in conditions more adverse than current scenario. BoE had said in its quarterly that Brexit posed most significant risk to UK's financial stability.
*G7 promises to ensure market stability:
Central bankers and other finance officials out promising to ensure market stability amid the contagion from the Brexit vote. Following reassurances from UK, Europe (ECB) and Japan (as well as intervention from SNB), G7 finance ministers and central bank governors said in a statement they are monitoring market developments. Affirmed their assessment that UK economy and financial sector remain resilient and are confident that UK authorities are wellpositioned to address consequences of referendum outcome. Added they recognize excessive volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. Pointed out they have taken steps to ensure adequate liquidity and support functioning of markets. Stands ready to use established liquidity instruments (ie swap lines).
*UK Prime Minister Cameron resigns after Brexit vote:
UK PM Cameron resigned early Friday after Brexit outcome. PM supported “Remain” case. He said: “We should aim to have a new prime minister in place by the Conservative party conference in October.” Added that he felt honored to have served the country, but felt that new “strong leadership” was needed to take the country through new negotiations with the EU. Added new PM will decide when to trigger Article 50 with EU. Ensured markets and global investors that UK economy is fundamentally strong. His resignation was in question following the vote, however many expected he would stay on beyond October to start process to divorce with EU. Lots of speculation Chancellor Osborne (loyal to Cameron) likely to follow suit. Conjecture continue to points to “Leave” campaigners former London mayor Boris Johnson or Justice Secretary Gove as likely PM candidates.
*All banks past Fed stress tests:
No real surprise as Fed said all 33 bank holding companies with $50B or more in assets passed Dodd-Frank Act Stress Test (DFAST) designed to measure capital adequacy under a severely adverse scenario. That scenario included a global recession with domestic unemployment rate rising five percentage points, accompanied by a heightened period of financial stress, and negative yields for short-term Treasuries. Noted firms’ aggregate common equity tier 1 capital ratio would fall from an actual 12.3% in Q4 of 2015 to a minimum level of 8.4%. This was well above the 4.5% minimum established by Fed and ~80 bp better than last year’s DFAST. DFAST did not bake in any changes in capital return plans. Next week’s Comprehensive Capital Analysis and Review (CCAR) more important, as it includes Fed’s decision on dividend and buyback requests.
*Sentiment, positioning was already cautious into Brexit vote:
Despite ramp in risk aversion from British vote to leave the EU, some thoughts fallout may still be somewhat cushioned by the already cautious sentiment and positioning going into the vote. Latest BofA Merrill Lynch Flow Show report highlighted a continuation of the risk-off theme this week. Equities saw $4B of outflows, while bonds saw $1.9B of inflows and precious metals attracted $1.2B. Added that $2.7B left junk bonds, with outflows now seen in seven of the past eight weeks. Pointed out that over last three months, equity funds have seen $63B of net redemptions over past three months, the largest since October 2011 and April 2008. Also noted that its Bull & Bear Indicator shows sentiment stuck in bearish territory of 2.3 (scale of 0-10), the lowest reading in three months and near a contrarian “buy” signal.
*May durable goods report disappoints:
May US core durable orders (nondefense, ex-aircraft) declined 0.7% vs an April decrease of 0.6% and consensus for a 0.5% gain. Core shipments also fell, dropping 0.5% vs an April gain of 0.6%. Headline durable goods orders fell 2.2% in May vs a downwardly revised 3.3% gain in April (was 3.4%) and consensus for a 0.8% decline. Shipments decreased 0.2% vs an April gain of 0.4%. Unfilled orders were up 0.2% and inventories were down 0.3%. Transportation equipment led the decrease in orders following two consecutive monthly gains. Orders ex-transports fell 0.3% against April’s 0.5% gain and consensus for a 0.5% rise.
*Analysts play down stellar German Ifo report:
Analysts already playing down the impressive German Ifo report, which beat expectations. Headline came in at 108.7 vs consensus 114.0 and prior 114.2. Current conditions index also at 114.5 vs consensus 114 and prior 114.2 and business climate index at 108.7 vs prior 107.4. Pick-up in Ifo follows strong ZEW reading earlier in the week and the encouraging manufacturing PMI data. However, number already looking somewhat outdated given the shock of the Brexit vote. Concerns over political contagion in the bloc and potential headwinds on the Eurozone outlook are being discussed. For bigger picture, sell-side economists are already looking ahead to July and August numbers.
*More buyback scrutiny:
More scrutiny surrounding buybacks following recently released Q1 data. According to FactSet’s latest Buyback Quarterly, share repurchases by S&P 500 companies amounted to $166.3B in Q1, up 15.1% q/q and 15.6% y/y, and marking a new post-recession high. NY Times, citing Fed data, discussed how buybacks are providing a cushion for stocks amid investor outflows. Also highlighted the cushion from a weak earnings backdrop. However, pointed out that over longer periods, unless earnings grow meaningfully, financially engineering is not enough. Noted that history shows that surges in buybacks are not always a good sign of things to come. Last 12-month buyback record was in December 2007, just before worst economic and stock market declines in recent history.
*House Republicans unveil tax reform plan:
House Republicans to officially unveil tax reform plan on Friday morning. Plan would reduce top US corporate tax rate to 20% from 35%. WSJ said it would scrap longstanding features of business tax system as net interest expense would no longer be deductible, while capital costs could deducted immediately instead of over several years. Also would shift to a "territorial" style tax system designed to exempt earnings of US companies abroad from US taxation. Top individual income tax rate would come down to 33% from 39.6%, while top rate on business income reported on individual tax returns would be 25%. Estate tax would be repealed, while capital gains and dividend taxes would be lowered. WSJ said compared with other plans proposed by Republicans in 2012 and 2014, this one leans more toward taxing consumption instead of income.
*Dallas Fed's Kaplan says accommodation should be removed in gradually:
In prepared remarks before Money Marketeers of NYU, Dallas Fed President Kaplan (non-voter) notes removal of accommodation should be done in gradual and patient manner. Expressed disappointment with Q1 GDP. However at the same time said he was optimistic about growth amid expectations of stronger consumer demand. Argued only 60K-120K per month of employment gains are necessary to keep unemployment rate constant. Noted since start of 2016, Dallas Trimmed Mean inflation rate has risen to 1.8-1.9%. Said stability and trend of this measure bolstered his confidence headline inflation will reach 2% over medium term. Also expressed concern over low yields, saying they may be sign policy is failing to maintain long-run price stability.
*AMP Limited (AMP):
AMP has confirmed director and former investment banker Catherine Brenner as its new chairman, bringing the total number of ASX 200 companies chaired by women to eight. Ms Brenner replaces Simon McKeon after his surprise resignation in April from the $16 billion wealth management giant. Ms Brenner, 45, has sat on the AMP board for the last six years as an independent director, and is also a long standing director of construction materials giant Boral and the David Gonski-chaired Coca-Cola Amatil.
*National Australia Bank Ltd. (NAB):
National Australia Bank is understood to be trawling through the annual results of a group-wide staff engagement survey which, along with performance, will no doubt factor into Thorburn’s thinking about divisional leadership. The survey is said to have shown an across-the-board improvement in staff engagement, but that will be dissected at a granular level in the coming weeks. A NAB spokesman confirmed the positive results of the survey but declined to comment further. Thorburn has had a busy time as chief, having steered the divestment of the bank’s troubled UK business and also becoming the first of the majors to sell a stake in its life insurance unit. The bank’s last earnings results, reported in May, showed bad debts in New Zealand weighing on earnings, and analysts are keeping a close eye on how NAB fares in business banking where it had been under attack as the most dominant player among its rivals.
Unexpected Brexit vote latest in a long line of policy normalization headwinds for Fed. Futures markets have rallied to such an extreme they are no longer pricing in any rate hikes in 2016 or 2017. Even pricing in possibility that funds rate could be lower in December. Several economists out this morning pushing back their expectations, though not as aggressively as markets. WSJ (Hilsenrath article) noted most important to development to emerge from Brexit vote is stronger dollar, given that it drives a tightening of financial conditions. Earlier this year, stronger dollar at center of a number of intertwined negative feedback loops that wreaked havoc on global economy and markets. Stronger dollar a headwind for corporate profitability, commodity prices, ability of foreign companies to service and repay debt. Also puts pressure on China to devalue yuan.
*Risk off as Britain votes to leave EU:
Global risk assets under meaningful pressure, but well off their worst levels, after Britain voted to leave the EU by 51.9% to 48.1%. Outcome was unexpected given some of the recent traction in polls for “Remain”, along with the 80%+ probability implied by the betting markets going into the vote. Selloff exacerbated by risk-on sentiment over last few sessions. Sell-side takeaways fairly consistent. Focus has been on protracted political and economic uncertainty in UK, contagion risks for EU and potential shock for global growth. Lot of discussion about political contagion. Anti-EU politicians from likes of Italy, France and Netherlands already out today calling for referendums. Street also looking for further downside in UK and European equities, sterling and core bond yields.
*Most sectors lower; defensives outperform:
Most sectors closed significantly lower in the wake of Brexit referendum, with companies generating the lion's share of revenues domestically markedly outperforming those with international exposure. On a sector basis,financials worst performer, with banks hit hard on expectations Fed tightening may be pushed out. Group lagging despite positive DFAST results released post-market yesterday. Industrial metals weighed onmaterials, but precious metals caught a bid in the risk-off atmosphere. All key groups weaker in tech. Machinerytrailed in industrials. Consumer discretionary largely in line. Retailers and restaurants relative outperformers while autos weaker. Healthcare broadly lower but beat the tape. Defensive sectors led. Utilities the only positive sector. Group a big beneficiary of risk-off/low-rate backdrop and hitting new record high today. Still concerns about overbought conditions, though sector had lagged this week with better sentiment going into Brexit vote.
*BoE ready to take additional measures; £250B liquidity available:
BoE Governor Carney said central bank will monitor economy in the coming weeks and decide whether to take more action. Added BoE has plenty of liquidity measures in sterling and foreign currency to ensure smooth functioning of markets. Importantly, Carney said BoE ready to provide an additional liquidity of £250B if needed. Noted there will be a period of uncertainty, but no initial change in way people operate. Also talked up how BoE is well prepared for this outcome given extensive contingency planning. Added that capital requirements of banks ten times higher than global financial crisis. Pointed out that BoE has stress tested banks and they are able operate in conditions more adverse than current scenario. BoE had said in its quarterly that Brexit posed most significant risk to UK's financial stability.
*G7 promises to ensure market stability:
Central bankers and other finance officials out promising to ensure market stability amid the contagion from the Brexit vote. Following reassurances from UK, Europe (ECB) and Japan (as well as intervention from SNB), G7 finance ministers and central bank governors said in a statement they are monitoring market developments. Affirmed their assessment that UK economy and financial sector remain resilient and are confident that UK authorities are wellpositioned to address consequences of referendum outcome. Added they recognize excessive volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. Pointed out they have taken steps to ensure adequate liquidity and support functioning of markets. Stands ready to use established liquidity instruments (ie swap lines).
*UK Prime Minister Cameron resigns after Brexit vote:
UK PM Cameron resigned early Friday after Brexit outcome. PM supported “Remain” case. He said: “We should aim to have a new prime minister in place by the Conservative party conference in October.” Added that he felt honored to have served the country, but felt that new “strong leadership” was needed to take the country through new negotiations with the EU. Added new PM will decide when to trigger Article 50 with EU. Ensured markets and global investors that UK economy is fundamentally strong. His resignation was in question following the vote, however many expected he would stay on beyond October to start process to divorce with EU. Lots of speculation Chancellor Osborne (loyal to Cameron) likely to follow suit. Conjecture continue to points to “Leave” campaigners former London mayor Boris Johnson or Justice Secretary Gove as likely PM candidates.
*All banks past Fed stress tests:
No real surprise as Fed said all 33 bank holding companies with $50B or more in assets passed Dodd-Frank Act Stress Test (DFAST) designed to measure capital adequacy under a severely adverse scenario. That scenario included a global recession with domestic unemployment rate rising five percentage points, accompanied by a heightened period of financial stress, and negative yields for short-term Treasuries. Noted firms’ aggregate common equity tier 1 capital ratio would fall from an actual 12.3% in Q4 of 2015 to a minimum level of 8.4%. This was well above the 4.5% minimum established by Fed and ~80 bp better than last year’s DFAST. DFAST did not bake in any changes in capital return plans. Next week’s Comprehensive Capital Analysis and Review (CCAR) more important, as it includes Fed’s decision on dividend and buyback requests.
*Sentiment, positioning was already cautious into Brexit vote:
Despite ramp in risk aversion from British vote to leave the EU, some thoughts fallout may still be somewhat cushioned by the already cautious sentiment and positioning going into the vote. Latest BofA Merrill Lynch Flow Show report highlighted a continuation of the risk-off theme this week. Equities saw $4B of outflows, while bonds saw $1.9B of inflows and precious metals attracted $1.2B. Added that $2.7B left junk bonds, with outflows now seen in seven of the past eight weeks. Pointed out that over last three months, equity funds have seen $63B of net redemptions over past three months, the largest since October 2011 and April 2008. Also noted that its Bull & Bear Indicator shows sentiment stuck in bearish territory of 2.3 (scale of 0-10), the lowest reading in three months and near a contrarian “buy” signal.
*May durable goods report disappoints:
May US core durable orders (nondefense, ex-aircraft) declined 0.7% vs an April decrease of 0.6% and consensus for a 0.5% gain. Core shipments also fell, dropping 0.5% vs an April gain of 0.6%. Headline durable goods orders fell 2.2% in May vs a downwardly revised 3.3% gain in April (was 3.4%) and consensus for a 0.8% decline. Shipments decreased 0.2% vs an April gain of 0.4%. Unfilled orders were up 0.2% and inventories were down 0.3%. Transportation equipment led the decrease in orders following two consecutive monthly gains. Orders ex-transports fell 0.3% against April’s 0.5% gain and consensus for a 0.5% rise.
*Analysts play down stellar German Ifo report:
Analysts already playing down the impressive German Ifo report, which beat expectations. Headline came in at 108.7 vs consensus 114.0 and prior 114.2. Current conditions index also at 114.5 vs consensus 114 and prior 114.2 and business climate index at 108.7 vs prior 107.4. Pick-up in Ifo follows strong ZEW reading earlier in the week and the encouraging manufacturing PMI data. However, number already looking somewhat outdated given the shock of the Brexit vote. Concerns over political contagion in the bloc and potential headwinds on the Eurozone outlook are being discussed. For bigger picture, sell-side economists are already looking ahead to July and August numbers.
*More buyback scrutiny:
More scrutiny surrounding buybacks following recently released Q1 data. According to FactSet’s latest Buyback Quarterly, share repurchases by S&P 500 companies amounted to $166.3B in Q1, up 15.1% q/q and 15.6% y/y, and marking a new post-recession high. NY Times, citing Fed data, discussed how buybacks are providing a cushion for stocks amid investor outflows. Also highlighted the cushion from a weak earnings backdrop. However, pointed out that over longer periods, unless earnings grow meaningfully, financially engineering is not enough. Noted that history shows that surges in buybacks are not always a good sign of things to come. Last 12-month buyback record was in December 2007, just before worst economic and stock market declines in recent history.
*House Republicans unveil tax reform plan:
House Republicans to officially unveil tax reform plan on Friday morning. Plan would reduce top US corporate tax rate to 20% from 35%. WSJ said it would scrap longstanding features of business tax system as net interest expense would no longer be deductible, while capital costs could deducted immediately instead of over several years. Also would shift to a "territorial" style tax system designed to exempt earnings of US companies abroad from US taxation. Top individual income tax rate would come down to 33% from 39.6%, while top rate on business income reported on individual tax returns would be 25%. Estate tax would be repealed, while capital gains and dividend taxes would be lowered. WSJ said compared with other plans proposed by Republicans in 2012 and 2014, this one leans more toward taxing consumption instead of income.
*Dallas Fed's Kaplan says accommodation should be removed in gradually:
In prepared remarks before Money Marketeers of NYU, Dallas Fed President Kaplan (non-voter) notes removal of accommodation should be done in gradual and patient manner. Expressed disappointment with Q1 GDP. However at the same time said he was optimistic about growth amid expectations of stronger consumer demand. Argued only 60K-120K per month of employment gains are necessary to keep unemployment rate constant. Noted since start of 2016, Dallas Trimmed Mean inflation rate has risen to 1.8-1.9%. Said stability and trend of this measure bolstered his confidence headline inflation will reach 2% over medium term. Also expressed concern over low yields, saying they may be sign policy is failing to maintain long-run price stability.
*AMP Limited (AMP):
AMP has confirmed director and former investment banker Catherine Brenner as its new chairman, bringing the total number of ASX 200 companies chaired by women to eight. Ms Brenner replaces Simon McKeon after his surprise resignation in April from the $16 billion wealth management giant. Ms Brenner, 45, has sat on the AMP board for the last six years as an independent director, and is also a long standing director of construction materials giant Boral and the David Gonski-chaired Coca-Cola Amatil.
*National Australia Bank Ltd. (NAB):
National Australia Bank is understood to be trawling through the annual results of a group-wide staff engagement survey which, along with performance, will no doubt factor into Thorburn’s thinking about divisional leadership. The survey is said to have shown an across-the-board improvement in staff engagement, but that will be dissected at a granular level in the coming weeks. A NAB spokesman confirmed the positive results of the survey but declined to comment further. Thorburn has had a busy time as chief, having steered the divestment of the bank’s troubled UK business and also becoming the first of the majors to sell a stake in its life insurance unit. The bank’s last earnings results, reported in May, showed bad debts in New Zealand weighing on earnings, and analysts are keeping a close eye on how NAB fares in business banking where it had been under attack as the most dominant player among its rivals.
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