Brexit vote will dominate global news and markets

BY  | FROM  | 2016-06-20 15:59

“You've got to know when to hold 'em, know when to fold 'em” was the global song, as the show went east after the FOMC (as well as the Banks of England and Japan) stayed pat and all eyes moved to the U.K., where everyone but the voters have had an opinion.  Next Thursday (June 23), “they” will get their say, and to say no one truly knows what the landscape will look like on Friday morning would be an understatement.  The U.K. vote to end its association with the EU has been news for a while, but it only seems that the possibility that the country might vote in favor of it recently became real, as central bankers appeared to take notice—though they took no action as their preparation for the event, which made the Street take notice (why we, or they, weren’t paying attention before is another story, and one I cannot answer).  MSIC decided to “hold ’em” as they delayed using “A” shares for the third time.  Microsoft decided to “play ’em” as it bid 50% higher for LinkedIn, while Moody’s ratings bid up the cost and said it would review Microsoft’s “Aaa” rating for borrowing for the game.  Related to that M&A, Twitter (TWTR) moved up 14.6% for the week, although it remains 30.6% down year-to-date.  They were singing “know when to run” for holders of German 10-year and Swiss 30-year Treasury bonds, as they turned negative.  The show on this side of the pond (in the U.S.) was still “Who I Don’t Want To Vote For,” which seemed to have enough support not just for a third candidate, but an outright majority win.  As for the market, it was singing “the blues”, as the index posted declines in four of its five sessions (and six of the last seven), falling 1.23%.  And in a Deja Vu moment, the Democratic National Committee again found itself to be the center of inquiry by a group fully dedicated to its demise.  In this case, it appeared to be the Russians hacking into their server, as compared to the Republicans (in June 1972) into their Watergate headquarters.  
M&A, internet and systems security issue Symantec (SYMC; up 15.4% for the week) said it would buy private security issue Blue Coat for USD 4.6 billion in cash (the issue was planning to go public), as Blue Coat’s CEO will become the CEO of Symantec after the deal.  Software issue Microsoft (MSFT; off 2.6% for the week) said it would buy LinkedIn (LNKD) for USD 26.2 billion in cash, as LinkedIn added 45.6% for the week.  Microsoft, which has over USD 100 billion in cash and equivalents, said it would finance the deal, given how low interest rates were.  Related, Moody’s Ratings placed Microsoft’s “Aaa” rating under review citing the funding for the deal.  Honeywell International (HON; off 0.6% for the week, with a market value of USD 88 billion) said it would not rule out bidding for a major aerospace suppler, after its bid for United Technology (UTX; off 0.8% for the week) failed earlier in the year.  Reports said that Chinese game developer Tencent (TCEHY; off 2.7% for the week) was near a deal to buy Softbank's (SFTBY; off 5.0% for the week) majority stake in Supercell Oy.  Beauty product maker Revlon (REV; up 1.5% for the week) said it would buy Elizabeth Arden (RDEN; up 44.3% for the week) for USD 870 million.
In economic news, fixed-asset investment in China posted a 9.6% year-to-date gain in May, down from April’s year-to-date 10.5% rate, as the private component posted a 3.9% gain, compared to last month’s 5.2%.  The Bank of Japan and the Bank of England met (after the FOMC) and took no action, with some economists citing next week’s Brexit vote; the Nikkei declined 3.1% on the news, as the yen traded at 104 to the U.S. dollar—a two-year high (it was 120 at year-end 2015).  In U.S. economics, Retail sales for May came in better than expected (up 0.5%, when a 0.3% gain was expected).  Imports for May came in up 1.4%, when a 0.8% gain was expected, as the year-over-year rate remained in the red, off 5.0%.  Exports increased 1.1%, when a 0.2% gain was expected, as they too remained in the red year-over-year, off 4.5%.  Business Inventories for April came in weaker than expected, up 0.1% for the month, when 0.2% was expected.  The Weekly Mortgage Application Report showed a 2.4% decline, as Purchase applications fell 5.0% and Refinancing ones declined 1.0%.  The Housing Market Index for June came in at 60, up from the prior month’s 58 (and the estimated 59).  Housing Starts for May came in at an annual 1.164 million units, slightly higher than the 1.15 million that was expected, while Permits came in at 1.138 million units, a tick below the 1.14 million expectation.  The May PPI increased 0.4%, when a lower 0.3% gain was expected, as the year-over-year rate remained in the red, at -0.1%.  The PPI ex-food and energy was up 0.3% (0.2% was expected), as the year-over-year change was up 1.2%. The May CPI came in up 0.2%, when a 0.3% gain was expected, as the year-over-year rate was up 1.0%.  The Core CPI (which excludes food and energy) was up 0.2%, as expected, with the year-over-year rate up 2.2%.  Industrial Production for May came in at -0.4%, when a -0.1% rate was expected, as Capacity Utilization came in at 74.9%, when 75.2% was expected.  The FOMC met and made no change to interest rates, as expected.  Their quarterly forecast (known as the “dot plot”) showed a slower expectation for increases, with potentially two increases this year.  The Fed (and Chair Yellen at her news conference afterward) said that while the unemployment is down, job gains have diminished, and she projected a more dovish approach.  On Brexit, the chair only said that the Fed would watch and that the country’s vote to secede could have consequences.  The Street saw one rate hike, either in September or December (with more expecting December), which was at odds with the FOMC median projection, and that the FOMC was nervous about the U.K. vote, given the uncertainty of the outcome and its impact.  Overall, the market’s reaction in the equity market was minor, with U.S. interest rates down slightly.  The weekly new jobless claims report came in with 277,000 new claims, higher than the 270,000 that was expected (as the prior week was restated up to 270,000 from the originally released 264,000). 
In layoffs, discount retailer Wal-Mart (WMT; up 0.3% for the week) said it would eliminate 1,500 back-office workers. 
On an issue level, entertainment issue Walt Disney (DIS; up 1.7% for the week) opened its new Disneyland theme park in Shanghai, costing an estimated USD 5.5 billion, as a tragic death of a two-year old in its Orlando, Florida park overshadowed the event.  Synchrony Financial (SYF) declined 16.4% for the week, as the company warned that it would increase reserves for credit card losses, which could be an indicator for the industry.  Whole Foods Market (WFM) lost 10.9% for the week, as the U.S. Food and Drug Administration said one of its facilities had unsanitary conditions.  China said Apple (AAPL; off 3.5% for the week) violated a Chinese Patent and ordered Apple to stop selling iPhone 6 and iPhone6 Plus in China.
In other news, a lone attacker at a nightclub in Orlando, Florida killed 49 people, and the attack was linked to terrorism.  In London, a lawmaker was shot to death (rather unusual for the U.K.) while campaigning for the Brexit vote, as both sides (“stay” and “go”) cancelled campaigning for two days. 
The German 10-year Treasury traded at a negative rate for the first time in its history, joining Japan, Denmark, and Switzerland, as the 30-year Treasury bond in Switzerland went negative for the first time as well.  Index provider MSCI decided not to include Chinese Class “A” shares in its emerging market index, for the third time, as MSCI cited concern over openness and transparency; most had expected inclusion.  Unrelated, the yuan reached its lowest level against the U.S. dollar in five years.  The IMF warned on Chinese debt.  Gold returned to the USD 1,300, closing at 1,300.70, up 1.8% from last week’s USD 1,277.40.  California, the most populous U.S. state, grew 4.1% in 2015 (GDP of USD 2.5 trillion) and as a stand-alone would now be ranked as the sixth-largest economy in the world, displacing France. 
Breadth remained negative, as both the FOMC and Brexit put pressure on the market.  For the week, 156 issues gained, down from last week’s 243 gains, and below the 286 issues the week before that.  Decliners increased to 343 from last week’s 261 declining issues and the prior week’s 219 issues.  One issue gained at least 10% (three did so last week), and five more were up at least 5% (eight were last week).  Four issues declined at least 10% (three did so last week), as 19 additional issues lost at least 5% (20 did so in the prior week).  Year-to-date, breadth remained positive, as 311 issues were ahead, down from last week’s 324 issues; 168 issues gained at least 10% (187 did so last week), compared with 194 down issues, an increase from last week’s 179, with 99 of them down at least 10% (91 were last week). 
It was a nervous week for the market, as the FOMC met and then the Brexit issue came into focus; next week will focus on the Thursday vote, with the market most likely becoming even more nervous.  For the week, the market posted its second weekly decline to close at 2,071.22, off 1.23% after last week’s minor 0.15% decline.  Year-to-date, the market remains up 1.33% (up 2.43% with dividends) and 2.80% off its all-time closing high (of which few are talking about now); breadth remained positive, with six of the ten sectors up. 
For the week, only two of the ten sectors gained, down from last week’s six, which was the same as prior week.  Health care did the worst, off 2.08%, as biotechnology again pushed the group down; year-to-date the sector is off 2.81%. Financials, which were last week’s worst sector, off 1.55% decline, fell another 1.93% this week, as interest rates again declined, helped on by a more dovish FOMC.  The sector remains the worst year-to-date, off 5.09%.  Telecommunication services again did the best, gaining 1.39% after last week’s 2.78% gain, as Verizon (VZ), which accounts for 43% of the sector’s weight, moved up 2.1% (up 3.4% last week); the sector is up 16.23% year-to-date.  Utilities were the other sector to gain, up 0.67% and up 16.73% year-to-date, the best of any group.  Energy fell 0.07%, as oil declined, while materials declined 0.83%. 
Trading volume ticked up 3%, after last week’s 9% decrease, as it was 10% below the one-year average.  Measurable volatility (the high-over-low price variance) stayed low, even as it increased to 1.71% from last week’s low of 1.46% and the prior week’s 0.97%; the one-year average is 3.04%.  For the third week in a row, no day posted a change of at least 1% (May 10, 2016 was the last one, up 1.25%).  The VIX moved up, as Brexit became an issue, as it reached 22.89, but pulled back to close at 19.17, up from last week’s 16.96 and 13.47 the week before that (it was 18.21 at year-end 2015; the 25-year average is 19.7).  Interest rates declined, as the FOMC now appeared more dovish, with September or December being the current expectation.  The 10-year U.S. Treasury closed at 1.61%, down from last week’s 1.64% (and the prior week’s 1.70%).  The 30-year U.S. Treasury closed at 2.42%, down from last week’s 2.49% (and the 2.46% close the week before that).  Oil prices, which were over USD 51 last week, fell and closed at USD 48.13, down from last week’s USD 49.02 (year-end 2015 was USD 37.06).  Gold moved up and crossed USD 1,300, as it closed at 1,300.70, up from last week’s USD 1,277.40 and the prior week’s 1,246.50.  The euro closed at 1.1279, up from last week’s 1.1257.  The pound closed at 1.4355, up from last week’s 1.4271 and the prior week’s 1.4519.  The yen (quoted in yen-to-U.S. dollars, so higher is weaker) closed at 104.16, down from last week’s 106.90 (year-end 2015 was 120.30).  The yuan closed at 6.5828, up from last week’s 6.5720 (and the prior week’s 6.5518). 
On a market-value basis, the S&P Global BMI decreased USD 828 billion for the week, compared with last week’s USD 232 billion decrease; year-to-date, the index was down USD 781 billion.  The S&P 500 decreased USD 216 billion for the week, compared with last week’s USD 28 billion decline, and it was up USD 119 billion year-to-date.  The S&P 500 represented 42.66% of the BMI, up from last week’s 42.34% (it represented 41.61% at year-end 2015 and 33.87% year-end 2010).  The Nikkei was off 6.03% for the week (off 0.25% last week) and was off 18.04% year-to-date.  The Shanghai was up 1.44% for the week (up 0.40% last week) and down 18.48% year-to-date. 
Next week’s Brexit vote on Thursday will dominate global news and markets next week (a prelude to the U.S. Nov. 8, 2016 presidential vote).  If the vote is to “go,” the long process to decide how and assets will start with no president and Prime Minister Cameron’s future unsure.  Trade agreements would also come into question, with discussions on Scotland leaving the U.K. increasing.  A “stay” vote would be calming, but the internal political fighting over immigration, benefits, and security would continue.  
Economic reports will be slow next week, as they start on Wednesday, with the weekly New Mortgage Application report.  The April FHFA Home Price index is expected to increase to 235.1 from March’s 231.1.  At 10 a.m., the May Existing Home Sales are expected to come in at an annualized 5.5 million units, up from April’s 5.45 million.  Thursday will start with the Weekly new claims report.  At 10 a.m., the New Home Sales report for May is expected to be in down, at an annual rate of 540,000, compared to April’s (higher than expected) 619,000, as the May Leading Indicator Report is expected to be up 0.2% (it was up 0.6% in April).  Friday will see May Durable Orders, which are expected to be down 2.8% for the month, as the ex-transportation component is expected to be down 0.3%.  Durable Shipments are expected to be up 0.5%. 
Earnings reports will start to pick up next week, as off-fiscal issues start to release their second quarter results.  Highlights will include Tuesday’s after-the-close package delivery issue FedEx (FDX), Wednesday’s home super-store Bed Bath & Beyond (BBBY), and Thursday’s residential home builder Lennar (LEN).  The main event, however, will be Thursday, as athletic footwear and apparel maker NIKE (NKE) becomes the first Dow Jones issues to report after the close—an honor previously held by Alcoa (AA).  Ironically, NIKE replaced Alcoa in the Dow in September 2013, after 54 years of membership (Alcoa reports July 11, 2016).

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