Wednesday, July 6th, 2016

TODAY

Call this the aftershock following the seismic event which was ‘Brexit’. Global stocks and yields continue to fall as the fear of uncertainty takes over. Stocks continue to retrace the kneejerk market move higher last week. From Japan to Frankfurt traders are seeing red flashing screens.

We fully expect most global central banks to continue down the ‘easing path’. Today we’ll see the minutes from the last meeting. Interesting to note that even the commodity markets aren’t showing signs of any optimism that there is growth ahead. Base metals are off of their highs. The most intense signal at the moment is the bond markets and the stamped to safety.

The S&P 500 is set to open lower, as sovereign bonds and gold remain the go to assets. Canadian 10 year bonds now yield 0.948%. Treasuries are 1.32%, both are well into negative territory when looking at the real rates factoring in inflation. German Bunds are now decently into negative territory at -0.18% after just crossing over into the negative zone a few weeks ago. Switzerland takes the cake though, 10s are at -0.69% and are still negative 30 years out. In our Chart of the Day we show what a difference a couple of weeks can make in the bond market.

Precious metals have done exceptionally well this year. Gold is up to a 28 month high. Falling real interest rates and political risk are two of the key drivers that have boosted demand for them. More from Bloomberg here.

What does any savvy borrower do when yields make new low? Refinance of course. The Mortgage Bankers Association notes that mortgage refinancing jumped almost 21% last week. Must have been a good week for mortgage brokers down south.

Silver futures rose to a two-year high during the Asian session on Monday. Some believe that Chinese day traders were responsible for the move. While open interest in Chinese silver futures has fallen, volume has surged. According to Saxo Bank’s Ole Hansen, “that’s a clear sign that day traders are behind much of the rally.”


A weakening Yuan and strong momentum have drawn speculators into the market. As such, it is reasonable to expect heightened volatility, especially during Asian hours.

Delivery by Robot
A team of European companies is teaming up to delivery products using self-driving robots. Starship Technologies, the company that makes the drones, “has been testing its robots in 12 countries over the past nine months.” Now it is time to start delivering to real customers. Fleets of 5 to 10 robots will travel by sidewalks to make deliveries within a small radius. Thus far, the robots have not had a single accident. More from Bloomberg here.

Just a Game” – Investment Outlook from Bill Gross for July 2016. Via Janus Capital Group

Diversion: The Future Of Farming Will Involve No Soil, 95% Less Water, And Trippy LED Lights

COMPANY NEWS

Walgreens reported earnings this morning that topped expectations. Lowering costs and growing sales of prescription drugs helped boost profits. Blackberry is finally parting ways with the cordy keyboard, eliminating production of the classic model. The 16gb iPhone seems to be going the way of the dodo bird as the next generation phone wont offer an option that small. This should silence the critics that complain this version is barely big enough to run the operating system and save a few videos. I don’t know how people do it, I struggle to manage with 128GB. Tesla is taking some hear this week after not reporting a crash from one of its vehicles using the auto-piolt feature, which ended up being fatal. They also reported weaker than expected sales over the weekend and are being questioned be investors for the purchase of SolarCity.

COMMODITIES

Gold prices are up big again this morning as the Brexit scare has moved  back into the markets. Concerns are spreading to Italy as the chances of instability spread there as well. More instability would likely support even higher gold prices.  Open interest for gold has risen to the highest level since 2010 as investor flying to safety in the asset class. Oil prices are lower again this morning after a big slide yesterday as investors are leaving risk assets like oil.

FIXED INCOME AND ECONOMICS

Another day, another record low for bond yields. We sat aghast in front of our screens yesterday and really could do nothing than remark at the sheer strength of the debt market. Treasuries and Canada’s were on fire despite the absence of any real jitters on the equity side with the belly up a half point and the long end stronger by almost two dollars. Those who like to really push their tenor out, the ultra long Canada 2.75% 12/1/2064 bullet bonds traded three points higher intraday to push its yield BELOW the 20 and 30 year benchmark! This morning we’re seeing more of the same buying with the 10 year Treasury yielding 1.35% (record low), the long bond at 2.12% (another record), and those aforementioned 50 year Canada’s up another $1.50 to yield a scant 1.53%. This of course has the curve flattening again with the U.S. 2-30 spread at +157.4 bps and the same Canada benchmark spread at just +108.33 bps (both multi-year lows). The story is the same overseas with sub-zero yields in out to 15 years in Germany and Japan, while the Switzerland nominal bond curve carrying a negative handle all the way out to 30 years (that is not a typo). Year-to-date returns on benchmarks are now well in excess of equities (even without considering coupons) and I will once again remark — who said bonds are boring?

It’s hard to really point a finger on a singular point for this rally. Is it the Brexit and contagion fears? Sort of hard to justify this when the equity market recovered (and then some) in the days following the vote. Conversely, we are seeing a real fall-out from the referendum result with investors scrambling to redeem fund assets in the U.K., only to be denied by the issuers whom have suspended selling outright (see here for the full details and possible repercussions). Is it the almost-overnight announcement of an imminent failure in the Italian banking system? In short, Italian banks are loaded with bad debts (speculation is that 17% of bank loans in Italy are distressed) and at a level much greater even than that of the U.S. banking system at the height of the financial crisis (5%). The concerns have resulted in the implementation of a short selling ban. Is it bad data? The U.S. trade deficit widened again in May to -$41.1 billion from -$37.4 billion. German factory orders released overnight indicated zero growth in May after falling -1.9% in April. Chinese PMI was weak. Whatever the reason, safety is in play and that has bond buyers whetting their appetites again.

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