Markets Move Higher With Talk Of An ‘Orderly’ Brexit

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Markets Move Higher With Talk Of An ‘Orderly’ Brexit, Volatility Retreats, How Do You Like Your Windows Dressed? Via @connectedWealth

Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata

Markets Move Higher With Talk Of An ‘Orderly’ Brexit – Today

Equities are moving sharply higher this morning with virtually every major moving higher, the best local performance at this point in the day being Spain.  In local dollar terms, the UK market has made back what it lost since Thursday’s close, with the FTSE 100 trading briefly at 6300 this morning, roughly where it closed on the 23rd.  In dollar terms, of course, we are still 10% below those same levels, as this type of macro event really plays itself out in the currencies.

Speaking of, the safe haven currencies continue to ease and Pounds are clawing back some of their losses, allowing losers like the A$, NOK, and C$ to recover a little as well.  Bond yields are staying low, though.  Longer dated issues from the US and Canada are gaining, making the long bond yields 2.25% and 1.71% respectively.  This means that long bond yields are completely ignoring the post-Brexit recovery happening in other asset classes.

On one hand, we’re glad to see the rebound continue post-Brexit, however it’s hard to feel completely comfortable with the rally heading into the long weekend for North America. How much of the price action is month and quarter-end window dressing?

There is no shortage of attention getting headlines lately. Soundbites from political leaders all over Europe make it seem like the world as we know it has ended. We’re dealing with lots of uncertainty at the moment, markets are certainly reflecting that. Perspective is paramount, and one word stands out in being able to add perspective to the bombardment of articles over the coming months. That word is:

Brinkmanship – the art or practice of pursuing a dangerous policy to the limits of safety before stopping, typically in politics.

Volatility continues its quick turnaround, the VIX is down to 17.65 and the term structure shows investor’s interest will be shifting again to the central banks. Though the Fed would have you believe every meeting is a ‘live’ meeting, the market is pricing in a zero chance of a hike out to December. The Brexit event isn’t so much of a shifting of the wind in the macro forces at work, but a tornado that came in quick, ripped a path of destruction for the hawks.

If you take your clues from derivatives traders, then don’t’ expect a hike until Jan. 31 2018.

Verizon has announced a deal to securitize customers’ cell phone contracts, tranching them into increasing safety levels much like a mortgage bond.  VZ gets 70% of its revenue from wireless customers, so while this concept gets an A+ for financial engineering, we wonder how existing bondholders would feel about seeing the primary revenue line being used to explicitly back other bonds.  Should the deal be successful, much like the banks’ covered bonds program, we can see the rest of the industry following suit.

Credit ratings tell us something about a country’s financial position. That said, they are of limited value to market participants. Credit default swaps on UK bonds rose into the referendum vote, pricing in a Brexit before S&P’s decision to cut the UK’s sovereign rating. As the WSJ puts it, “ratings changes appear to follow – rather than lead – market moves.” Another notable instance took place in the summer of 2011, when S&P downgraded US debt from AAA. Rates actually went down after the announcements and CDS spreads were mostly flat.

Rating governments is more difficult than rating firms because governments can print money to repay debts and sell assets to raise money. As such, analysts have limited insight beyond a government’s publically available financials, which do not tell them nearly as much as a company’s financials do. More from the WSJ here.

Diversion: Red Nose Day Paul Rudd & Blake Griffin Sketch

Company News

CIBC is purchasing PrivateBancorp for $3.8b to build out their U.S. commercial banking platform. The cash and stock deal is a 31% premium to the closing price yesterday. Nike reported earnings after the close yesterday with strong numbers internationally that were overlooked by decelerating North American volumes. The biggest concern was in Basketball where shoe sales were up a mere 2% compared to the rising of 64% seen by Under Amour in the same quarter. Williams Co and Energy Transfer are stepping away from a $33bb deal to merge after trying for over 18 months. Monsanto reported worse than expected earnings as a weak agriculture industry weighed on results. Competitors are aggressively cutting seed prices, weighing on margins.


Oil and gold prices are both rallying this morning as stocks continue to make up lost ground from the Brexit vote last week. Oil was buoyed by declining inventories in the U.S. yesterday. API reported that stockpiles fell nearly 4mm barrels last week. After a rally in soybean prices farmers began dumping seeds into the ground as the differential with corn widened out. The soybean crop is expected to reach an all-time high, which is impressive as the last two years have been very robust. Brazil sugar producers are exporting so much that there is a supply squeeze domestically, causing prices to rise.

Brexit Richardson GMP

Fixed Income And Economics

Treasury markets are flat despite broad equities rallying for a second straight day. In fact, U.S. benchmarks were actually higher much earlier this morning before we received a pair of economic releases that surpsingly dampened the appetite for risk aversion. Personal spending in the U.S. rose by +0.4% last month to match the consensus but was much lower than the +1.1% reading in April. Durables accounted for the majority of the buying but services also marked improvement. Similarly, incomes grew by just +0.2% over this time, slower by more than half from prior. Disposable incomes were higher by +0.1% and after adjusting for inflation, was the slowest pace since March 2015. The market is ignoring this though and backing into their camp that bad data will keep the FOMC on hold for longer.

Moody’s has downgraded the senior unsecured long-term ratings for Molson Coors Brewing Company and its rated subsidiaries to Baa3 from Baa2. The rating action comes in the wake of the agency’s review for downgrade that began on November 11, 2015 when Molson Coors reached an agreement to acquire from SABMiller the 58% of the MillerCoors Joint Venture that it does not already own for approximately $12 billion. Moody’s also assigned Baa3 ratings to Molson Coors’ and subsidiaries for the proposed new senior unsecured bonds which will be used to partially fund the deal. The outlook remains stable. This downgrade brings Moody’s in line with S&P and Fitch whom already have the issuer rated at BBB- and a notch above junk status.

Put your hand up if you’ve ever received your wireless phone bill, grumbled at the monthly carrying cost, then cursed under your breath as you reluctantly paid your dues. You’d think that someone would have realized by now that the cell phone has become a necessity to our daily lives and that the consumer will go to great lengths to maintain this status quo. Cue up Verizon Communications Inc. who is planning on launching a $1.2 billion bond deal that will be backed by the contracts of approximately 2.5 million users in the U.S. who have recently brought new smartphones. The largest American wireless service provider has previously securitized its handset receivables with banks in private transactions, but this will be the first time it has done it more broadly for investors. The monthly payments made by consumers would be used to pay interest and principal to buyers of the securities. The funds raised will allow Verizon to finance the upfront cost of the handsets whereby It will only securitize the 24-month device payments, and not the monthly service charge. The deal is expected in Q3 and pricing terms have not yet been announced while an investor roadshow will take place this week and next.

Chart Of The Day

Brexit Richardson GMP

Quote Of The Day

I have fun like a child in the street. When the day comes when I’m not enjoying it, I will leave football. – Lionel Messi

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