Pound sterling was trading at 1.405 on Thursday morning when a tragic event sent it soaring 600 pips higher, rising above 1.4660 in the following days. Whether the murder of Jo Cox was the catalyst that has turned around the outcome of the Brexit referendum is unclear, however it is certain that the moment when the news of her shooting and subsequent death hit is when cable was at it lows. Since then it has soared without looking back, as the momentum in the Leave camp has gone, replaced by a poll showing “Remain” leading by three percentage points before the referendum on Thursday.
As a result, as we showed last night, global equities and US futures rallied and the pound strengthened the most since 2008, soaring by 300 pips since the Friday close as polls signaled the campaign for the U.K to stay in the European Union was gaining momentum. Haven assets including the yen, U.S. Treasuries and gold slumped.
In short: global “risk on.”
The Stoxx Europe 600 Index surged by the most since February as the MSCI Asia Pacific Index advanced with S&P 500 futures. The yen fell for the first time in seven days. The naira slid 22 percent after Nigeria let the currency float freely, and India’s rupee sank to this month’s low after the central bank chief said he will be stepping down. Oil rallied with industrial metals as gold retreated from a five-month high.
With Leave ascendent going into Thursday, and with campaigning suspended into Saturday, this is what has happened since for those who missed it. There were four notable polls over the weekend. YouGov have compiled two which straddle Thursday’s campaign suspension. The first (Good Morning Britain – GMB) was compiled entirely before (15th-16th), and the second (Sunday Times – ST) saw a third of responses before (fieldwork spanned 16th and 17th). The GMB poll saw ‘leave’ 2 points in the lead, the ST poll had ‘remain’ 1 point in the lead. Both were online polls which compares to the 7% lead for ‘leave’ in their last online YouGov poll at the start of last week. So it could be said some momentum shift had occurred before Thursday’s campaign suspension but after it there seems to be further evidence.
The other two polls saw Opinium (for the Observer) see a 50/50 online survey split (fieldwork last Tues-Friday) and a Survation phone (fieldwork Friday-Saturday) poll giving the ‘remain’ side a 3% lead. This confirms the above trends.
In other words, what has shift the mood dramatically is just one poll taken since the killing and published over the weekend which showed 45% of voters backed the ‘Remain’ camp, while 42% were in favor of Brexit — a turnaround from early last week when a slew of surveys put the latter group ahead.
The result of all of the above is shown in the chart below:
But does one poll determine the outcome of the referendum? Some are sceptical: “We are seeing a risk-on move after the latest Brexit poll,” said Niv Dagan, executive director at Peak Asset Management LLC in Melbourne. “It may be short-lived and volatility is likely to remain high until Thursday’s vote. This really could still go either way.”
While polls suggest the final vote could still go either way, the bookies are far lss ambiguous: odds at betting shops suggest there’s a 31% chance of Britons voting to pull out of the EU, down from a record 44% before Cox’s death, Oddschecker data show. The referendum is being watched by governments, central banks and investors around the world amid worries that a U.K. withdrawal from the 28-nation bloc could unleash a wave of turmoil across global markets.
For now, however, whether it is another massive short squeeze or a genuine elimination of Brexit as a concerns, global stocks have soared: the Stoxx Europe 600 Index climbed 2.9 percent as of 9:30 a.m. in London, after rallying 1.4 percent on Friday. Germany’s Dax was higher by 3.4% to just under 10,000. The MSCI Asia Pacific Index rose 1.7 percent, led by gains in raw-materials producers and energy stocks. BHP Billiton Ltd., the world’s largest mining company, gained 4.4 percent in Sydney. Its Brazilian joint venture with Vale SA is exploring ways to restructure about $1.6 billion in loans. Japan’s Topix jumped 2.3 percent, with exporters Toyota Motor Corp. and Sony Corp. outperforming the benchmark amid the yen’s retreat. Japanese exports dropped in May for the eighth month in a row, data showed Monday, before a speech by central bank Governor Haruhiko Kuroda. Futures on the S&P 500 climbed 1.3%.
WTI crude climbed 1.8% to $48.86 a barrel, buoyed by a fourth daily decline in the Bloomberg Dollar Spot Index, and ignoring the third consecutive week of oil rig increases as US shale producers are once again back in business.
- S&P 500 futures up 1.3% to 2087
- Stoxx 600 up 3.4% to 337
- FTSE 100 up 2.7% to 6182
- DAX up 3.5% to 9967
- S&P GSCI Index up 0.8% to 380
- MSCI Asia Pacific up 1.8% to 129
- Nikkei 225 up 2.3% to 15965
- Hang Seng up 1.7% to 20510
- Shanghai Composite up 0.1% to 2889
- S&P/ASX 200 up 1.8% to 5257
- US 10-yr yield up 6bps to 1.66%
- German 10Yr yield up 3bps to 0.05%
- Italian 10Yr yield down 8bps to 1.43%
- Spanish 10Yr yield down 8bps to 1.48%
- Dollar Index down 0.62% to 93.63
- WTI Crude futures up 1.5% to $48.72
- Brent Futures up 1.7% to $50.02
- Gold spot down 1.3% to $1,282
- Silver spot down 0.3% to $17.44
Top Global News
- Brexit Campaign Reopens as Cameron Accuses Rivals of Deception: Angry appearance marks end of truce after lawmaker murder
- IMF Revives Recession Warning for U.K. Economy Over Brexit Vote: Says effects of leaving would be negative and substantial
- BHP-Vale Mine, Crippled by Spill, Said in Restructure Talks: Brazil venture explores restructuring $1.6 billion of loans
- Putin Said to Weigh $11b Rosneft Sale to China and India: Russia selling 19.5% stake as ‘we need the money,’ Putin says
- Boeing Said Near $4b Deal With Russian Firm to Save 747: Volga-Dnepr in talks for at least 10 Boeing 747-8 freighters
- Iran Said to Sign Contract With Boeing to Buy 100 Planes: Deal to be U.S. company’s first since sanctions lifted
- Disney Sets Opening Record With ‘Nemo’ Sequel ‘Finding Dory’: Animated movie also has biggest debut weekend ever for Pixar
- Bezos Rocket Passes Safety Test as Project Secrecy Starts Easing: Capsule returns safely after testing chute-out scenario
- Hackers Targeting Clinton Aides Struck Across U.S. Politics: Intrusions burrowed into law and lobbying firms, foundations
- IEX Outduels Citadel, NYSE as ‘Flash Boys’ Exchange Approved: SEC approves Katsuyama’s fix for market some say is rigged
- Antitrust Officials Said to Voice Concerns on Anthem-Cigna: WSJ: Govt officials outlined worries at meeting about the merger
- JD.Com Said to Be in Talks to Buy Wal-Mart’s Yihaodian: Yicai: co. reached final stages of negotiations, Yicai reports
- MTN Names Rob Shuter CEO After Settling Record Nigerian Fine: co. turns to South African with European experience
- Nigeria’s Naira Slumps as 15-Month Currency Peg Ends in Lagos: Currency falls 22% to dollar as interbank market opens
Looking at regional market, we start in Asia where stocks shrugged off last Friday’s US weakness, with most equity markets trading in positive territory following strength in crude and optimism for the Remain camp ahead of the EU referendum. Nikkei 225 (+2.3%) coat-tailed on a rebound in USD/JPY, while poor trade data increased pressure for further BoJ stimulus. Energy dictated sentiment in the ASX 200 (+1.8%) as WTI crude futures continued to gain momentum after crude rose by the most in 2 months. Shanghai Comp (+0.1%) traded in negative territory for much of the session before coming off worst levels ahead of the close as the “National Team” showed up again. The early downside came despite a significant CNY 170bIn liquidity injection by the PBoC, with demand for stocks dampened after firm China Home Prices data increased the appeal for property investment and also provides less room for China to ease policy.10yr JGBs traded higher despite the increased appetite for Japanese stocks with support seen after the BoJ’s buying operations to the tune of JPY 520b1n in government debt.
Top Asian News
- Japan Exports Decline for Eighth Consecutive Month in May: Exports fell 11.3% y/y vs est. -10%
- Rupee Pares Loss From One-Month Low on Suspected Intervention: RBI Governor Rajan to leave post when term expires in Sept.
- Orient Securities Hong Kong Offer Seeks Up to $1.2 Billion: Co. and investors are offering combined 957m shares at HK$7.85 to HK$9.35/each
- Vanke’s $6.9 Billion Share-Sale Plan Opposed by Shareholder: Plan aims to make Shenzhen Metro biggest shareholder in Vanke
- China Home Prices Rose in Fewer Cities in May Amid Slower Sales: New-home prices gained in 60 cities in May versus 65 in April
- Phone Tracking, Nude Selfie IOUs See Chinese Bare All for Credit: Consumers willingly give data at levels unacceptable elsewhere
In Europe, we have seen a strong bout of risk on sentiment across Europe, following the latest batch of referendum polls shifting towards the ‘remain’ camp. As such, European equities have stormed ahead during the European morning (Euro Stoxx: +3.2%), with outperformance seen in financial names. Germany’s DAX has exploded some 3.5% higher. As well as this energy names have also performed well today given strength seen in the energy complex. In terms of fixed income, Bunds are trading lower this morning with yields seeing a reprieve amid the rally in equities as Brexit fears abate, as such the 10-yr benchmark has slipped below 165.00 while the yield curve has notably bear steepened.
Top European News
- Pound Climbs Most Since 2008 as ‘Remain’ Regains Lead in Polls: Previous polls showing ‘Leave’ ahead sparked mkt turmoil
- Schaeuble Says EU Set to Avoid Chaos If Britons Vote for Exit: German finance chief renews warning on excessive liquidity
- VW Said Ready With $10 Billion Diesel Plan, to Devise Fix Later: co. still needs regulatory approval for retrofitting cars
- Credit Suisse, UBS Said to Work With Abu Dhabi Banks on Deal: Credit Suisse advising NBAD on combination, UBS said with FGB
- Renzi Suffers Local Vote Setback, Rome Has First Woman Mayor: Lawyer Virginia Raggi wins landslide in Italian capital
- Barclays EMEA Head of Credit Restructuring Said to Join KKR Unit: Conway said to join Pillarstone banking advisory unit
- Banks Face Harsher Penalties in Denmark After Nordea Failures: Government and regulator are looking into tougher laws
In FX, the pound strengthened against all 31 major peers, rising 2 percent versus the dollar, its biggest surge since 2008. The euro appreciated 0.5 percent, while the currencies of New Zealand, Norway and Sweden climbed 0.9 percent. South Korea’s won led gains in emerging markets with a 1.1 percent advance. “The markets have always been more comfortable with the U.K. remaining in the European Union, hence the boost to risk sentiment now that the ‘Remain’ camp’s campaign appears to be back on track,” Kathleen Brooks, London-based research director at Gain Capital Holdings Inc., wrote in a note. The yen dropped 0.4 percent to 104.58 versus the greenback, having surged 2.7 percent last week as the Bank of Japan refrained from expanding monetary stimulus at a time when Brexit risk was spurring demand for haven assets. Former Finance Ministry official Eisuke Sakakibara, known as Mr. Yen for his ability to influence the exchange rate in the late 1990s, predicts the exchange rate will gradually strengthen more than 4 percent toward 100 by the end of the year. India’s rupee fell 0.4 percent following central bank Governor Raghuram Rajan’s announcement that he will be leaving the authority when his term ends Sept. 4. Elsewhere, on the day Nigeria’s devaluation went official, the naira dropped to 253.50 versus the dollar. It was pegged at 197-199 through the end of last week, when three-month non-deliverable forwards were trading at 320.
In commodities, gold slipped 1.1 percent after Brexit risk spurred a 1.9 percent surge in the precious metal last week. As of June 14, money managers held the second-biggest bet ever that bullion would rally further, according to U.S. Commodity Futures Trading Commission data.West Texas Intermediate crude climbed 1.3 percent to $48.58 a barrel, buoyed by a fourth daily decline in the Bloomberg Dollar Spot Index. Nickel led gains among industrial metals, rallying 1.2 percent in London. Copper added 0.7 percent and zinc rose 0.8 percent. Corn dropped 1.8 percent after capping a sixth weekly climb on Friday, while soybeans lost 1.1 percent following a 2.6 percent surge in the last session. The U.S. Department of Agriculture is set to release its U.S. crop conditions report on Monday. About 75 percent of the the nation’s corn crop was in good-to-excellent condition as of June 12, the USDA said last week.
There are no major economic data expected in the US today; Bloomberg data with just the Fed’s Kashkari giving remarks on TBTF at 12:15pm ET
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Bulletin Headline Summary from RanSquawk and Bloomberg
- The latest Brexit polls have favoured ‘Remain’ and as such, significant upside has been seen in GBP/USD, which trades above 1.4650
- Equities have benefitted from the positive sentiment to trade in a sea of green, while Bunds have slipped back below 165
- Today is set to be a quiet session in terms of scheduled data, with focus to fall on the upcoming Brexit referendum, as well as participants looking to Yellen comments during the week
- Treasuries decline in overnight trading, global equity markets and oil rally, gold falls as Brexit odds swing back toward “Remain.” Treasury to sell $26b 2Y notes, WI 0.75%; last sold at 0.92% vs 0.943% WI yield at bidding deadline, biggest stop through by a 2Y auction since June 2009.
- The U.K. Prime Minister David Cameron tried to capitalize on a swing in momentum back to the “Remain” campaign and former London Mayor Boris Johnson accused the prime minister of having nothing to offer voters
- With the outcome of the British vote too close to judge, central bankers are reaching for measures honed during the last financial crisis to assuage investor nerves
- The Modi administration critiqued outgoing Reserve Bank of India Governor Raghuram Rajan’s record and moved to reassure foreign investors two days after he unexpectedly withdrew from being considered for a second term
- Nigeria’s naira weakened 22% to 253.50 per dollar after the central bank allowed the currency of Africa’s biggest economy to float freely on Monday
- Banks have been ramping up hiring of high touch sales traders in the last six to eight months, says recruitment firm Armstrong International
US Event Calendar
- No major economic data expected
- 12:15pm: Fed’s Kashkari Gives Prepared Remarks on TBTF
DB’s Jim Reid Concludes the overnight wrap
Those with a nervous disposition might want to hide this week as we have what could be a highly stressful event. Yes it episode 9 of the current series of Game of Thrones tonight. If previous series are anything to go by, the penultimate installment is the one to leave you shocked and emotionally drained. I’ve seen the title for tonight’s episode (which can’t be repeated in a family daily) and everything suggests an epic! No spoilers though please as I’ll be watching a day late due to England playing tonight. I’m a bit stressed writing this as I can’t remember if I told my wife the football was delaying GoT for a day.
Onto the actual main event of the week, if one believes the UK EU Referendum polls are a good reflection of sentiment, then this weekend it seems like the ‘Remain’ campaign have managed to undo the momentum that the ‘Leave’ campaign seemed to have built before last Thursday’s suspension of debate and activity.
There have been four notable polls over the weekend. Interestingly YouGov have compiled two which straddle Thursday’s campaign suspension. The first (Good Morning Britain – GMB) was compiled entirely before (15th-16th), and the second (Sunday Times – ST) saw a third of responses before (fieldwork spanned 16th and 17th). The GMB poll saw ‘leave’ 2 points in the lead, the ST poll had ‘remain’ 1 point in the lead. Both were online polls which compares to the 7% lead for ‘leave’ in their last online YouGov poll at the start of last week. So it could be said some momentum shift had occurred before Thursday’s campaign suspension but after it there seems to be further evidence. Interestingly if we dig into the Sunday Times poll 33% thought that they would be worse off if Britain left the EU, up from 23% a fortnight ago and comfortably the highest answer seen to this question.
The other two polls saw Opinium (for the Observer) see a 50/50 online survey split (fieldwork last Tues-Friday) and a Survation phone (fieldwork Friday-Saturday) poll giving the ‘remain’ side a 3% lead. This confirms the above trends. A reminder that on Friday we showed a graph comparing the polls in the lead up to the Quebec, Scottish and current UK/EU referendum. In the previous two, the ‘Leave’ momentum built as the poll approached but in both the status quo of ‘remain’ saw the actual vote 5% higher than the last few polls so one can see why the ‘leave’ lead might need to appear to be more than 5% for there to be high confidence that this will be the final result.
Following a two and a half day suspension, the referendum campaigning is back underway again with PM David Cameron yesterday taking part in BBC’s Question Time in which he suggested that a potential ‘leave’ outcome would be a tragedy that would damage the UK economy and wreck job prospects. Expect plenty more comments from figureheads in both camps in the lead up this week but it’s clearly the opinion polls which will be front and centre. For now we’ve seen a reasonable turnaround in the implied probabilities based on political bookmaker odds. At Thursday’s close the odds of a ‘remain’ outcome were sitting at 66.2% (after dipping as low as 61% earlier in the session). Since then there’s been a steady move higher however and we closed Friday, Saturday and Sunday at 66.9%, 70.4% and 73.6% respectively. As we type the current odds are 74.4%. Meanwhile the main reaction to the weekend polls in markets has come in FX where Sterling is currently +1.46% and +0.80% versus the Dollar and Euro respectively.
While we’re talking currencies, DB’s Alan Ruskin noted in a piece published on Friday that the market has long worked on the presumption that Sterling’s downside on a ‘Brexit’ was much larger than its upside on a ‘Bremain’. He noted that this was partly based on the idea that ‘Brexit’ represented political and economic change and continued uncertainty, while ‘Bremain’ was more consistent with the status quo. However Alan thinks that there are a number of other factors which make the response more symmetrical including the sizable over hedging for GBP downside extreme moves, related spec positioning and downside protection from the BoE, amongst others. Indeed this more balanced view is also shared by DB strategists in other asset classes. Our European equity strategists see 10% upside in a remain scenario and 10% downside in a leave scenario while our interest rates strategists suggest that the market has adjusted to the point of pricing close to 50/50 risk although the asymmetry in the rates market is tilted slightly towards a higher probability of a leave vote. Overall though it feels like the general conclusion is one of much more balance in terms of pricing either way although clearly that could change quickly depending on the progression of remaining polls into Thursday.
Finally for today on the referendum, last week we published a note (Brexit risk in GBP and EUR credit) assessing the market’s pricing of ‘Brexit’ risk. Calculating this has been complicated by the ECB’s CSPP. Normally credit and equity performance is linked, at least in terms of direction. However this is turning into a rare year. This morning we’ve published a quick Credit Bites one pager showing that since the Euro credit market became established in 1999, 2016 YTD is only the second year (after 2001) where the Stoxx 600 has gone down while credit spreads are tighter and discuss that due to the ECB, Euro credit is bucking the ‘Brexit’ risk trend seen in other asset classes, especially equities. See the report an hour before this one for more.
The other big news from the weekend has come out of India where the Governor of the RBI, Raghuram Rajan, has announced that he is to stand down at the end of his current term in September. While his future had become a more talked about subject in recent weeks, it still throws open a period of uncertainty for India at a time where the UK EU referendum vote and Fed watching have markets already on edge. Indian equity markets are back to flat after initially opening in the red.
Elsewhere however and China aside, markets are relatively positive this morning. The Nikkei is currently +2.21% with the Yen weakening, despite exports in Japan reported as declining more than expected in May (-11.3% yoy vs. -10.0% expected). Meanwhile the Hang Seng (+0.68%), Kospi (+1.18%) and ASX (+1.16%) are also firmer. Elsewhere and as we type news is filtering through that Italy’s anti-establishment Five Star Movement is set to win mayoral elections in Rome and Turin according to Bloomberg. It’s worth keeping an eye on that as more information gets released.
Recapping Friday, markets finished the week on fairly divergent paths on each side of the Atlantic. Sentiment was greatly improved in Europe with the suspension of the UK EU referendum campaign seemingly helping. The Stoxx 600 closed +1.40% to help limit its five-day loss to -2.14% while the DAX was up +0.85% on the day and down -2.07% over the week. The FTSE 100 rose +1.19% and interestingly outperformed (-1.55%) on a relative basis versus other core European markets last week. It was the peripherals which stood out the most on Friday however with Italy’s FTSE MIB in particular closing +3.49%.
Over in the US however that positive sentiment never really carried over and markets were in the red from the off. Both the S&P 500 and Dow finished down -0.33% meaning they were -1.19% and -1.06% respectively on the week. A rough session for tech and health care names was to blame with bellwethers such as Apple and Alphabet down close to 3%. This more than offset the big gains from commodity sensitive names. Indeed Gold rose +1.58% and continues to test $1300/oz, while Oil markets finally snapped a run of six consecutive daily declines with WTI rallying just shy of 4%. Those moves coincided with another weak day for the US Dollar.
In truth there wasn’t a huge amount to report back from Friday’s session allowing investors to finally draw a breath from what was a frantic week. There was some interest however over at the Fed where the mystery FOMC dot was revealed. St Louis Fed President Bullard confirmed that he favours only one more rate hike through 2018 (to come this year) and declined to give a long-run projection. Clearly this is a huge change in stance from someone who was previously considered one of the most hawkish members of the committee. It’s possible that this could be more of a protest of the use of the dot plot projections however which have been seen as costing the Fed some credibility.
Friday’s dataflow didn’t add a whole lot to the debate. The only releases of note came in the afternoon in the US when it was revealed that housing starts declined less than expected in May (-0.3% mom vs. -1.9% expected). Building permits rose slightly less than expected however (+0.7% mom vs. +1.3% expected) although we did see a reasonable upward revision to the prior month’s data. The Atlanta Fed kept its Q2 GDP forecast unchanged at 2.8%, although that contrasts to the NY Fed who cut their forecast to 2.1% from 2.4%.
Following on from a frantic last week, it’s a quiet start to proceedings today with the latest German PPI print the only data of note on either side of the Atlantic.
The big event next week however is away from the data and of course reserved for Thursday with the UK EU referendum vote. In the lead up there are various TV debates scheduled each evening. As well as that, we will also hear from Fed Chair Yellen this week when she is set to address the Senate on Tuesday (3.00pm BST) and House Financial Services Policy on Wednesday (3.00pm BST) as part of her semi-annual monetary policy report. We’re also due to get comments from Kashkari this evening, Powell on Wednesday and Kaplan on Friday. Over at the ECB we’ll hear from Mersch today while a business conference sponsored by the German CDU party tomorrow will see Merkel, Schaeuble and Dijsselbloem all make comments. If all that wasn’t enough, next weekend on Sunday is of course also the Spanish General Election.
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