- Bund Yields Crash Most Ever To Record Lows As Peripheral Sovereign Risk Explodes
With 10Y German Bunds yields collapsing 26bps to a record -17bps low, European capital markets have gone a little but “turbo.”
And Peripheral bond spreads are exploding…
For some context, Portuguese bond risk is up 80bps today (the most since Feb 2012), Spanish and Italian spreads spikd 38bps (the most since Aug 2012).
We are going to need more “whatever it takes”…
- "Our Views Coincide" – Putin Talks Up Russia's Alliance With China
In what should come as a surprise to nobody, as the United States continues to poke and prod at China and Russia, those two countries have become even closer friends.
In an interview conducted with Xinhua, Russian President Vladimir Putin talked up his relationship with Chinese President Xi Jinping, and praised the level of trust the two governments have for one another. "To say we have a strategic cooperation is not enough anymore. This is why we have started talking about a comprehensive partnership and strategic collaboration. Comprehensive means that we work virtually on all major avenues; strategic means that we attach enormous inter-government importance to this work" Putin told Xinhua.
Putin spoke of the important role that China has played in its trade, specifically the energy market and high-speed rail projects. Recall that in April we reported that China imported a record amount of Russian oil in April, as the two nations continue to push for the de-dollarization of global trade. Putin also pointed out that Russia and China were cooperating on military-technical items as well.
As RT reports
China is increasing its presence in our energy market, it is a major shareholder in one of our significant projects, Yamal LNG, and it has acquired 10 percent of the shares in one of our leading chemical holdings, SIBUR. We welcome these Chinese investments not only as a means of placing financial resources but also as a means of further developing our partnership.
Intensive work is underway on the famous Moscow-Kazan High-Speed Rail Line Project. Some railway sections will allow for a train speed of up to 400 kilometers per hour. We pay considerable attention to these prospects; this can be only the beginning of our large-scale infrastructure cooperation.
Our interaction in the humanitarian field is no less important. Thus, we have held cross?years of China in Russia and Russia in China, the Year of Youth Exchange, the Year of the Russian Language and, accordingly, the Year of the Chinese Language, the Year of Tourist Exchange, etc. Some events were initiated by the Russian side, and others – by the Chinese side; but they all have been very successful and will undoubtedly contribute to building an atmosphere of confidence between our peoples. These projects are as important as, for example, those in the energy sphere, such as the huge Power of Siberia project to supply up to 38 billion cubic meters of Russian gas per annum via a newly established eastern route from Russia to China. Add to this diplomatic, military, and military-technical cooperation.
In regards to collaborating on international affairs, Putin said that China and Russia's views are quite similar, and that the two consult each other on global and regional issues.
Apart from our joint work in the Shanghai Cooperation Organization, we cooperate within BRICS, which in fact was jointly established by us, and we actively collaborate at the UN.
I would take the liberty to recall that it was this country, the Soviet Union at that time, which made every effort to give the People's Republic of China its deserved place among the permanent members of the Security Council. We have always believed that this is the place for the People's Republic of China. Today, we are particularly pleased that this has happened, since our views on international affairs, as diplomats say, are either very similar or coincide. At the same time, this similarity or coincidence is backed by concrete work, including efforts on the technical level. We are in constant contact and we consult on global and regional issues. Since we consider each other close allies, naturally, we always listen to our partners and take into account each other’s interests.
I am certain that our joint work during my visit to the People's Republic of China will proceed in the same way.
* * *
So, while the US provokes, ties are strengthening between Russia and China. We're sure China's order of 1,000 heavy transport aircraft and Russian vessels being spotted near disputed islands in the East China Sea are both just a coincidence and not a red flag that if the US engages with one, it will wind up with two problems.
Full interview here.
- "Victory For Freedom" – Le Pen Demands Referendum For France
First, The Dutch; and now, The French…
French far-right leader Marine Le Pen says there should be a similar referendum about EU membership in France after Britons voted to leave the 28-nation bloc.
- European Stocks Crash Most In History
Euro Stoxx 50 Futures have collapsed over 11% at the open… the biggest single-day crash in Rhhistory…
The question is – do the central banks rush in to save the world (and prove Brexit wasn’t so bad after all), or do they fiddle while Rome burns?
- Key Brexit Question: Is Cameron The Biggest Liar In History?
Submitted by Michael Shedlock via MishTalk.com,
Please recall that Prime Minister David Cameron repeatedly stated there will be no second vote.
Cameron also stipulated that he would invoke article 50 of the Lisbon treaty, which represents formal notification of a decision to leave the EU.
Unfortunately, the battle is not over. A key question remains: Is Cameron an even bigger liar than we all know?
Now that the vote is in, I fully expect all the other liars, notably French president Francois Hollande and German Chancellor Angela Merkel to propose a second vote with added sweeteners.
Also note the Brexit vote is not legally binding. Cameron could easily resign, leaving this up to the next parliament to decide.
Either of those is arguably more likely than straight-up leave negotiations.
And we have yet to hear from European Commission president Jean-Claude Juncker who now doubt will promise (lie) anything and everything to get another vote.
Vote by Country
I captured that snapshot earlier in the evening. I have no update but it is likely reasonably close.
What I am certain of is the two biggest votes for remain were Scotland and Northern Ireland.
Final Question
I leave you with one final question: Whose country is this, and will Cameron support it?
- "Now It's Our Turn" – Geert Wilders Calls For A Dutch Referendum
Just as we warned, the historic British rejection of the EU’s totalitarian rule has sparked renewed ambitions to leave the clutches of Brussels across Europe. First to congratulate Britain was Holland’s Geert Wilders, who calls for a Dutch referendum as soon as possible…
Thursday, June 23, 2016, will go down in history as Britain’s Independence Day.
The Europhile elite has been defeated. Britain points Europe the way to the future and to liberation. It is time for a new start, relying on our own strength and sovereignty. Also in the Netherlands.
A recent survey (EenVandaag, Dutch television) shows that a majority of the Dutch want a referendum on EU membership. It also shows that more Dutch are in favour of exit than of remaining in the EU.
The Dutch people deserve a referendum as well. The Party for Freedom consequently demands a referendum on NExit, a Dutch EU exit.
As quickly as possible the Dutch need to get the opportunity to have their say about Dutch membership of the European Union.
Geert Wilders: “We want be in charge of our own country, our own money, our own borders, and our own immigration policy. If I become prime minister, there will be a referendum in the Netherlands on leaving the European Union as well. Let the Dutch people decide.”
Meanwhile, Europe is a bloodbath…This is the biggest drop in EURUSD (DEMUSD) since 1978!!
as NExit looms…
- Brexit Wins! Next Stop: Frexit, Italexit and Swexit
Congratulations to Great Britain!
They’ve voted to exit the European Union.
Next up: Frexit, Italexit, Swexit, Netherlexit… etcexit?
- S&P Futures Halted Limit Down As VIX Spikes Above 26
S&P Futures are down halted limit down as carnage washes across every and any asset class on the heals of Britain’s historic vote…
This has smashed the S&P down to its 200DMA…
Charts: Bloomberg
- Morgan Stanley Explains "What Leave Means" (Spoiler Alert: A Lot Of Pain For The Longs)
With the voting out of the way, the only thing left is the crying. Oh, and the margin calls which start in just a few hours. And, alongside all of that, forecasts of doom that have to comply with all the scaremongering that was unleashed over the past few months as part of the Remain campaign. Sure enough, here is Morgan Stanley’s Andrew Sheets explaining “What Leave Means.”
It’s not pretty. Here is the summary answer:
We see GBP moving to 1.25-1.30 and 15-20% downside to European equities relative to Thursday’s levels. Corporate and sovereign credit present the best opportunities to buy on weakness
- Economic implications: The UK faces a prolonged period of uncertainty which should lead both investment and consumption to wane. Longer term, a less open economy could lower the UK’s rate of potential growth. Risks to the economy will likely lead the Bank of England to keep an easing bias – staying on hold through 2017-18, or a rate cut to 10bp with further QE depending on exit negotiations.
- What has furthest to fall: Negative implications extend beyond the UK. We see the most downside in GBP and EU equities, and would also be sellers of AUDJPY (target 70), USDJPY (90) and EURCHF (1.02) on a flight to safety. Gilt yields could rally 30-35bp to all-time lows, but breakeven inflation could ultimately rise, given weaker GBP. In EM FX and local rates, sell Poland and South Africa.
- Where to be brave: ECB support, both potential and existing, argues for buying corporate and sovereign credit into weakness. We discuss levels and our expected central bank response.
- FX: Poor fundamentals could support 10%+ downside in GBP. Higher global volatility favours JPY and CHF. Increased concerns over eurozone vulnerabilities make PLN the best short in EM.
- European equities: We expect significant downside for European stocks – SX5E at 2400-2550 and FTSE 100 at 5000-5300. Financials and Consumer Discretionary will likely lead the market lower, while Staples and Healthcare should outperform.
- Credit: We expect a strong response from the ECB – we’d add risk in CSPPeligible assets and ‘A’-rated ineligible non-fins on initial weakness. We’d also add bank credit selectively on what we expect will be materially lower prices today – UK banks’ LT2 and AT1s have best asymmetric returns.
- European rates: We reiterate our long duration recommendations and believe UK yields could rally 30-35bp. GBP depreciation should be a dominant force on inflationary pressures over the next two years – long Nov-18 UKTi breakevens. The decline in global yields could see 30y UK real yields return to all-time lows; we reiterate long Mar-46 UKTi real yield. BTP spreads moving more than 25bp would represent value to ‘buy on weakness’, in our view.
- EM fixed income: We expect risk-aversion to widen the impact beyond countries with direct UK links. We see Poland and South Africa most exposed in rates and FX, and South Africa and Turkey most exposed within EM credit.
And the full one:
Cross-asset implications: Bracing for volatility, by Andrew Sheets
It looks likely that the UK has voted to leave the EU. This result will come as a surprise to markets, based on Thursday’s pricing, and creates material political and economic uncertainty in Europe. Both are negative for risk premiums, and the question over the next several days is not whether prices fall, but by how much, and whether central banks respond.
What level of sell-off is warranted? A great deal of uncertainty hovers around all of our estimates in this scenario. Generally speaking, we see the most downside in European FX and equities. We think both European corporate and sovereign credit will be better insulated, given central bank support.
Specifically, we think GBPUSD could trade down to 1.25-1.30, as valuations need to adjust sharply before the currency is ‘cheap’, in our view. EURUSD could fall to 1.05 over the next six months as its correlation with risk flips, reverting back to the pattern seen in 2011-12, when EUR served as a proxy for European cohesion. JPY and CHF, in contrast, should be well-supported. We think European equities could sell off by 15-20%, on a ~5% hit to earnings and de-rating the P/E back to near historical averages. Within equities, we prefer to be defensive, favouring Staples and Healthcare, and our ‘Weaker EUR beneficiaries’ basket (MSSTWKEU).
While spreads should also widen, we think corporate and sovereign credit stand to outperform FX and equities significantly, given the ECB’s outstanding purchase programmes for both. We expect CDS to materially underperform cash, with XOver moving out towards 450bp.
What to watch for? All eyes are now on the ECB, and how aggressively it decides to intervene in order to protect its member states and deflect downside risks to inflation that could result from increased economic uncertainty. In the very short term, we think the ECB could reassure markets about liquidity provision (including via FX swap lines and emergency liquidity assistance) today. We would also watch MS GRDI* (STGRDI <Index>), our preferred sentiment measure, dropping below -3, for assessing if the sell-off has run its course. We see US assets across the spectrum – stocks, FX, credit and government bonds – becoming relative safe havens: We reinforce our preference for US versus ROW in equities. We think EM equities are more vulnerable to contagion risks from Europe than US equities.
We see US assets across the spectrum – stocks, FX, credit and government bonds – becoming relative safe havens: We reinforce our preference for US versus ROW in equities. We think EM equities are more vulnerable to contagion risks from Europe than US equities.
* * *
What else? Oh yes: central banks to the rescue, of course.
Statements and actions by central bankers
Elga Bartsch and Chetan Ahya, our global economists, think that in the immediate aftermath of a vote to leave key global central banks will make statements that they stand ready to support markets by providing liquidity and by reopening existing FX swap lines. Such statements could well be coordinated across the G7. Central banks with active QE programmes could make operational adjustments to their asset purchase programmes, if needed. Beyond these emergency measures, however, they do not expect changes in the monetary policy stance in the immediate aftermath of a vote to leave.
Good luck.
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