Stocks rallied on Monday as markets began to dial down their fears over the coming “Brexit” referendum, or vote for the UK to either remain or leave the European Union, set for Thursday.
Equity markets, however, lost considerable momentum in the final half hour of the trading day.
- Dow: 17,814, +139, (+0.8%)
- S&P 500: 2,083, +12, (+0.6%)
- Nasdaq: 4,838, +38, (+0.8%)
- WTI crude oil: $49.80, +2.5%
- 10-year Treasury: 1.67%
So, no Brexit?
Markets woke up Monday to a huge rally around the world as stocks in Europe ripped higher by more than 3% after recent polls showed the spread between the ‘Remain’ and ‘Leave’ camp in the UK’s EU referendum tighten in polls out over the weekend.
On Thursday, as a quick reminder, the UK will vote on whether to remain a member of the EU or leave.
Last week, polls gave the ‘Leave’ camp as much as a 6-point lead just about a week before Britons took to the polls, which gave financial markets the jitters as the potential for a ‘Leave’ vote and the unknown knock-on effects this could have on not only the European economy but London’s standing as a financial center made investors wary.
Betting markets and most of the conventional wisdom on Wall Street has said the ‘Remain’ camp is most likely to prevail, but the lead taken by ‘Leave’ last week gave this long-held belief reason to be doubted.
This weekend, a poll for the Mail on Sunday by Survation gave the In campaign 45% of the vote against 42% for Out. A separate poll for the Sunday Times by YouGov had Remain at 44% to Leave’s 43%, and an Opinium poll for the Observer put the two sides neck and neck at 44%.
In addition to stocks ripping higher, the British pound had one of its best days against the US dollar in a decade, rising as much as 2.4% to as high as $1.4705 overnight. In late afternoon trading in New York the pound was up about 2.2% against the dollar to around $1.469.
As The Wall Street Journal’s Mike Bird noted, some estimates had put a potential move for the pound — which has slid considerably against the dollar for the last month — to as strong as $1.50, which would be a smaller move than what we saw on Monday (2.1% vs. about 2.2%).
Said another way: if there’s going to be a big relief rally in the case of a ‘Remain’ vote, we already saw most of it.
Elsewhere in idle Brexit commentary, strategists at BNP Paribas asked rhetorically in a note to clients if the strong market move to Brexit polls signals an underlying fragility in the global financial system. I’m inclined to say maybe, as the recent dislocations we’ve seen over the last couple of years suggest a hypersensitivity to news flow.
The question I think BNP might really be probing at is whether liquidity conditions are at fault or whether it’s ease-of-trading innovations that make panicky investors more easily able to act on that panic?
Among other possibilities, of course.
Pimco says a “storm is brewing” in the US commercial real estate market.
They go all in on the metaphor:
Storms form when moisture, unstable air and updrafts interact. Similarly, a confluence of factors — volatility in public markets, tightened regulations, maturing loans and uncertain foreign capital flows — is creating a blast of volatility for U.S. commercial real estate (CRE) that we anticipate could lower overall private U.S CRE prices by as much as 5% over the next 12 months. For nimble investment platforms, however, these swirling winds should create attractive opportunities over the secular horizon.
An impending problem for the commercial real estate market, or more specifically the commercial mortgage-backed securities (CMBS) market, is liquidity.
As Pimco outlines, post-crisis regulations have limited the amount of CMBS that sit as inventory on dealer balance sheets leading to periods of stress in markets when hedge funds were forced to sell down their CMBS portfolios to meet redemptions. A sort of textbook example of why people are worried about bond market liquidity.
Of course, as Pimco outlines in the chunk quoted above, if you are sitting on a bunch of cash the depressed prices of CMBS should create opportunities in coming year.
Pimco also runs through the potentially fickle foreign capital flows that have created considerable demand for CMBS as negative or near-negative interest rates in other markets make what seem like expensive prices for these instruments relatively attractive.
Also of note is Pimco’s handwave towards the impending rush of non-bank capital onto the market (this could be, for example, pension funds trying to gain more credit exposure by investing in actual commercial mortgage deals, for example), as potentially filling a liquidity gap in the future.
As we see banks pull back from a variety of markets someone is going to fill the gap. And pensions have big liabilities to fund. Just a thing I’m seeing.
Federal Reserve Chair Janet Yellen will be on Capitol Hill the next two days talking about monetary policy.
Having heard twice from the Chair over the last couple of weeks, not much new is expected.
Here’s Deutsche Bank’s Joe LaVorgna: “The Chair’s prepared remarks are likely to mimic those of last week’s post-FOMC press conference — we do not expect to learn anything new.” So there’s that.
Most of the excitement around this testimony, referred to as the Humphrey-Hawkins testimony, is the questions Chair Yellen will field for roughly a combined four hours over the next couple of days. Expect questions about negative interest rates, helicopter money, and why interest rates aren’t higher since savers are getting crushed.
All of these questions, in my humble opinion, are sort of just sideshows, but then again what is the real goal of bringing the most important economist in the world before US lawmakers but to make these officials look smart?
The most interesting Fed commentary hitting the inbox over the weekend came from Stephen Stanley at Amherst Pierpont, who was not taken in by the St. Louis Fed’s new framework for thinking about policy. I wrote over the weekend that this changes the way we think about the Fed, which was sort of just taking the St. Louis Fed’s suggestion that the economy does not move towards neutral states but exists inside regimes, at face value.
Stanley thinks me and others like me who took this literally were sort of duped, writing in a note to clients (emphasis mine):
If this new “model” is an earnest effort to provide a realistic forecast, then it is one of the more inane things that I have seen in all my years of Fed watching. I’ve seen a little Street economist commentary on the paper that seems to take the “model” literally, and my only reaction is to chuckle. I think this is something quite different. While this paper will never make it onto an undergraduate summer reading list, I view it as very skillful economic satire, maybe within an Economics context as good as Gulliver’s Travels and Animal Farm.
Jokes on me.
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