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By Tyler Durden

From the desk of Mark Haefele, CIO UBS Wealth Management,

Brexit – Navigating The Aftermath

In short

The effects of the UK's vote to leave the European Union have been felt around the world. Markets have re-priced to reflect heightened political uncertainty, the threat of lower growth in Europe, and the potential for deeper contagion to the global economy and financial system.

What's moved?

Equity markets initially traded down sharply but have recovered some ground during the day: the S&P 500 is currently -2.4%, European banks closed -13%, the Nikkei -8%, and the FTSE 250 -7%.

Meanwhile, the dash for safe havens led the Japanese yen to rally by more than 6% at one point, 10-year gilt prices are +2.7%, Treasuries +1.7%, and Bunds +1.5%. The Swiss franc did not rally materially against the euro, but only due to intervention from the Swiss National Bank to limit currency strength.

It is important to remember that although the equity market moves have been significant, they come in the context of a sharp rally in recent weeks, as markets had moved to largely price out the risk of Brexit. Betting markets had moved from pricing the risk of Brexit at around 40% last Friday to as little as 15% yesterday. While expectations clearly needed to readjust, markets are now, in general, back to levels of last week, and above the lows of last month. As such, today's moves should not be considered a major change in momentum at this stage. Even the British pound is overall down by only 2% in the past 10 days.

This kind of volatility goes to show that core investment principles like rebalancing, diversification across asset classes, and geographies are key, particularly as nations move further into unchartered political and economic territory.

What we're watching

Looking forward, global market outcomes will be shaped by the progression of central bank intervention, global risk appetite, political risk, and economic contagion.

Central banks have already moved quickly to stabilize market conditions. The Bank of England has made an additional GBP 250bn of liquidity available, and confirmed open currency swap lines if banks need them. The European Central Bank (ECB) also said it stood ready to provide additional liquidity if required. Both the Swiss National Bank and the Bank of Japan intervened to mitigate the appreciation of their currencies. The US Federal Reserve highlighted Brexit as a key risk for financial markets in its last statement. We now believe it highly unlikely that US interest rates will rise at the Fed's July meeting, and we now only expect one interest rate hike in 2016.

So far, global central banks have continued their recent form by acting with determination to maintain financial stability, while supporting growth and inflation. We expect them to remain on the alert to any indications of tightening financial conditions, and respond promptly if they arise. But signs of central bank indecision or unwillingness to act could be considered a negative signal for risk markets.

Global risk appetite: Ahead of a series of political events, including the Spanish election, Greek debt negotiations, …read more

Source: UBS CIO Warns "The Status Quo Is Over… Get Used To It"

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By Tyler Durden

The calm is over. FX marksts are open and Cable is currently down another 170 pips, testing 1.3500 once again. USDJPY is also sliding back below 102.00 as the world awaits China’s reaction with its official peg as offshore Yuan plunged on Friday…

…read more

Source: Currency Carnage Continues: Cable, USDJPY Tumble As FX Markets Open

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By Tyler Durden

While the world is focused on the aftermath of the Brexit vote, another surprise to the European status quo was just served thanks to Spain’s parliamentary elections, where according to the just released exit polls…

LATEST: Table comparing two exit polls with actual result from December:https://t.co/NtMMNlbvTR pic.twitter.com/bAAn4PTZ9t

— The Spain Report (@thespainreport) June 26, 2016

… the country’s two main progressive parties, the 137-year-old Socialists and the anti-establishment group Podemos, most likely have won a majority of seats in parliament according to early exit polls.

Podemos won 91 to 95 seats compared with 71 at the last vote in December while the Socialists won 81 to 85 seats compared with 90, according to the poll by Sigma Dos published by the state broadcaster. Parties need 176 lawmakers for a majority in the 350-seat chamber. Caretaker Prime Minister Mariano Rajoy’s People’s Party won the most seats with 117 to 121, though the second- and third-placed groups have both ruled out supporting him. The liberals of Ciudadanos fell to 26 to 30 seats compared with 40 last time.

The election is perhaps most notable for the latest confirmation of total apathy: while 37 million people are eligible to participate, barely half of them had voted by 6 p.m. in Madrid, the lowest turnout on record.

As a reminder, this is the second election following a previous one in December when the result was deadlocked, preventing any single party or alliance from claiming a majority. Opinion polls had suggested the parliament that emerges this time will be just as fragmented as the previous one. Four big parties and six smaller regional ones are likely to win seats in the 350-strong assembly, none of them coming close to a majority.

The center-right People’s Party (PP) looks set to be the biggest party again, with around 120 seats. But its natural coalition partner, the liberal Ciudadanos (“Citizens”), appears likely to win only 30 seats or less, far worse than polls had expected, leaving them well short of the 176 needed for a majority.

In theory, the rise of Unidos Podemos (“Together We Can”), a leftist alliance led by Podemos, could offer a way out. The 90+ seats it is expected to win, combined with around 80 for the Socialist Party (PSOE), would be close to a majority. Support from some of the regional parties could enable them to form a government.

That said, it all depends on the socialists: analysts believe that the 137-year-old Socialist Party would prefer to form a ‘grand coalition’ with the PP, led by the acting prime minister, Mariano Rajoy, or give passive support to a minority PP government, rather than combine with a group that threatens their existence, according to Reuters.

“This is a crucial time for the left. Our time has come. We have an opportunity for change,” said Carlos Martinez, a retired administrative clerk who cast his ballot for Unidos Podemos in the Arganzuela neighborhood, in the south of Madrid. However, the 77-year-old, who voted in December for …read more

Source: In Latest Shock To Status Quo, Spanish Left-Wing Parties Set To Win Parliamentary Majority

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By Tyler Durden

Years before Ferguson, Missouri became famous for the Michael Brown shooting and subsequent emergence of the Black Lives Matter movement, the City's finances were in trouble, and the Finance Director had a proposal to help fill the gaps.

The Finance Director's proposal, as Priceonomics reports, was to have the police generate more revenues from fines (eg: traffic violations, parking tickets, missing court appearances), warning that the city would be in financial trouble “unless ticket writing ramps up significantly before the end of the year.” The Finance Director went on to add that “given that we are looking at a substantial sales tax shortfall, it's not an insignificant issue.”

This correspondence was uncovered as part of the US Department of Justice's investigation of the Ferguson Police Department as a result of the Michael Brown shooting in August 2014 with the goal of better understanding why the citizens of Ferguson felt so at odds with the police department.

The DOJ concluded that the mistrust primarily resulted of excessive fining. “Ferguson's law enforcement practices are shaped by the City's focus on revenue rather than by public safety needs” the DOJ report stated. Adding that the use of fines to fund the government undermined “law enforcement legitimacy among African Americans in particular”

To find out whether or not Ferguson is an anomaly, Priceonomics investigated the proportion of revenues that cities typically receive from fines, as well as the characteristics of cities that rely on fines the most.

Here is what was found:

We found one demographic that was most characteristic of cities that levy large amounts of fines on their citizens: a large African American population. Among the fifty cities with the highest proportion of revenues from fines, the median size of the African American population—on a percentage basis—is more than five times greater than the national median.

Surprisingly, we found that income had very little connection to cities’ reliance on fines as a revenue source. Municipalities that are overwhelming White and non-Hispanic do not exhibit as much excessive fining, even if they are poor.

Our analysis indicates that the use of fines as a source of revenue is not a socioeconomic problem, but a racial one. The cities most likely to exploit residents for fine revenue are those with the most African Americans.

The following chart shows the relationship between the % of revenues from fines and forfeitures and the proportion of the population that is African-American.

This chart shows that poverty rates really don't play a factor in the % of revenues that come from fines.

In looking at a regression, Priceonomics admits that while there is a correlation between African-American population and the % of revenues from fines for municipalities, it is not fully explained by just a strong African-American population. However, some outliers can be seen for some Southern states.

Of the top 100 municipalities in terms of revenues from fines, more than two thirds are in just six states: Texas (19), Georgia (17), Missouri (12), Illinois (9), Maryland (9), and …read more

Source: The Fining Of Black America: Are Municipalities Issuing Tickets Along Racial Lines?

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“Independence Day: Resurgence” didn’t bring any fireworks at the box office this weekend. …read more

Source: ‘Independence Day: Resurgence’ lacks fireworks at the box office

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By Tyler Durden

Any “faint prospect” of a Fed July rate increase has entirely vanished, ING economist Rob Carnell wrote in note adding that the longstanding ING call for Sept. hike looks to be “hanging in tatters.” Here are more comments, courtesy of Bloomberg, from Wall Steet’s so-called experts, none of whom predicted the actual a Brexit outcome, about U.S. monetary policy outlook following the outcome of the U.K. referendum.

BofAML (Ethan Harris, others)

• Next Fed hike now seen in Dec., not Sept.
• Brexit vote is another in “long string of confidence shocks,” will reduce U.S. GDP by an est. 0.2ppts over next 6 qtrs

BoT-Mits (Cliff Tan)

• Brexit will tighten financial conditions, mkt reaction is going to possibly be “pretty severe” over next few trading days

Janus Capital (Bill Gross)

• Fed’s dots have no future relevancy
• Brexit was storming of the gates of finance by populists

JPMorgan (Michael Feroli)

• Fed now seen hiking in Dec., not Sept.
• There’s “exceptionally low visibility” on monetary policy outlook now

Macquarie (David Doyle, Brendan Livingstone)

• Fed could need mos. to get clear picture about Brexit’s effect on global outlook
• Unlikely to be full clarity before Sept.

Renaissance Macro (Neil Dutta)

• FOMC to stand pat in July, Sept.; 50% odds of Dec. move
• Fed might hike in Dec. if labor mkt recovers, estimates of GDP remain ~2%, financial conditions ease

Stifel (Lindsey Piegza)

• Fed “has no other option but to remain on sidelines”
• Uncertainty, volatility from Brexit takes any near-term hike “off the table”

Warburg (Carsten Klude)

• Fed may lower rates if Brexit-fueled volatility lasts
• Lowering of rates may occur before autumn if equity mkts experience sustained turbulence

Fed funds futures price 1st rate hike to 0.50%-0.75% range as more than likely for Nov.-Dec. 2017 as of Fri., compared with Jan. 2017 at Thur.’s close. Also, as noted on Friday, there is a greater probability of a rate cut than a rate hike now.

…read more

Source: The Fed’s Rate Hike Plans Are Now "In Tatters" – What Wall Street Thinks

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By Secular Investor

Low interest rates can be a great tool to get an economy in slow-down mode going again, but there always is an unwanted side effect. If credit becomes too cheap and available for just anyone, there’s bound to be ‘abuse’ in the system, as households (and companies) can spend the borrowed cash on anything they want.

We have already warned you before about the share buybacks on the financial markets, as the increasing profits (per share) are mainly inflated by lower interest expenses and a lower amount of outstanding shares, rather than really seeing a substantial improvement of the business and sector those companies are operating in.

Source: Factset Research

Even though there has been a lot of chatter of a rate hike (which will very likely be completely off the table after the Brexit-vote), S&P 500 companies still seem to be ‘addicted’ to borrowing cash to repurchase shares, and in the first quarter of this year, the 500 companies that are part of the S&P index have spent a stunning $161B on share repurchases, which is the second largest quarterly buyback rate since Q3 2007. And yes, we see the same sort of hubris in the markets today and we don’t think it’s a coincidence the record-high buyback rate was peaking right before the global financial crisis erupted in 2008.

Source: Factset Research

The same alarm bells are ringing now as well, as the world economy is slowing down and central banks are considering rate cuts and new rounds of quantitative easing to keep things going. Granted, this has been going on for a while, but the recent Brexit vote might be the long-awaited catalyst as it’s an indication things are changing in this world…

The massive buyback scheme (with almost $600B spent on buybacks from Q2 2015-Q1 2016) will simply HAVE to slow down as approximately 60% of the free cash flow of the S&P 500 is being spent on these buybacks. Sure, this means there’s an additional margin of 40% to make sure the S&P companies can keep this pace up, but then the next chart is showing there’s no way those companies can keep this thing going when (and not if) the economy will slowing down.

Source: Factset Research

Yes indeed, the dividend payout ratio on a trailing twelve month basis is approximately 40% for the S&P companies, and combined with the 60% spent on share buybacks, these companies have no fully allocated cash flow to fund share buybacks and dividends, rather than investing in growth. And that’s a worrisome conclusion.

After all, the central banks around the world are still playing with the idea to increase the interest rates as they think the world economy has been fixed, but if this indeed happens, the companies will have a …read more

Source: Forget Brexit, This Is The Ticking Time Bomb For The Markets

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By Tyler Durden

Yesterday we warned that the biggest threat to the UK political process in the aftermath of the Friday referendum is neither an arguably fake petition to hold another referendum (it won’t happen), nor the so-called buyer’s remorse on the side of “Leave” voters, especially with ComRes confirming a negligible 1% of those voters were “Unhappy” with the outcome…

Vote split // On the #EUref result (Remain / Leave):
Happy: 4% / 92%
Unhappy: 88% / 1%
Indifferent: 7% / 5%
(via ComRes)

— Britain Elects (@britainelects) June 25, 2016

…but rather a surprising discovery in a UK government Command Paper laying out “The Process of withdrawing from the European Union“, which goes through the process of invoking the infamous Article 50 of the Treaty on European Union, and notes that there may be a rather substantial hurdle to the actual Brexit process: a Scottish and/or Northern Irish veto to Britain’s separation from the EU. To wit:

The role of the devolved legislatures in implementing the withdrawal agreement:

We asked Sir David whether he thought the Scottish Parliament would have to give its consent to measures extinguishing the application of EU law in Scotland. He noted that such measures would entail amendment of section 29 of the Scotland Act 1998, which binds the Scottish Parliament to act in a manner compatible with EU law, and he therefore believed that the Scottish Parliament’s consent would be required. He could envisage certain political advantages being drawn from not giving consent.

We note that the European Communities Act is also entrenched in the devolution settlements of Wales and Northern Ireland. Though we have taken no evidence on this specific point, we have no reason to believe that the requirement for legislative consent for its repeal would not apply to all the devolved nations.

As it turns out, this warning was spot on, because earlier today Scotland’s First Minister Nicola Sturgeon told the BBC that the Scottish Parliament could try to block the UK’s exit from the EU. As a reminder, unlike England where the vote went 52% to 48% in Brexit’s favor, in Scotland the picture was vastly different with 62% backing Remain and 38% wanting to go. And as predicted, the Scottish National Party leader, who went through her own UK independence referendum two years ago and is now considering yet another referendum, said that “of course” she would ask MSPs to refuse to give their “legislative consent”.

Scotland’s First Minister @NicolaSturgeon on potentially blocking British exit from EU https://t.co/K6pbNn362q
https://t.co/IquNADYPlX

— BBC Breaking News (@BBCBreaking) June 26, 2016

In other words, Scotland’s leader is threatening to break down the very concept of a “Great Britain”, which includes England, Wales and Scotland, and pledge allegiance to the EU, while turning her back on more than half of the English population.

In an interview with the BBC‘s Sunday Politics Scotland program Sturgeon was asked what the Scottish Parliament would do now. Ms …read more

Source: Scotland Threatens To Veto Brexit

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