First Impressions

Not-So-Slow News Day
JLN Staff

The world just took a step toward hell in a handbasket.

Britain voted to leave the European Union, its Prime Minister, David Cameron, announced he will resign, and the markets everywhere are plunging, as is the British pound. “Leave” won 52 percent to 48 percent. Scotland, which voted overwhelmingly to stay in the EU, is talking about a referendum on independence from Britain.

While we at JLN generally stick to market structure, technology, regulation and the “non-price-oriented” risks to one’s business, sometimes prices are the story, and the culmination of these other risks. So let’s first run down a few prices, then look at what the historic vote may mean for the market structure.

After a decent rally yesterday, where the British pound touched 1.50 to the dollar for the first time in a while, it fell at one point about 18 big figures lower. Those of us who were on the trading floor when the pound dropped out of the ERM in 1992 know how big a move this was. Equity markets are down across the board today, but hardest hit in the UK and Asia. Japan was down about 8 percent. The FTSE was down about 7 percent at one point, but recovered a bit. Banks, naturally, are getting creamed. The opening print on Barclays, for example, saw the stock down about 30 percent.

Atop everyone’s mind is this question – “How did the market get this so wrong?” The predictive power of markets is dubious at best. Markets are a snapshot, an equilibrium value of assets, and the amalgamation of the views of all market participants, given what information is known and what is expected down the road. But amid this information are the market prices themselves. So in the case of Brexit, some see stability in the currency and equity markets as a sign that all is well, and buy into and reinforce the stability. It is easy to see why a surprise can rattle the market and unravel this stability, as it was held together by circular logic.

Prices will (or may already have) reached a new equilibrium, and market participants will move on. But what about the market structure? Though the phrase “game changer” is now cliche, this vote truly is one. Today marks a new market paradigm, with many more questions than answers.

What is the future of London as a financial center? Does this vote shift power to the continent? Or to New York? What about the impending merger between the London Stock Exchange and Deutsche Boerse Group? They said going into the vote that it changes nothing, but can that actually be true?

Now it appears imminent that Scotland will hold its own referendum to rejoin. Does this mean Scotland will abandon the pound and join the eurozone?

The developed nations, led by the US and EU, have just spent the last six years overhauling financial market regulations. Though many of the rules are similar, and conform to the G-20 agreement forged in Pittsburgh in 2009, there have been hundreds if not thousands of meetings, calls, roundtables and such, to harmonize rules across jurisdictions. For example, the US and the EU have been battling for several years on central counterparty equivalence, and are only now making true progress. Does Britain need to start from scratch? If so, this is a huge and costly undertaking.

In other words, the market structure effects of the historic vote are and will be taking shape over the coming weeks and months.

Quote of the Day

“China is the 800-pound gorilla in the room. The probability of a global recession that we were teetering on before Brexit is now more in play. We are in the danger zone.”

Michael Mullaney of Boston-based Fiduciary Trust in the story, “The Brexit Selloff Hits U.S. Shores — Reactions From Traders, Strategists and Fund Managers”

Lead Stories

How They Got It So Wrong. Complacent Traders Stunned by Brexit
Simon Quijano-Evans has made a career of assessing the potential for instability in far-flung corners of the globe. On Friday, the chief emerging-markets strategist at Commerzbank AG in London woke to find some of the deepest financial peril he’d ever seen on the streets just outside his office.

Europe’s Leaders Urge Britain To Leave Bloc Quickly
NY Times
European Union leaders called Friday for Britain to start a two-year process of leaving the bloc, and to do so without delay.
The call, made by the leaders of the European Union’s four main institutions, reflected growing concern that a toxic tug of war between Britain and the European Union could drag on for months, even years, until London makes the first move.

S&P says Britain’s ‘AAA’ credit rating untenable after Brexit vote
Ratings agency Standard and Poor’s said Britain’s top-notch “AAA” credit rating is no longer tenable after voters opted to leave the European Union, the Financial Times reported on Friday.

Why Banks Are Taking Brunt of ‘Brexit’ Crash
European bank shares are getting crushed—the sum of all investors’ fears focused on the most exposed stocks.
In early trading, shares in Barclays, Lloyds Banking Group and Royal Bank of Scotland all dropped by about 30%.
The first and immediate fear is a sterling crisis and what that entails for the U.K.’s ability to borrow and service its debt. And that applies to the government itself, the banks and all their customers.

The Brexit Selloff Hits U.S. Shores — Reactions From Traders, Strategists and Fund Managers
The U.K. has voted to leave the European Union, a decision that marks the first time a European nation has chosen to leave the union. It raises a number of new risks for the U.K., Europe, and a global economy that was already struggling.

‘Brexit’ Hits U.S. Stock Market Harder Than an Election
NY Times
In response to the British vote to leave the European Union, the American stock markets have moved more than they have in response to any presidential election over the past 60 years.
The S.&P. 500 — a broad measure of stock prices — was trading about 2.5 percent lower on Friday morning. By contrast, since 1952, elections have typically led stocks to rise or fall by only a percentage point or two.

Brexit will reconfigure the UK economy
Financial Times
David Cameron, the prime minister, took a huge gamble and lost. The fearmongering of Boris Johnson, Michael Gove, Nigel Farage, The Sun and the Daily Mail has won. The UK, Europe, the west and the world are, this morning, damaged. The UK is diminished and will, quite possibly, end up divided. Europe has lost its second-biggest and most outward-looking power.

Morgan Stanley denies it has begun moving 2,000 staff out of London
Morgan Stanley denied it had begun moving 2,000 investment banking staff out of London, rejecting earlier media reports following Britain’s historic vote to leave the European Union.

Nation’s Biggest Banks Would All Withstand Recession, Fed Says
NY Times
The nation’s biggest banks have all built up big enough buffers to weather a severe recession in decent shape, United States regulators said on Thursday.
The Federal Reserve looked at how the country’s 33 largest banks would do in a recession with sustained high unemployment and negative interest rates. It found that the big banks would all suffer major losses — $526 billion in total.

Central Banks

Yellen’s Fed to Play Long Game Dealing with Brexit Fallout
Britain’s vote to leave the European Union will almost certainly have repercussions for the Federal Reserve — and those could play out over days or months.
The severity of the fallout will become clear over three time horizons. On Friday, the Fed said it’s ready to act with its global central bank partners to shore up liquidity in markets, if needed. In the medium term, the post-Brexit market turmoil could delay a rate increase, while in the longer term, secondhand effects could bleed into U.S. economic data. Here’s what to look for at each stage.

Global Central Banks Raise Cash Offer to Quell Brexit Panic
Central banks across the world offered the financial system fresh funds and intervened in currency markets, in an effort to reassure investors sent into panic by the U.K.’s vote to leave the European Union.

Asia central banks, policymakers wade in to calm markets on Brexit vote
At least two Asian central banks were suspected of intervening in their currency markets on Friday, according to traders, as global financial markets went into a tailspin after Britain voted to leave the European Union in a historic vote.

Carney: BoE to use extra 250 billion pounds to help markets, consider more action
Bank of England Governor Mark Carney said on Friday the central bank was ready to provide 250 billion pounds ($345.93 billion) of additional funds to support financial markets after Britain voted to leave the European Union.

Bank of England says will take all necessary steps to ensure stability
The Bank of England said on Friday it would take all necessary steps to shield Britain’s economy from the shock decision by voters to pull the country out of the European Union which caused immediate turmoil on financial markets.

Fed says ready to provide dollar liquidity after British vote
The U.S. Federal Reserve sought to calm global financial markets on Friday by saying it was ready to provide dollar liquidity following Britain’s vote to exit the European Union.

Gross Says Brexit Will Put Off Fed Hike, Possibly Through 2017
The Brexit vote probably will end the chances for a Federal Reserve rate hike this year and perhaps through 2017, according to Bill Gross, the bond manager who has been warning that low rates are hurting global growth.


Pound Plunges to 30-Year Low as U.K. Stocks Slide on Brexit
The pound made history, plunging with U.K. stocks after the nation voted for a Brexit.
Sterling slid by the most on record against the dollar, reaching its weakest level since 1985, as the nation opted to quit the European Union after more than four decades. U.K. stocks tumbled, with banking stocks losing as much as 32 percent. The final tally, announced just after 7 a.m. London time, showed voters had backed “Leave” by 52 percent to 48 percent. Prime Minister David Cameron said he would step down.

World currencies are tanking on Brexit, but bitcoin is surging
Global currency markets are a sea of red in the wake of this morning’s shock Brexit news. The pound is down 6.44% against the euro and weakened 10% against the dollar. But one currency – or more accurately, cryptocurrency – is surging: Bitcoin is up 7% in the last seven hours of trading, adding gains to a rally that started as the UK went to the polls yesterday (June 23).

Currencies in AAA Scandinavia Torn Apart as Brexit Now a Reality
The currencies of Norway and Sweden sank while Denmark’s krone gained as traders struggled to grasp the consequences of the U.K.’s decision to exit the European Union.
With the “Leave” camp getting the most votes, Sweden’s krona lost more than 3 percent against the euro at one point. Norway’s krone sank as much as 3.3 percent, tracking movements in Brent crude, which fell more than 6 percent.

Brexit: Japanese yen gains while other Asian currencies lose ground
Japanese Finance Minister Taro Aso signalled today (24 June) that his government would step in to control the huge strengthening of the yen. This comes after the Japanese currency, which has for long been considered a safe haven by investors, rallied to its highest levels since 2013 after UK decided to leave the European Union.

Emerging Market Currencies Drop on ‘Brexit’ Vote
Currencies in emerging markets from South Africa to Poland plunged on Friday after the U.K. voted to leave the European Union and investors dumped riskier assets in response to the surprising results.
The selloff comes after a monthslong rally in many emerging markets. More accommodative positions by central banks this year have allowed investors to stop fretting about interest rate increases, which boosted these currencies against the dollar.


Gilts Lead Bond Rally, Showing No Loss of Safe Haven Status
MoneyBeat – WSJ
Investors are clamoring for safe government bonds Friday after the Brexit result, but U.K. gilts are among the most in-demand.
The yield on the 10-year gilt fell 0.27 percentage points to 1.09%, according to Tradeweb. By comparison, the 10-year U.S. Treasury note yield only dropped 0.18 percentage points to 1.56%.

Brexit Bond Binge: Another Leg of Lower for Longer
The U.K. vote to leave the European Union and the resignation of Prime Minister David Cameron has layered fresh political and economic uncertainty on an already uncertain outlook. Bonds are the winners in the near term, but ever-lower yields create risks of their own.

Bond Trades on Brexit Mean Sell What You Can in Illiquid Market
Corporate-bond traders trying to navigate the fallout from Britain’s decision to leave the European Union collided with the reality of illiquid markets, leaving few bonds they could actually buy and sell. A market rout was driven by higher-rated speculative-grade securities, which sold off because they’re easier to trade. By contrast, bond prices indicate that the riskiest company notes didn’t change hands.

Indexes & Index Products

Why FTSE 100 is suffering less than its European counterparts after Brexit
U.K. blue-chip stocks were getting hammered Friday, but the benchmark FTSE 100 was faring relatively better than other indexes across Europe after the U.K. voted to cut ties with the European Union.

Prime Time for Volatility ETPs Where Trading Surged Pre-Brexit
One pocket of the market where skepticism never went out of favor in the weeks before Britain’s secession vote is rewarding the faithful in its aftermath.
Exchange-traded products tied to levels of turbulence in the U.S. stock market saw prices surge in record trading Friday, handing a rare payday to investors who bought them either to protect against losses or speculate on an equity selloff.

Russell Rebalancing Having ‘Brexit’-Like Effect on U.S. Stocks, Too
The Street
The market’s reaction to Britain’s vote to leave the European Union is not the only thing roiling stocks today. The Russell rebalancing is also underway.
The entire family of Russell U.S. and Russell Global Indexes are rebalanced each June to reflect market changes in the past year. Approximately $6 trillion in assets benchmarked to and invested in products based on the indexes, according to Russell. Approximately $10 trillion in assets are currently benchmarked to indexes offered by global index provider FTSE Russell, created through the combination of FTSE and Russell indexes last year.


Gold Soars as Investors Seek Haven Following Brexit
Gold prices soared on Friday, after Britain’s decision to leave the European Union sent investors flooding into safe-haven assets.
Gold for August delivery was recently up 5.2% at $1,328.20 an ounce on the Comex division of the New York Mercantile Exchange. Gold prices spiked as high as $1,362.60 on Thursday night, hitting the highest level since March 2014.

Brexit Reminds Us Why Sentiment Is King In The Gold Market
The Brexit referendum is, of course, the only thing that the market is presently concerning itself with and the real chance of a “leave” vote has sent much of the market into damage control mode. Consequently, the process is once again highlighting gold’s link to fear and uncertainty. Just as polling data in the lead up to the referendum saw gold slide, the swell of uncertainty and surprising strength of the “leave” campaign has seen the metal surge.

Gold Rises Most Since 2008 Crisis as Investors Seek Brexit Haven
Gold surged the most since the height of the 2008 global financial crisis after the U.K. voted to exit the European Union, causing turmoil across markets and boosting haven demand.

****JB: I think readers can see a theme running here in the Gold section. Brexit has swamped all financial stories today and that covers gold as well. We chose a sample of these stories but there are plenty others you can find with a search if you like.


Society to House Papers of Felix Rohatyn, Hero in New York’s Financial Rescue
NY Times
If there is ever a Mount Rushmore created for New Yorkers, the faces on it might reasonably be those of Peter Stuyvesant, Fiorello H. La Guardia, Robert Moses and Felix G. Rohatyn.
In the 1970s, Mr. Rohatyn, an investment banker, engineered the rescues first of the New York Stock Exchange and then of the city itself, which was on the verge of financial collapse. Documents from these episodes, and other stages of his life, including his childhood flight from the Nazis, have been given to the New-York Historical Society by Mr. Rohatyn, 88, and his wife, Elizabeth, a former chairwoman of the New York Public Library.

Goldman Sachs Uses Video to Cast Wider Net for Young Bankers
NY Times
To stem attrition, Goldman Sachs has given its young workers more time off, higher salaries and less busy work. Now the firm is focused on finding analysts better suited to the demands of banking.

TD Ameritrade, Fidelity problems rile social media users
Social media users flooded TD Ameritrade’s (AMTD.O) and Fidelity Investments’ Twitter feeds with irate messages on Friday, as customers struggled to access their accounts with the online brokers.

How Did the Bookies Get It So Wrong: Ladbrokes Tries to Explain
The result of the U.K.’s Brexit referendum defied gambling firms, which placed a 90 percent chance on the nation remaining in the European Union as the campaign drew to a close. It might just be one of the occasions where an outsider wins, Ladbrokes Plc said.

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