The Daily Shot And Data - June 27, 2016

Greetings,

Let's us begin the week with a number of Brexit related headlines. These alone tell us how the rising uncertainty in Europe is keeping global markets on the edge.

1. The EU is telling the UK to leave as "soon as possible" to avoid sparking a "chain reaction."

Source: @AFP

2. Wait, what is the EU?

Source: Washington Post

Source: Deutsche Bank

3. Was there a plan behind Brexit?

Source: Huffington Post

4. According to Google, the UK search to obtain an Irish passport (thus rataining an EU passport) surged. Apparently the backlog of applications has been massive even before the EU Referendum.

Source: Google

5. Moody's cut UK's credit outlook and S&P said the UK will lose the top rating.

Source: BBC

6. No comment on this one.

Source: Bloomberg

7. Scotland and Northern Ireland are talking about referendums to separate from the UK and rejoin the EU as independent nations.

Source: Reuters

8. According to the FT, UK's "regions with the biggest votes for Leave are also the most economically dependent on the EU".

Source: @FT

Before we look at the markets, here is a good economic summary on Brexit from Merrill Lynch.

Source: BofAML

Here we go ...

1. The British pound opens sharply lower early Monday.

Here is Friday's GBP move in perspective. Amazing.

2. Friday's market action created numerous exceptions for banks' trading VAR models. Moreover with this data now in the VAR models going forward, risk taking (and potentially liquidity) will shrink further.

Source: @tracyalloway

3. The 10y gilt yield hit record lows.

4. At the same time, UK's default probability (implied by sovereign CDS spread) rose.

Source: @Schuldensuehner

5. Cross-currency basis swap spreads blew out, showing rising demand for US dollar funding.

Source: WSJ

6. Shares of European banks (index) fell 19% on Friday - a stunning move.

Source: Investing.com

7. Italian banks were down 22% on the day, hitting the lowest level since the Eurozone crisis. Watch Italian banks - this is going to be a major area of concern for the markets in weeks ahead.

8. Greek banks were down 30%. Nobody seems to care.

9. It's interesting that subordinated European bank credit wasn't hit as hard as equities. More pressure on credit in the days ahead?

Source: Citi

10. The overall credit markets also held up better than the equity vol market would suggest.

Source: Barclays

11. Emerging markets credit spread increase was modest in comparison to recent events.

1. Continuing with emerging markets, the PBoC's RMB trading fix on Monday was the weakest (vs. USD) since 2010. This is spooking many market participants.

Source: @barchart

2. Argentine peso is pushing toward 15 to the dollar - this is not going to help with the nasty inflation problem.

Source: @barchart

3. Mexican retail sales remain strong (the month-over-month sales saw a decline, but the overall level is robust).

4. Over the past couple of months, Brazil's current account turned positive for the first time since 2009.

5. India's bank loan growth is the lowest in decades (driven mostly by weakness in corporate loans).

Separately, Rajan leaves the RBI with record FX reserves.

In the Eurozone, German business sentiment beat forecasts. The trend is likely to reverse sharply after the recent events.

Source: ifo

Italian wage growth over the past couple of months has been the lowest on record. Last week's event is likely to bring back deflationary pressures in the Eurozone and elsewhere in the EU.

Back in the United States, durable-goods orders fell 2.2% in May - much worse than expected. Shipments also show weakness.

Combine the above with Brexit and Fed Fund futures are now pricing in some probability of a rate cut in the US this year.

Source: CME

1. In US fixed income markets, the 10y treasury yield is back below 1.5% in early Monday morning trading.

Here is Deutsche Bank's forecast for the 10y treasury yield.

Source: Deutsche Bank

2. US inflation expectations opened sharply lower on Friday but recovered during the day.

Source: @MattGarrett3

3. Brexit generated significant pressure on the funding markets, as the GC repo rate spikes. It's another critical indicator to watch closely in the next few days - especially over the quarter-end.