On Friday, the UK voted to leave the European Union after more than four decades of membership, crashing the British pound and negatively impacting markets around the world. The stunning rejection of the political and economic order of Europe prompted Prime Minister Cameron to step down, and international central banks were scrambling to ensure marketplaces continued operating normally. Asian equity markets crashed, with the Nikkei closing down -8% on Friday. The yen soared with the USD/JPY dipping below 100 for the very first time in three years. The CAC dropped -8%, DAX fell -7%, and the UK FTSE was down -2.2%. Gold soared to two-year highs. In the US, the dollar surged higher along with Treasury bonds.
The framework of the new relationship with the EU and the UK, including trade deals, will be negotiated over a span of years. Scottish nationalist leader Nicola Sturgeon said the Scottish National Party is preparing laws to enable a new Scotland referendum to take place before the UK leaves the EU. Scotland voted to remain in the EU with 62 ‘stay’ compared to 38% for ‘leave.’
The ECB warned the global banking system of a possible spread of contagion and loss of confidence. (Read More….)
The spread between the yield on the 2-year and the 30-year bond is at its lowest in nearly seven years. Since 2014, the 2-year bond yield has been rising, while the 30-year yield has been falling.
The trade balance is tracking the 30-year bond yield. Money is flowing into 30-year bonds from around the world in a flight to safety as many stock markets have crashed over the last year. This flow of money into the U.S. pushes long-term rates down. The flight to safety into U.S. Treasuries means a lot of foreign money is flowing into the U.S. The problem is that in this low-interest-rate environment, there are not a lot of domestic savers, and thus U.S. consumers do not have much buying power. Worse, as the Fed raises rates on the short-end of the yield curve, it pushes up the U.S. dollar which makes domestic products more expensive, and foreign goods cheaper. As consumers feel the pinch in this deflationary environment, they buy less expensive goods produced domestically, and more affordable products made overseas which creates the trade imbalance.
The mainstream media likes to frame Donald Trump as a low IQ racist, but that can’t be further (Read More….)
Industrial production fell -0.4% in May for a year over year decline of -1.4%. This is the 9th month in a row that US Industrial Production report came in below 0.
This is the longest streak of negative (contraction) industrial production outside an economic recession in US history.
Vehicle production had been leading this report but came in at -4.2% for May.
Declines were in almost every sub-component including consumer goods, business equipment and construction supplies.
How did the stock market react to this bad report this morning? It went up of course as the bad news is good news trade is on:
Forget that folks. I’m on the sidelines and in the safety of cash.