Morning Report: Brexit 6/24/16

Posted on June 24, 2016 by Brent Nyitray

Stocks are getting sold this morning after the UK voted to leave the EU. Bonds and MBS are up.

Last night the UK voted to leave the EU, which was a surprise to the markets. European stocks are getting crushed this morning, and the biggest ones taking a hit are the banks. Barclay’s is down 17%, Santander is down 18%, for example, so there is the distinct possibility of some sort of banking crisis over there. Note we are not seeing a huge move in US banks, so it looks like any crisis over there isn’t going to spill over to the US banking sector.

Big picture: The Fed is doing nothing – in fact there will be calls for the next move to be a rate cut. This could cause a mild recession over here, which means lower rates.  In fact, durable goods orders were terrible this morning, down 2.2%. One of the big investment banks was calling for a 1.4% 10 year bond yield if the UK left. The 2 year bond yield dropped 14 basis points to 64 bps, That will be the one to watch to get a read on what the market thinks the Fed will do.

In terms of mortgage rates, the TBAs (which determine mortgage rates) will lag the move downward in yields. For example, the Fannie Mae TBAs are up this morning, but nowhere near the move in bonds. So, while the 10 year bond yield will get everybody excited, don’t expect a huge move downward in mortgage rates, at least initially. Once the 10 year finds its level, TBAs will find their level, probably over the next few weeks or so. If the European banking system goes into full crisis mode, the impact on mortgage rates will probably be a pull-back in jumbo pricing, which is the most vulnerable since it relies on a private securitization market. FN and GN pricing should not be affected. So basically, we will see some drama in the stock and bond markets, and not so much in the mortgage markets.

Filed under: Economy, EU, Morning Report, politics, UK | 25 Comments »

Brexit Report: Chaos ensues

Posted on June 24, 2016 by ScottC

The UK voted to leave the European Union last night, 52% to 48%. taking the market by surprise. All markets had discounted the possibility of a Leave vote going into the referendum, resulting is massive market moves once it became clear that Leave had won the day.

The GBP dropped nearly 14% at one point, from 1.49 down to 1.30. It is currently back up to 1.39.

Rates across the globe have rallied. The UST 10yr note is currently at 1.54%, and traded as low as 1.42%, after closing yesterday at 1.73%. German 10yr bonds are back into negative yield territory, having dropped to -.15%, although they have since sold off back to -.07%.

Stock markets have been crushed. The FTSE is down 271 points (4.3%) but is off the lows, having opened up down almost 600 points. Dow and S&P futures are down 472 and 71 points respectively. The UK financial sector has been hit particularly hard. Barclays and RBS were each down nearly 30% at one point. Eurpoean banks are down roughly 8% across the board.

Prime Minister David Cameron has already resigned. It is unclear who will replace him atop the Conservative Party, or whether he will call for a national election, but former London mayor Boris Johnson, who was a vocal Leave supporter, certainly has to be looking good. Populist leaders across Europe, from Sweden to France, are already calling for similar referendums in their own countries, although the likelihood of it happening any time soon is remote, especially given the complicating factor of the single currency, which the UK was never a part of. More probable is that people will wait to see how Britain’s exit plays out. But clearly this is a bad sign for the future of the European project.

Next up: Texit?

Filed under: Economy | 5 Comments »