Morning Report: Brexit 6/24/16

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.

25 Responses

  1. Two interesting ideas out of Scotland and N.I. But –

    First, the referendum is not self-actuating.

    Second, it does however bind Scotland and N.I, which both voted to REMAIN.

    Third, if Scotland and N.I. vote themselves out of the UK they would be new applicants to the EU, and not assured of entry.

    SO, Interesting Idea #1: A floated Scottish idea is for England and Wales to now vote for devolution and leave the UK, automatically dropping them out of the EU, while Scotland and N.I. would remain AS the UK, and thus remain members of the EU.

    And I.I. #2: An idea floated in N.I. is to seek unification with Ireland, an EU member.

    Too clever by half? Well, every single district in Scotland voted REMAIN.


  2. Apparently the whole “self loathing gay man” narrative vis-a-vis the Orlando shooter may be pure BS.


    • Irrelevant now, media narrative’s been set to the left’s liking.


      • Regardless of “narrative” most of us accept “another crazy asshole” as a good operating theory every time a mass shooting happens.


        • Yes, that’s the one that’s been set.

          As Fat Fuc… er Michael Moore said, “One man’s terrorist is another man’s freedom fighter.” The action, to our understanding seems crazed, to a fundamentalist muzzie’s understanding it’s a perfectly rational and heroic act.

          Luckily it’s just a run of the mill Republican inspired case of Toxic Masculinity and Gay Panic that can be cured by the confiscation of things we think are scary looking.


  3. Good piece:

    “It’s hard to believe that just over a year ago Cameron won a smashing election victory that rid the Tories of a coalition with the religiously pro-Europe Liberal Democrats and threw Labour into a leadership crisis that eventually culminated in the election of the leftist Corbyn — sort of the Bernie Sanders of the U.K. — as leader. (It’s also been less than two years since Scottish voters rejected an independence referendum — another big test for Cameron.) But the price for Tory unity in 2015 was the prime minister’s promise to hold a binding referendum on Brexit, and in the end Cameron was undone by the European issue that also brought down Margaret Thatcher and John Major in their day.

    The most discussed short-term consequence of the Brexit vote is a calamitous split in the Tory ranks. But it may be more accurate to say the Tories have long been split on the subject of Europe, and perhaps now the party can actually begin to recover, particularly since it is no longer in partnership with the LibDems. Labour may have the more serious split between a pro-Europe political leadership and a Euroskeptic rank and file, whose resentment of Eastern European immigration would be familiar to anyone looking at white working-class sentiment in the U.S. Rust Belt. More immediately, Scottish independence represents an existential threat to Labour, which needs Scottish seats in Parliament if it is ever to reclaim a majority.”


  4. Blaming the Leave victory on theBritidh tabloids seems ridiculous considering how badly their doing financially.

    It’s like blaming a Republican loss on Newspapers, no one here are reading them either.

    Maybe they just didn’t like the dog food.


  5. Entirely predictable. Sore losers Remainers call for a second EU referendum.

    The petition, set up by William Oliver Healey, states: “We the undersigned call upon HM Government to implement a rule that if the Remain or Leave vote is less than 60%, based on a turnout less than 75%, there should be another referendum.”


    • Not surprised, but my reading is that it seems unlikely to happen. I still can’t quite see what all the fuss is about, and why markets have fallen: the UK has always had it’s own currency, and the main change would ultimately be one of autonomy . . . if they want to decide to allow EU residents to work and live in the UK as they did under the EU, they could. And they might. It keeps getting cast as if the EU is this magical place, when the primary and immediate change seems to be that the EU quits getting huge sums of money to make stupid decisions about that the UK can do (I refer to fishing quotas; I assume there are others, based on experience).


  6. Mark:

    What’s is it with Austin anyway?

    Fresh after chasing away Uber, the ride-sharing business, as a sop to the politically powerful cartel that runs the city’s taxi business, Democrat-dominated Austin went after Airbnb users and other short-term rental entrepreneurs. They passed an ordinance explicitly designed to shut down many of those businesses, one that included truly outrageous and invasive measures. Short-term rentals (STRs) that are not owner-occupied will be outlawed entirely by 2022. If two couples are sharing a two-bedroom vacation rental and they want to invite four people over to a dinner party, they’re breaking the law if dessert and coffee goes past 10 p.m., no matter if it is served in complete silence. Renting a vacation home on two acres and planning a cookout for seven people on a Sunday afternoon? That’s against the law, too. Want to rent out your ten-bedroom, 5,500-square-foot spread to a visiting delegation of twelve representatives of the Women’s Republican Club coming to visit the state capital for a week? Nope. Got a problem with the city springing an unannounced inspection on you at 2 a.m. with no cause or complaint? Too bad.


    • I’m assuming there’s not enough opportunity for graft.

      Hat tip to Glen Reynolds.


    • Austin feels too privileged and entitled and affluent, and has decided to pursue a future that leads them first to a Chicago style economy, and then one that more resembles Detroit.


    • All I can say is that whenever you talk about fed reg and I tell you that in 48 years of active law practice in Austin it was my experience that the VERY WORST and most REPRESSIVE regulation was local, and that local gummint always sided with developers over builders and homeowners and with hotels over B&Bs, and BIG projects over small, and that many commercial builders would not touch this city for bidding projects b/c of the red tape it wasn’t always about being “liberal” or “D” but it sure as hell was about boosterism, and promoting rapid growth, and whatever was the fashion of the day, it was this kind of stuff.

      My neighborhood was carefully platted with a commercial strip along the highway and a huge green buffer to the residences. But an out-of-town developer comes in and asks for a zoning change to put high density apartments in and the city is about to permit the change over the protest of the neighborhood. The change will clog our egress to the highway. Offices or Retail on that land would not, because commercial traffic is not outbound at 7 AM and inbound at 6 PM. It will cause drainage problems downstream in the neighborhood to our south – probable flooding. Fuck us.

      We used to have a capital view ordinance like Washington DC. Now the Capitol Building is invisible behind the 50 story buildings downtown. Ordinance never changed, but BIG developers get variances where it can take a year to get a fucking permit to change your deck.

      And the City Hall? Had an available cheap location that it could share with County gummint on 53 1/2 street and Airport Blvd – central, but not squarely downtown. No. They built a fucking marble palace on the River.
      Somebody is impressed.

      The city Hall is now the low slung building about 2/5ths of the distance from the bridge on the left to the one on the right.

      And this was the City when I entered LS.

      Austin’s blend of “liberal” and “booster” hs been uhh – unique. No other city in America has grown from 250K to 1M in 50 years.


      • “Ordinance never changed, but BIG developers get variances where it can take a year to get a fucking permit to change your deck.”

        If you had a couple of hundred grand and maybe some nice gifts or a Hawaiian vacation masquerading as a business meeting or seminar to throw at them, I’d bet you’d get the permit to change your deck pretty quickly!


  7. Scott, here is a data driven result you and I picked up on years ago and agreed upon from the limited info we saw then: the “middle class was shrinking” because more people were being classified as rich, not poor.


    • Add the transition from middle class to upper class with the classification of poor immigrants (1st or 2nd generation) as net poor, you get a pretty clear explanation for the “shrinking middle class” that doesn’t involve people who were middle class becoming impoverished en masse.


    • Mar:

      Scott, here is a data driven result you and I picked up on years ago and agreed upon from the limited info we saw then

      Thanks….good info. And very much unsurprising.


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