For a supposedly pro-business GOPer to take a stand that attacks the country's financial center is remarkable. » Read More
So close, and yet so far.
That's how many a Wall Street bank C-suite executive has likely felt for the last few days, after the stunning Brexit upset vote forced Wall Street to pare its rate hike expectations, and, by extension, reduced big banks' expectations for revenue derived from interest.
Instead of staying the course and expecting either one or two rate increases in 2016, traders have backed off the idea the Fed will raise rates at all this year, and some are thinking the central bank will reverse course and cut rates. But, it doesn't sound like big banks' struggles have earned them a lot of sympathizers.
"The idea interest rates stay lower for longer is not a new concept," said CLSA banking analyst Mike Mayo. "Banks need to find an adequate plan B."
It seemed like not so long ago the Federal Reserve was telling markets to expect as many as four interest rate hikes this year.
Now, traders are beginning to give serious consideration to a rate cut before 2016 is over.
In fact, it really wasn't long ago that the U.S. central bank was gearing up for a substantial round of policy-tightening. At the Federal Open Market Committee's December meeting, officials indicated through the so-called dot plot that quarterly hikes were in order. The Fed enacted a quarter-point move at that meeting, the first hike in 9½ years.
However, a moribund U.S. economy combined with global rumblings — not least of them last week's Brexit vote — have changed the Fed's positioning. Where the bank was hoping to begin normalizing policy, markets now expect it to be on hold or even dialing back.
Traders are assigning an 18.3 percent chance for a rate cut in September or November, according to the latest readings on the CME's FedWatch tracker. There's just an 11.7 percent probability put on an increase before the end of the year, even though FOMC members, at their June meeting, indicated that they still expect two hikes.
The current futures market is allowing for no chance of a rate hike through November, and isn't fully pricing in a move until January 2017. In fact, futures pricing indicates a slight decline in the overnight funds rate, from 0.38 percent currently to 0.32 percent as the year closes.
Expectations for Fed accommodation also are playing out in the bond market.
The spread between yields on the U.S. two-year and 10-year notes broke through a key support level recently and is at its lowest level since the early days of the financial crisis, a year or so before the Fed went to near-zero on the funds rate. Fixed income traders are watching whether the curve will start to steepen, which would be likely if the Fed eases.
"The bigger question is whether we believe a longer-term steepening can take hold. For us, that inflection point will occur when the Fed moves more aggressively to actually provide some accommodation to the markets," Aaron Kohli, fixed income strategist at BMO Capital Markets, said in a note Tuesday morning. "That move is still some distance away as the Fed is unlikely to pivot from hiking to accommodation without an extended period of staying on hold."
The 10-year yield is around a four-year low and has dropped more than 36 percent this year.
The stunning Brexit move in Europe has led to plenty of fear and lots of speculation on where the best quick trades can be made.
As markets digest the news, short-term traders have been moving money quickly. The two-day market plunge has seen billions poured into exchange-traded funds that track the price of gold as well as various indexes within bonds.
But what about investors playing the long game — those with horizons that run three to five years rather than three to five minutes (or seconds)?
Here are some basic moves retail investors can make while traders on Wall Street look for the Brexit dust to settle:
U.K. banks continue to face pressure in the wake of the country's shocking Brexit vote, and Monday morning, banking sector stocks around the world plunged again.
In the U.K., the FTSE closed down 2.5 percent, after earlier falling more than 3 percent. British bank stocks including RBS and Barclays plummeted, with each seeing shares drop more than 10 percent, down far more than market benchmarks. RBS and Barclays declined to comment.
"With political and economic uncertainty likely to be here to stay, we expect the coming weeks and month will see significant volatility in the share prices of U.K. financials and those with U.K. operations," analysts at Deutsche Bank wrote in a report released Monday.
Donald Trump's camp is firing back at a Moody's Analytics assessment that his economic policies will send the United States into recession.
Moody's last week predicted that if the presumptive Republican nominee's proposals went into effect, the country would see a "lengthy recession" that could last up to two years. In addition, the report said the Trump plan would roll up another $11 trillion in national debt, trigger a trade war with China and push unemployment higher.
A pro-Trump economist, though, questioned the fundamental assertions in the report, as well as the objectivity of Moody's chief economist Mark Zandi, the lead author.
"The Moody's report is a partisan document that fundamentally lacks credibility," wrote Peter Navarro, an economics professor at the University of California-Irvine. "It is based on flawed assumptions that the authors admit 'are our own,' and these assumptions grossly misrepresent the Trump campaign's policy statements on the economy, trade, tax reform, and immigration."
Navarro said he examined the Moody's analysis — which resembled critiques from other Wall Street economists — at the behest of the Trump campaign, though he said his response was independent of influence from the campaign. Trump's side did not respond to a request for confirmation that Navarro was consulted.
The response rejects the key assertions of the Moody's analysis.
"Moody's Keynesian and partisan analysis also deeply discounts the supply side stimulus effects associated with the tax cuts themselves," Navarro wrote. "In reality, Trump's tax package will significantly stimulate GDP growth, the rate of job creation, and the tax revenues raised much as the Reagan supply side tax reforms did in the 1980s."
Investor Lynn Tilton is bringing in some new hired guns.
Tilton, who spent years cultivating a reputation as a savvy turnaround investor in distressed manufacturing companies, is facing multiple lawsuits from backers of her funds, as well as a fraud case which could result in her being barred from the securities industry.
Law firm Gibson, Dunn & Crutcher is going to work on Tilton's legal defense, after she was represented for years by from Skadden, Arps, Slate, Meagher & Flom, a source said. Skadden was listed alongside other lawyers working on her defense against the Securities and Exchange Commission, which last year accused her of fraud.
Skadden lawyers did not respond to a request for comment, but Tilton's communications firm, Brunswick Group, issued a statement on her behalf and confirmed the source's comments.
For investors, that translates into the potential of a long headache and accompanying market volatility that will make decisions on where to put money treacherous.
"We're going to be more sick of talking about the Brexit than we were about the Fed move," said JJ Kinahan, chief strategist at T.D. Ameritrade.
A simple divorce from the EU is designed to happen in two years, once the article that addresses breakups is invoked. But with the interconnected and complicated nature of trade deals and other binding agreements in play, the process of Britain completely shedding itself of EU-related obligations could last a decade.
Markets were in a state of extreme disruption following Thursday's Brexit referendum, in which the move to leave pulled 52 percent of the vote to 48 percent for the remain side. U.S. stock indexes dropped more than 2 percent, and the damage was considerably worse in Europe and Asia.
"I suspect this will take perhaps as long as seven to 10 years for Britain to fully extract itself from the European Union," said Fergus McCormick, head of the global sovereign ratings group at research and ratings firm DBRS. "In the short term, the degree of uncertainty is extremely high. I'm not at all surprised by the reaction of the market."
Traders now believe the already-dovish Federal Reserve won't be raising interest rates at all this year.
As the market digested Thursday's U.K. vote to leave the European Union, market participants sharply ratcheted down expectations for the U.S. central bank.
There's now virtually no chance of a rate hike at the July Federal Open Market Committee meeting, according to the CME's fed fund futures tracker, which indicates a 4.8 percent chance of a quarter-point rate cut at the session.
Reading out to December, there's only a 22.9 percent chance of a hike, while traders assign a 3.6 percent probability to a cut.
The news is particularly surprising considering that FOMC members had indicated as recently as December that there likely would be four hikes this year. Projections after the June meeting still indicated two increases likely, though Fed officials scaled back their expectations for coming years.
Though fed fund futures are notoriously volatile, central bank officials, in particular Chair Janet Yellen, in recent weeks have expressed substantial concerns over the Brexit vote, indicating that the the FOMC will find it harder to justify a hike.
"It depends on events over the coming days. Will there be a coordinated response to this from Europe? Will there be open swap lines from the Fed to the Bank of England?" said Fergus McCormick, the head of the global sovereign ratings group at research and ratings firm DBRS. "If the markets take this calmly and this is conducted in an organized, calm manner, then the risk to global growth will be far less."
For its part, the Fed released a statement Friday morning amid the post-Brexit vote fallout, that it "is carefully monitoring developments in global financial markets." The also indicated that it indeed is ready to provide market liquidity through dollar swap lines, which are currency agreements that ensure cash is flowing through the global markets. The Fed took measures during the financial crisis.
"I do think the chance of a rate hike in the near future is less certain," McCormick said.
Bank of America Merrill Lynch on Friday scaled back its projections for the Fed this year, believing the Fed will hike in December then move only two times in 2017. The firm also cut its economic forecast for 2017, with the expectation now that gross domestic product will gain just 1.8 percent, down 0.2 percentage points from the earlier forecast.
for the latest on the markets.
Bullish positions in gold and volatility and well-timed short bets on China and emerging markets, among other areas, were some of the trades that benefited hedge funds on Friday as markets digested Britons' surprise decision to exit the European Union, according to people familiar with the matter.
Saba Capital, the credit hedge fund in New York, and a flagship fund at the London investment firm Odey Asset Management were two beneficiaries of the "leave" victory in the U.K. overnight, according to these people. And so-called "macro" fund managers George Soros and Stanley Druckenmiller, who run private firms managing family money through investments in a range of assets, appeared to be benefiting from long positions in gold, according to filings, though their overall performance numbers weren't clear.
Saba, run by the fund manager Boaz Weinstein, was up primarily on positions that benefited from volatility — a combination of holdings that included equity put options in Europe and Asia and credit-default swaps, or insurance policies on debtors unable to pay off their debts, one of these people said.
With nearly 13 percent upside through the end of May, Saba is one of the better performing hedge funds this year, according to an industry poll conducted weekly by HSBC.
At the same time, Odey Asset Management, which runs a variety of funds, was up 15 percent in its flagship fund by the close of European markets on Friday, according to people familiar with the matter. (Nonetheless, with declines of more than 26 percent through mid-June, according to HSBC, in its European fund, Odey has been home to some of the worst performance numbers so far this year.)
Odey, which manages about $10 billion, is headed by Crispin Odey, an outspoken advocate for Britain's exit from the EU who according to sources familiar with the matter commissioned private polls to get an early gauge on the potential outcome of Thursday's referendum vote.
Widely followed banking analyst Dick Bove said he doesn't understand why investors were dumping banking stocks Friday.
"Buying bank stocks at this moment makes a great deal of sense," the Rafferty Capital Markets analyst wrote in a report, as bank stocks around the world plummeted on uncertainty stemming from the vote in favor of Britain leaving the European Union. "There is no basis for arguing that there will be a financial collapse in this country," he added, referring to the U.S.
Bove said that despite the "shocker" decision in the U.K. to quit the EU, some of the threats to the country's banking system will be contained to Britain and won't reach U.S. shores. Bank shares slumped, with the MSCI Europe Financials Index falling more than 15 percent in Friday trading and the KBW Nasdaq Bank Index down 6 percent by early afternoon.
Further, he takes issue with the idea that big banks will have only two years to pack up and ship out of the U.K.