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Daily Agenda: Clinton Secures Nomination. What’s Next for the Markets?

Fatal bombing in Istanbul; Valeant guides lower on a quarterly loss; Goldman, BSI scorched by 1MDB scandal.

Yesterday former secretary of state Hillary Clinton achieved the required number of delegates and superdelegates to secure the party’s presidential nomination. Clinton must now attempt to mend rifts within the Democratic Party, notably with her still-battling challenger, Vermont Senator Bernie Sanders, as she prepares to take on presumptive Republican nominee Donald Trump in the race for the White House. For investors, a major question now is how this election cycle will affect financial markets. Trump has embraced protectionist rhetoric that has sparked concerns abroad while Clinton must address the strong anti-Wall Street sentiment from within her own party — particularly from the Sanders camp. Any rhetorical shifts between the presumptive candidates on economic and fiscal issues could inject fireworks into the usual summer market lull.

Terror blast in Istanbul. The latest in a string of terrorist attacks left 11 dead and more than 30 injured in Istanbul today in the Beyazit neighborhood, near Istanbul University and world-famous tourist sites such as the Blue Mosque and Haghia Sophia. A police van appears to have been the primary target and seven officers were among the dead. Although no organization has claimed responsibility, both the Kurdistan Workers’ Party, or PKK, and Islamic State operatives have staged attacks inside Turkey within the past eight months.

AB InBev offers deal to South African union. Anheuser-Busch InBev today announced an enhanced offer to settle a dispute with South African unionized workers at SABMiller who have fought the proposed merger between the two brewing giants. The proposed deal with the workers would guarantee the value of share units held by the union with a payment upon completion of the merger.

U.S. officials look at Goldman role in Malaysian wealth fund scandal. A report in The Wall Street Journal report published today noted that U.S. regulators are examining whether Goldman Sachs violated Bank Secrecy Act rules when handling financial transactions on behalf of Malaysian state investment fund 1MDB. Investigators globally continue to examine transactions by the sovereign wealth fund. Swiss regulators today announced an investigation into Swiss-based merchant bank BSI Bank’s role in money transfers from 1MDB coffers to politically connected individuals. Singapore pulled BSI’s license to operate in the city-state last month and reportedly referred the names of six executives to the public prosector on criminal charges.

Valeant guides even lower. Embattled executives at Valeant Pharmaceuticals International lowered forward earnings guidance today after reporting a loss of more than $370 million for the first quarter of 2016. The company earned $1.27 per share. After an adjustment for the impact of one-time charges, the company earned $1.27 a share, ten cents below consensus analyst estimates.

Portfolio Perspectives: Bullish Set-up for U.S. Equities — Karl Haeling, Landesbank Baden-Württemberg

The U.S. stock market seems ready to set new record highs in coming weeks almost regardless of whether the Federal Reserve raises rates this summer or leaves them unchanged until later this year. Equities were strengthening last week before the May jobs report and did so again on Monday. Even bank shares joined in Monday’s gains, recovering most of the losses made on Friday.

The more equities rally, the more underweight investors feel pressure to do at least some buying. Most of the various rally highs made during the past year’s sideways pattern have come at slightly lower peaks than the preceding ones. So every time one of these highs gets broken, the more likely it is that the breakout process has already started.

There is not much discussion about it among analysts and the financial media, but the real driver behind the equity strength probably involves expectations for the earnings cycle to soon turn positive. Citi reported that U.S. equities had one of their best weeks of the year last week in terms of net upward revisions to earnings estimates. In addition, continental European shares just saw their first week of net positive upward revisions since May 2015, a full year ago. Energy company earnings were the major reason for the so-called earnings recession of the past year or so, and with oil prices now rising, this increases the potential for more positive corporate results over the rest of the year.

An upside breakout in equities would likely draw liquidity out of bond funds but we do not see this as turning into anything particularly bearish for Treasuries, as international considerations should remain bullish for bonds for the foreseeable future, and the yield curve should resume flattening sooner or later even if the Fed keeps rates unchanged this summer.

Karl Haeling is a vice president at Landesbank Baden-Württemberg in New York.

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