Daily Agenda: Markets Calm as Investors Await Brexit Vote

Market volatility remained muted in early trading today as the European Union referendum tomorrow in the U.K. and Federal Reserve chair Janet Yellen’s testimony before Congress remained the primary focus of risk narratives. With the pound sterling holding gains made in recent sessions, investors appear cautiously optimistic that the Remain campaign will succeed while U.S. interest-rate derivatives markets signal no fear of more than one additional Fed rate hike this year. While elevated by recent historical standards, the CBOE’s Volatility Index has retreated from the highs of last week suggesting that U.S. equity traders appear less concerned about the potential of a U.K. exit from the European Union. For now, “wait and see” appears to be the order of the day for most allocators.

Tesla moves to acquire SolarCity. Yesterday Tesla Motors announced a bid to acquire SolarCity Corp. in a stock transaction valued at almost $2.8 billion. Tesla founder, CEO and largest shareholder Elon Musk defended the acquisition in the face of concern among some analysts that the acquisition of the solar-panel manufacturer makes sense in his larger vision for the electric car company. Musk is chair, founder and largest shareholder of SolarCity.

FedEx earnings beat estimates. Memphis-based delivery company FedEx Corp. yesterday reported a loss of $0.26 per diluted share for the fiscal fourth quarter or an adjusted $3.30 per-share — beating consensus analysts’ estimates as revenue growth also exceeded expectations. Company management guided expectations for fiscal 2017 to the high end of the current consensus range.

Brazil provides emergency aid to Rio ahead of Olympics. Scting Brazilian President Michel Temer yesterday approved a nearly $1 billion aid package for Rio de Janeiro State to cover budget shortfalls a scant two months ahead of the 2016 Summer Olympic games. The money will be deployed to cover public safety and security requirements as tourists flock to the event.

Portfolio Perspective: Countdown to Brexit — Tom Stringfellow, Frost Investment Advisors

This coming week may well end with either a European relief rally or a ratcheting up in global volatility. Either way, voters in the U.K. will set the stage at the polls tomorrow, deciding the future economic and political course for the European Union through the next crisis. Although the Greeks and Scots heralded their breakaway initiatives roughly a year ago, the magnitude of the U.K. splintering from the economic union will be significantly more substantive. Pollsters this past week’s end began lowering odds of an EU exit, with the larger betting firms in the U.K. more confident of a Remain vote, placing a 60 percent chance of the voters averting Brexit. Although the results of the vote are yet to be realized, the ongoing debates point to fairly serious economic, regulatory, political and nationalist consequences. One of the more significant risks that could be unleashed is the threat of a further unraveling from the peripheral nations of the EU, such as Italy, Spain or Greece (again). On the economic front, the U.K. Treasury has estimated that an EU exit would ultimately lower the nation’s gross domestic product by 3.6 percent after two years, in turn raising unemployment by 520,000. And let’s not forget the potential consequences of being forced to sift through four decades of EU member contracts, regulations and laws that are suddenly back on the block.

With EU rhetoric taking center stage last week, the global risk-off theme was pervasive, with domestic equity markets settling lower by Friday, offset by sharp bond rallies (and the resulting lower yields). As one report noted, the sovereign ten-year bond yields for the likes of the U.K., Japan and Germany hit fresh record lows, while the yield on the ten-year Bund actually went negative. Institutional investors were also taking notice of the elevated-risk tone in the markets, raising cash levels an average of 5.7 percent, which according to the latest Global Fund Manager Survey is the highest level since November 2001, on concerns about a potential “summer of shocks” and “quantitative failure.” While the markets will likely remain on edge through this week, it is again worth noticing that on the domestic front, all isn’t bad. True, recent, more dovish, Fed policy commentary did take note of the recent slowdown in the labor markets, but they also noted that household spending is strengthening. We also note that labor market surveys remain tight, the housing market is stable and there are stealth signs of improving trends in core CPI, PPI and import prices. More news potentially down the road with one more countdown, the final revision in Q1 GDP expected on June 28.

Tom Stringfellow is the president and chief investment officer of Frost Investment Advisors in San Antonio, Texas.