Wednesday March 29

Stock indices were mixed today as investors focused on the UK triggering Article 50. The S&P 500 rose 0.1% to 2,361 and the Dow Jones fell 0.2% to 20,659. The KBW Bank index lost 0.6% while utilities fell 0.5%. Charles Evans spoke today and said that he would be in favor of 1 or 2 more rate hikes in 2017 and assured that it was “very safe” to assume 1. Eric Rosengren of the Boston Fed on the other hand came across more hawkish saying that he supports four more rate hikes this year. John Williams also cautioned not to rule out the possibility of more than 3 rate hikes in 2017. The EIA report today showed that crude oil inventories increased only 900k barrels last week which was bullish for oil prices and energy companies. Also important to note today was a report that Reuters ran about the ECB that affected euro markets. The report said that the ECB might not make any changes to its policy statement when it meets next month because ECB officials feel that traders over interpreted Draghi’s comments at the last meeting as being more hawkish than were intended. The statement also said that officials were concerned that while core country yields were fine, the periphery was still a source of concern. That sent the euro lower. On that backdrop the two year Treasury yield fell 3bp to 1.28% shaking off the hawkish FOMC comments. The ten year Treasury yield fell 4bp to 2.38%. Accordingly 2yr vs 10yr bull flattened to 1.10% which is the lowest level since the election. In Germany the 10 year bund yield fell 4bp to 0.35%. USD rose 0.4% against EUR to $1.0769 on the unconfirmed ECB report. USD fell 0.1% against JPY to Y111.03. USD rose 0.1% against GBP to $1.2440 and UK stocks finished 0.4% higher after the UK invoked article 50. On the EIA data WTI and Brent rose 2.2% and 1.9% to $49.43 and $52.30 respectively.

Westinghouse Electric company which is a subsidiary of Toshiba filed for Chapter 11 bankruptcy protection just a few weeks after it took a $6bn write down on some of its US assets. Westinghouse currently has $9.8bn in liabilities which some analysts believe could threaten Toshiba’s viability as a company. Toshiba now plans to exit the nuclear construction business and exit the overseas nuclear business altogether. Apollo gave the company $800mm in debtor in possession financing which will allow Westinghouse to continue its operations while seeking to reorganize. As part of the reorganization process Westinghouse hopes to focus more on fuel and consulting lines of business. Two US companies for which Westinghouse was in the process of building reactors likely face a drawn out legal battle in the courts as well as the federal government since it provided an $8.3bn credit facility for the two construction projects as well. The construction projects are both significantly over budget and behind schedule. Westinghouse says that it will run out of money and have to stop construction soon if there is no outside help or renegotiation of the contracts. Given all of the costs and guarantees Toshiba faces associated with this, it is expecting to post a net loss of $9bn this year with negative shareholders equity. Nuclear energy has suffered problems as an industry, and now it seems as if the most profitable part of the business is consulting for decommissioning old power plants.

The $28bn merger between Deutsche Borse and the London Stock Exchange was blocked by London regulators on anti-trust grounds. Regulators were concerned that the combined entity would have too much influence over the clearing of fixed income trades. EU regulators had previously wanted LSE to sell its stake in some underlying businesses however the LSE refused to do that which created a road block for the deal. Today’s outcome was largely expected given LSE’s stance on exiting certain businesses. The companies wanted to merge to increase scale to better compete with exchanges in the United States and in Asia. After the deals block was announced LSE said it would buy back $249mm in shares which it believes would have been the appropriate return for shareholders had the deal gone as expected. LSE also continues to explore inorganic growth. The Brexit slightly complicated any potential deal that would have taken place since German regulators would have looked at it more closely and LSE executives wouldn’t entertain the idea of a dual HQ in London and Germany. Both companies for the time being will operate at standalone entities. Last year Deutsche Borse had earnings growth of 14% and LSE had 17% earnings growth.

Theresa May invoked Article 50 which officially triggers the negotiations that will result in the UK leaving the EU. It is important to note that the six page letter that formally begins the 2 year exit negotiations was interpreted as conciliatory and flexible by EU officials. In the letter she emphasized early priority in negotiations on “bold and ambitious free trade agreements” that she hopes will include financial services. It is unclear how much ground EU officials will be willing to give up on that front. Angela Merkel is taking a hard stance on the issue as German officials believe the UK still owes the EU EUR 60bn before any trade negotiations can be discussed. One piece of leverage that the UK does have relates to security. The UK is by far the largest contributor to Europol which is the EU wide crime-fighting organization, and threatens to reduce funding and information from that bureau which would reduce the security of the EU. To coincide with the official triggering of Brexit GBP is trading around the 50 day moving average which is seen as a key technical level for traders who focus on that. The 50 day moving average is currently $1.2426 and GBP is trading around $1.2411. Some analysts believe that this is coincidental timing wise and that political risk surrounding triggering Brexit was already priced in. On a somewhat related note data released today from Dealogic showed that London’s share of global IPO volume in 2016 was the lowest since 2012 and it is off to a slow start this year. That could suggest that companies are hesitant to raise capital in London markets given the regulatory and financial uncertainty surrounding the Brexit process.

Wednesday March 29

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