WEBVTT - Brean's Tchir Sees Brexit Risk to High Grade Corporates (Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>dot Com, the Radio plus mobile last, and on your radio.

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<v Speaker 1>This is a Bloomberg Business Flash from Bloomberg World Headquarters.

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<v Speaker 1>I'm Katherine Cowdery. The stock market is rebounding from a

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<v Speaker 1>two day sell off sparked by the British vote to

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<v Speaker 1>leave the European Union. There's optimism that policymakers are committed

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<v Speaker 1>to limit the fallout from the UK's exit. European Central

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<v Speaker 1>Bank President Mario Draggy said there is a common responsibility

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<v Speaker 1>to address the world's economic weaknesses. Both the Bank of

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<v Speaker 1>England and European Central Bank pledged to increase liquidity. We

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<v Speaker 1>take the markets every fifteen minutes throughout the trading day.

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<v Speaker 1>Down industrial average is up two hundred fifty two points

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<v Speaker 1>one and a half percent, trading at seventeen thousand three

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<v Speaker 1>d smp F I founded up thirty four points one

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<v Speaker 1>point seven percent to two thousand thirty four. Then AZDAC

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<v Speaker 1>is hired by ninety four points, a gain of two percent.

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<v Speaker 1>It's trading at eighty eight less. Texas intermediate crude oil

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<v Speaker 1>up a dollar fifty eight to barrel three point four percent.

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<v Speaker 1>Spot gold is down eight dollars ten cents announced at

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<v Speaker 1>thirteen sixteen sixty and a tenure treasury is down six

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<v Speaker 1>thirty seconds with the yield of one point four five

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<v Speaker 1>And that's Lumberg business flash. Catherine Cowderie, thank you so

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<v Speaker 1>very much. Stocks haven't quite a bounce back today, Bonds

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<v Speaker 1>holding in with just as some small losses, keeping that

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<v Speaker 1>benchmark tenure note yield down at one point four six percent.

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<v Speaker 1>That's not a very good way to earn income, is it.

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<v Speaker 1>That's why we are returning now to Catherine Cowdery in

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<v Speaker 1>our daily e t F Report to look at earning

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<v Speaker 1>income from dividend pairs in e t s. As the

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<v Speaker 1>Brexit fueled turmoil continues in global markets, investors might want

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<v Speaker 1>to consider income oriented e t s. That's a word

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<v Speaker 1>from Todd Rosenwood, director of et F Research for SMP

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<v Speaker 1>Global Market Intelligence. His advice look for dividend paying e

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<v Speaker 1>t s with limited exposure to Europe. He suggests considering

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<v Speaker 1>the pro shares SMP MidCap four hundred dividend Aristocrat et

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<v Speaker 1>F taker R e g L MidCap companies tend to

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<v Speaker 1>be more insulated from the economic nstrategy. That's that's taken

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<v Speaker 1>place in Europe, that's taking place in Japan and other

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<v Speaker 1>markets as a whole, so good growth potential with an

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<v Speaker 1>income component as well. Rosen Bluth also likes the wisdom

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<v Speaker 1>Tree Small Cap Dividend Fund. It has exposure to financial

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<v Speaker 1>services companies, industrial companies, consumer strestionary companies that are currently

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<v Speaker 1>paying dividend and, according to the wisdom Tree approach to

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<v Speaker 1>selecting securities, have room for dividend growth. That e t

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<v Speaker 1>F trades under the assemble d e S and has

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<v Speaker 1>one point three billion dollars in total assets. That's your

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<v Speaker 1>Bloomberg ETF report. I'm Katherine Cowdery. You're listening to Taking

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<v Speaker 1>Stock with pim Box at Jacolin Hays on Bloomberg Radio.

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<v Speaker 1>Brexit the impact on stocks, Uh, well, it's faded at

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<v Speaker 1>least for tow, but we don't know if it's really faded.

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<v Speaker 1>After two days of pounding after the vote, US equities

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<v Speaker 1>are now up, as you just heard Catherine Cattery reporting

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<v Speaker 1>anywhere from one and a half to two percent across

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<v Speaker 1>the board on the major market indexes. But you know,

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<v Speaker 1>if you've been watching the market lately or even for

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<v Speaker 1>a long time, you know you can't let one day

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<v Speaker 1>of rebound. Fool you. Headlines, of course are a big

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<v Speaker 1>vulnerability to the stock market and to the bond market.

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<v Speaker 1>Now Peter Cheer joins this now head of macro strategy

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<v Speaker 1>at Breen Capital right here in New York City, And

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<v Speaker 1>of course just to explain that little bit more, Peter,

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<v Speaker 1>because you know, when I say headlines, I mean headline risk.

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<v Speaker 1>I mean everybody's watching Brexit. What's Agleamarkell going to say

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<v Speaker 1>the Chancellor of Germany about her willingness to let the

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<v Speaker 1>EU negotiate a deal that's favorable. What's going to happen

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<v Speaker 1>within the Labor Party? So many ifs? What is what

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<v Speaker 1>is the expectation right now? Do you think in global

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<v Speaker 1>markets that could be upended by an unexpected turn on

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<v Speaker 1>the politics side? You know, I think for the last

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<v Speaker 1>twenty four hours, all of a sudden, I think people

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<v Speaker 1>are realizing a little bit that maybe Brexit isn't quite

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<v Speaker 1>as an immediate thing as they thought. You know, it's

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<v Speaker 1>kind of termed okay Brexit, and then there's almost a

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<v Speaker 1>sense that it's an immediate reaction, it's immediate filing. And

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<v Speaker 1>I think quickly we're finding out one this is going

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<v Speaker 1>to be delayed. Right, there's Cameron's already stepped down, so

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<v Speaker 1>they're gonna have to find a new leader. There's a

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<v Speaker 1>chance maybe there'll be a new election in England to

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<v Speaker 1>determine this. There's how does the ECB play out its

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<v Speaker 1>role in this? It seems like the ECB today into

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<v Speaker 1>that maybe promising more quie in the future if needed.

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<v Speaker 1>And then as Mirke going to continue a hardline, is

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<v Speaker 1>you're going to be aggressive against England? Or is there

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<v Speaker 1>the small chance that they start using this as a

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<v Speaker 1>way to back up because if you look countries, even

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<v Speaker 1>Merkel has that our own trouble in Germany about the

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<v Speaker 1>immigration issue. This immigration issue is not just you know,

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<v Speaker 1>a northern England issue. It's kind of hit all of Europe.

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<v Speaker 1>So this might be the chance to back up a

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<v Speaker 1>little bit and create a better union. All right, let's

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<v Speaker 1>say that we get through this, we get further, Maybe

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<v Speaker 1>she backs up, the UK calls a general election. Uh,

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<v Speaker 1>they get ready to elect their next prime minister. And

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<v Speaker 1>it seems that this really is heading towards the next step.

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<v Speaker 1>Can't go back, you can only go down the road.

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<v Speaker 1>Uh what about the dominoes that this could cause to

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<v Speaker 1>start falling. What is the risk there? What is the

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<v Speaker 1>pattern you see? And I think the pattern there would

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<v Speaker 1>be you know, Spain, they muddled through their election and

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<v Speaker 1>they came out okay, it actually wasn't as bad as

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<v Speaker 1>some feared. But I think you would see this kind

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<v Speaker 1>of ongoing demand from countries people to hey, let's challenge

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<v Speaker 1>whether we want to be part of this. And again,

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<v Speaker 1>I think England's actually the relatively easy part because they're

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<v Speaker 1>not part of the common currency, so it's actually much

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<v Speaker 1>easier to separate. If you start talking to with Spain

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<v Speaker 1>and Italy and they start threatening to pull out or

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<v Speaker 1>they want out, that becomes much much more complicated, and

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<v Speaker 1>I think that grinds things to a halt much faster

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<v Speaker 1>even than anything that's going on the UK. So I

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<v Speaker 1>think that's the real fear that you get this domino effect.

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<v Speaker 1>And I think within that, one thing we're all very

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<v Speaker 1>concerned about is had the central banks kind of lost

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<v Speaker 1>their mojo? Do they really have the ability to support this.

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<v Speaker 1>I think the FED lost a lot of credibility when

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<v Speaker 1>they put June on the table and then didn't have

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<v Speaker 1>the data to support that. So I think we're at

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<v Speaker 1>this real fragile state where if you start seeing these

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<v Speaker 1>dominoes in place that slow the global economy and this

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<v Speaker 1>lack of faith in these central bankers, you could have

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<v Speaker 1>a pretty severe sell off. And you know, we looked

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<v Speaker 1>potentially down to the S and P if we get

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<v Speaker 1>that scenario. I think to get there first we have

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<v Speaker 1>to see a that the dominoes are coming and be

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<v Speaker 1>there's just too many shorts in the market. I think

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<v Speaker 1>part of the reason today we're getting this big rally

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<v Speaker 1>is there were so many people prepared for Brexit that

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<v Speaker 1>it wasn't as damaging it could have been otherwise. And

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<v Speaker 1>now you're kind of getting the short squeeze lied led

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<v Speaker 1>by the VIX, which is going down dramatically. All the

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<v Speaker 1>VIX vts I think are buying back stock effectively or

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<v Speaker 1>implicitly through their actions. So that's part of the reason

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<v Speaker 1>we're getting this rally. It's not that it's over. We're

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<v Speaker 1>getting a bit of a short squeeze hedging, you say,

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<v Speaker 1>but there's a lot of hedging behind this stock market.

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<v Speaker 1>And even though it had to down days uh, it

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<v Speaker 1>could have been worse. That the declines really haven't taken

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<v Speaker 1>this that much lower than the market was before Brexit.

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<v Speaker 1>What is going on there? And again, I think we've

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<v Speaker 1>had this period time really since the February rally started

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<v Speaker 1>that no one's really liked this rally. And I think

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<v Speaker 1>we got lucky as a marketplace that we were pretty

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<v Speaker 1>close to the highs we are two thousand and seventy.

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<v Speaker 1>I think the Friday before the Brexit vote was occurring,

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<v Speaker 1>so you know, not last Friday, but the Friday before,

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<v Speaker 1>and I think that gave people out of confidence. Hey,

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<v Speaker 1>you know what, I'm not going to bet on Brexit

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<v Speaker 1>winning or on Remain winning because what's the upside. So

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<v Speaker 1>I think we got very lucky that this has been

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<v Speaker 1>a market that has not been well loved. I think

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<v Speaker 1>people are under invested. Cash balances remain very high. You've

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<v Speaker 1>seen all this options activity, but call ratios were very high,

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<v Speaker 1>and you've seen all these inflows into these zix et

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<v Speaker 1>s and e t N. So I think people were

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<v Speaker 1>very very well prepared for this Brexit vote, which is

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<v Speaker 1>why originally we only went from twenty thousand and down

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<v Speaker 1>to twenty thousand and fifty and even you know, two

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<v Speaker 1>thousand and ten, So it hasn't been that dramatic sort

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<v Speaker 1>of pull out because everyone wasn't positioned off sides. And

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<v Speaker 1>for myself, when I look at the Macel world, I'm

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<v Speaker 1>always looking at how people are positioned. I think the

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<v Speaker 1>fact that people are positioned so lightly on risk was

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<v Speaker 1>a relatively saving grace. And is letting us get this

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<v Speaker 1>rally today? Your single largest fear, everybody listened to Peter cheers,

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<v Speaker 1>single largest fear. I think that it's Junker in them.

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<v Speaker 1>Continue to talk, really show a EU that is completely

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<v Speaker 1>out of touch with reality, that the you know, politically light,

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<v Speaker 1>continue to elite, pretend to be or continue to act elite,

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<v Speaker 1>and I think that will drive this faster than they realize.

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<v Speaker 1>And you will very quickly see people pushing against Brussels,

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<v Speaker 1>wanting out. And I don't think the economic system is

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<v Speaker 1>sustainable right now, and if all these hedges get squeezed out,

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<v Speaker 1>that will be the worst. So I will be looking

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<v Speaker 1>tonight to see our hedges going down. Do you see

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<v Speaker 1>shares outstanding and some of these vix ets come down.

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<v Speaker 1>If you see that coupled with an adamant you know, EU,

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<v Speaker 1>or a EU that's out of touch, then yeah, I

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<v Speaker 1>think we have trouble. John Claude Jinger is the President

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<v Speaker 1>of the European Commission. That's why his words are so important.

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<v Speaker 1>What about a possible wave of credit losses in the

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<v Speaker 1>investment grade market? And you know, to me, if we

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<v Speaker 1>start this next wave of selling off, I am very

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<v Speaker 1>concerned that it starts hitting the investment grade space, not

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<v Speaker 1>necessarily because there will be default, but because there will

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<v Speaker 1>be marked market losses. And how I look at the world,

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<v Speaker 1>I look at a little bit through I call it

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<v Speaker 1>Maslow's hierarchy of credit bubbles. And we've kind of already

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<v Speaker 1>seen high yield sell offs and we've had a couple

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<v Speaker 1>in the past year. And what happens in hiw yield

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<v Speaker 1>sell offs we get volatilely in the equity market, but

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<v Speaker 1>it's usually contained. And the reason for that is I

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<v Speaker 1>think most people invest in high yield with their eyes

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<v Speaker 1>wide open, as they understand, hey, you know what, I

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<v Speaker 1>might lose five percent, but I'm trying to make eight

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<v Speaker 1>or nine percent, so I'll deal with that volatility. It's

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<v Speaker 1>the investment grade where people are only trying to make

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<v Speaker 1>three or four percent, where all of a sudd maybe

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<v Speaker 1>see this big spread widening and people lose two or

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<v Speaker 1>three percent, that all of a sudden, they question whether

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<v Speaker 1>they want to be in there, they sell. I think,

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<v Speaker 1>you know, just before us, they were talking about, you know,

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<v Speaker 1>dividend stocks, same sort of thing. There's been this huge

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<v Speaker 1>flight into so called safe stocks, all this yield hungry investments,

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<v Speaker 1>and I think they're very crowd of trade, and if

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<v Speaker 1>it starts selling off, I'm not sure who the buyer

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<v Speaker 1>of this is. So that's why this chips into investment grade,

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<v Speaker 1>which is a much bigger problem for the equity market.

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<v Speaker 1>Fifteen seconds. Your second biggest fear is that the stock

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<v Speaker 1>buyout blackout period starts, companies won't buy back stocks, and

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<v Speaker 1>that's a big issue potentially. Yeah, and I think that's

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<v Speaker 1>part of what happened in January February. Is one of

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<v Speaker 1>the big drivers of this market has been some companies

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<v Speaker 1>buying back their own stocks, are selling puts against their stocks,

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<v Speaker 1>and as they come into earning period, they get blacked out,

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<v Speaker 1>so they cannot do that during earning period. So again,

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<v Speaker 1>very susceptible to a January February type time frame exactly

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<v Speaker 1>as they start July, well, the j months, there's some

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<v Speaker 1>some potential pitfalls there. Thanks so much to Peter Cheer,

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<v Speaker 1>He's head of macro strategy at breen A Capital. He's

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<v Speaker 1>coming back. Dave Wilson are Stocks Editor to look at

0:11:08.000 --> 0:11:11.040
<v Speaker 1>movers and shakers with me. I'm Kathleen Hayes As is

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<v Speaker 1>taking stock on Bloomberg Radio.