Welcome to the one year anniversary of the Brexit vote. Welcome also to the annual Russell rebalance, traditionally one of the busiest trading days of the year: according to Bloomberg, last year’s rebalance helped propel a near record turnover of over 15 billion shares, as a result of the $8.5 trillion in stocks linked to the various Russell indices, many of which will be forced to find new owners after today’s index recomposition. In fact, in four of the last five years, reconstitution day ranked in the 10 busiest trading sessions.

Yet despite the traditional annual surge in volume, the rebal rarely leads to spikes in volatility or major market moves: since 2008, the S&P 500 has moved more than 0.5% on the day of rebalancing only twice, in 2011 and 2016. According to Jefferies’ Steven DeSanctis, the reason why the transition at the end of the day on June 23 rarely leads to turmoil is because investors are prepared for the changes, . For the broader Russell 3000 index, DeSanctis sees 196 additions this year compared with 183 in 2016.

“Russell rebalancing gives the small-cap market a bit more liquidity and trading volume, and managers could take advantage of the better volume,” DeSanctis said. “We could also see some swings in performance from a handful of individual names, and that too can help active managers.”

A boost in volume is what this somnolent market urgently needs, with little of note taking place in the overnight trading session as European stocks drop -0.3%, set to end the week lower. While Asian stocks rose, U.S. futures slide fractionally into the red moments ago after Retuers quoted a souce saying that the “scarcity of Bunds makes extending Qe difficult for the ECB and will be a factor for consideration when deciding whether to taper or extend existing program.”

And as another central bank hints that the Fed is not alone in its tapering intentions, a reminder that global stocks have never been higher. The two are probably linked, as Bank of America and many others have hinted recently.

Looking at regional markets, there was little of note in the Asian session which saw the MSCI Asia Pacific Index rise 0.2%. ASX 200 (+0.1%) and Nikkei 225 (+0.1%) traded relatively flat, with the former restricted by weakness in its largest-weighted financial sector. Shanghai Comp (-0.7%) and Hang Seng (+0.1 %) fared no better amid increased regulatory scrutiny with the CBRC probing loans to the large deal-making firms and after the PBoC refrained from open market operations due to current high liquidity levels. PBOC weakened the daily CNY fixing for fourth straight day; skipping open market operations and draining another 50 billion yuan in
liquidity after the PBOC said liquidity levels are sufficient. Bank of Japan keeps bond purchases unchanged; Nikkei and yen little changed.

European equities slipped, extending the longest run of weekly losses in a year as U.K.-listed stocks struggled on the anniversary of Britain’s vote to leave the European Union. The Stoxx Europe 600 index dropped for a third week, with food and beverage companies leading declines after Stifel Financial Corp. downgraded brewer Heineken NV’s stock. Shares in the U.K. were were set for a fourth day of losses, while the pound pared its weekly decline with Brexit negotiations under way.  The FTSE 100 Index was down 0.3 percent on Friday, heading for a 0.6 percent weekly decline.

The dollar is a tad softer and many benchmark sovereign yields are not far from seven-month lows after Bullard became on Thursday the fifth Fed speaker this week to urge rate hike patience; The pound rose 0.4 percent to $1.2734, paring drop this week to 0.4 percent. The euro rose 0.2 percent to $1.1169. The yen rose less than 0.1 percent to 111.27 per dollar.

Futures on the S&P 500 Index fell less than 0.1 percent. The underlying gauge fell less than 0.1 percent on Thursday.

In politics, UK PM May unveiled proposals for EU citizens at Brussels summit including a proposal that would allow 3 million EU citizens to stay in the UK Permanently. There were later comments German Chancellor Merkel who stated that UK PM May’s offer on EU citizens’ rights was a good start but many issues still need to be resolved, while Austrian Chancellor Kern stated UK PM May’s offer leaves a long, long way for negotiations, with many citizens’ concerns not covered.

WTI crude nears $43 after halting a three-day losing streak although it is poised for a fifth weekly decline after sinking into a bear market.  In China, Dalian iron ore modestly firmer. Gold rose 0.5 percent to $1,256.77 an ounce, for a third day of gains.

In rates, the yield on 10-year Treasuries rose one basis point to 2.16 percent. U.K. 10-year gilt yields rose two basis points to 1.04 percent, led by losses in shorter-dated securities as U.K. money markets push odds of a rate hike by the end of 2017 over sixty percent.

Economic data today includes new home sales and the Markit U.S. Services PMI.

Market Snapshot

• S&P 500 futures down less than 0.1% to 2,431.00
• STOXX Europe 600 down 0.4% to 387.01
• MXAP up 0.2% to 155.17
• MXAPJ up 0.2% to 504.96
• Nikkei up 0.1% to 20,132.67
• Topix up 0.06% to 1,611.34
• Hang Seng Index down 0.02% to 25,670.05
• Shanghai Composite up 0.3% to 3,157.87
• Sensex down 0.2% to 31,221.04
• Australia S&P/ASX 200 up 0.2% to 5,715.88
• Kospi up 0.4% to 2,378.60
• German 10Y yield rose 1.1 bps to 0.263%
• Euro up 0.3% to 1.1182 per US$
• Italian 10Y yield unchanged at 1.617%
• Spanish 10Y yield fell 0.2 bps to 1.384%
• Brent Futures up 0.6% to $45.51/bbl
• Gold spot up 0.5% to $1,256.56
• U.S. Dollar Index down 0.3% to 97.31

Top Overnight News

• Bullard says Fed’s current rate hike path unnecessarily aggressive: WSJ
• Fed’s stress test shows all 34 banks exceed minimum requirement
• Fed Tests Show Better Real Estate Credit Quality, Cards Stress
• Theresa May says 3 million EU citizens in the U.K. can stay after Brexit
• BOE Forbes: Lift-off of U.K. rates should not be delayed any longer
• China is willing to coordinate with U.S. on North Korean issue: Xinhua
• PBOC says Chinese banks confident about ample end-June liquidity
• Mexico rate pause could last through another Fed hike, Carstens says
• Senate Holdouts Seek Upper Hand in Perilous Health Bill Talks
• Obamacare Taxes Torched in Senate Bill, Drawing Democratic Ire
• Bed Bath & Beyond Falls After Comps Miss, Dragging Peers Lower
• Tokyo Exchange to Demote Toshiba to Second Section From Aug. 1

Looking at Asian equity markets, there was little activity amid quiet newsflow and after a subdued Wall St. close in which stocks posted a 3rd consecutive day of losses. ASX 200 (+0.1%) and Nikkei 225 (+0.1%) traded relatively flat, with the former restricted by weakness in its largest-weighted financial sector. Shanghai Comp (-0.7%) and Hang Seng (+0.1 %) fared no better amid increased regulatory scrutiny with the CBRC probing loans to the large deal-making firms and after the PBoC refrained from open market operations due to current high liquidity levels. 10yr JGBs edged gains in late trade, although
upside has only been minimal despite an indecisive risk tone and the BoJ in the market for JPY 880b1n in JGBs. PBoC refrained from open market operations for a net weekly drain of CNY 60bIn vs. CNY 410bIn injection last week.

Top Asian News

• Noble Group Lures Goldilocks as Major Holder as Bears Prowl
• China Webcasting Crackdown Seen Dragging on Weibo Stock: Roundup
• $100 Billion Chinese City in the Sea Is Hit by Capital Controls
• China Steel Scrap Exports Surge Amid Illegal Furnace Crackdown
• China Fines Russian Speed Trader $101 Million, Issues Jail Terms
• Saudi- Led Bloc Presents 13 Demands to End Qatar Crisis, AP Says
• Hong Kong Needs Close China Ties to Prosper, Next Leader Says
• Carlyle Co-CEO: Asia Valuations About 20% Lower Than U.S.
• ACCC Says Won’t Allow Tobacco Companies to Act Together
• China Says Trump Open to Cooperating on Silk Road Projects

In Europe, In equities, major EU bourses trade lower, albeit modestly so with the Eurostoxx 50 lower by just 0.3%. Sector performance downside is somewhat broad-based with some slight underperformance in energy names in what has been a tough week for oil prices. In terms of stock specifics, major moves are on the light side with IN (+2.1%) top of the FTSE 100 after a broker upgrade at Morgan Stanley.
In fixed income markets, it’s been a quiet end to the week with Bunds modestly lower and Gilts underperforming after gapping lower at the open as participants continue to try and gauge the future path of BoE policy and what kind of a deal PM May will walk away with from Brussels. Peripheral yields trade lower with yields softer by circa 1-2bps with Bonos leading the way.

Top European News

• Euro-Area Momentum Eases as Best Quarter in Over Six Years Ends
• Juncker Calls May’s Citizens-Rights Proposal ‘Not Sufficient’
• Ireland Raises 3 Billion Euros in Allied Irish Banks Sale
• Bank Risk Is in Demand as $113 Billion Fund Strikes ‘Big’ Deals
• ECB Demands Power Over Clearing as Brexit Talks Start: Chart
• Gilts Dip as BOE Hike Pricing Rises; Citigroup Recommend Fading
• ‘Everything Appears Bad’ for ITV, But Valuation Attractive: MS
• Lagardere, Solocal, SFR, Les Echos in Online Ad. Alliance

In currencies, The early FX flow was dominated by GBP buying as the market reacted to news that PM May was to unveil proposals that will allow 3 million EU citizens to remain in the UK. Such concessions augur well for the EU talks ahead, but a mixed response so far from leading figures, but a softer approach from the UK will benefit the Pound. Cable has rallied, but stalled into the 1.2740-60 zone. EUR/GBP remains offered neared the session lows, but this is down to EUR/USD pulling back again from the daily highs just in front of 1.1190, but modestly so as yet. EU PMIs are lower in the composite on weakness in the services component, but manufacturing exceeded expectations. The US PMIs due later today, and may have some impact on the USD which continues to range against the EUR, JPY and CHF as US Treasury yields meander inside near term ranges. USD/JPY support ahead of 111.00, having met with demand after the brief dip under here yesterday.

In commodities, widespread gains across the commodity spectrum today, and with focus on the Oil price rout, the near-term stabilisation in WTI circa USD43.00 may add some relief to the energy sector. Amid the volatility, the WTI/Brent spread widen briefly to around USD3.00, but this has since narrowed back to the uniform USD2.50 level as specs take a breather on Light Texas. There is still little prospect of a significant recovery as the sell-off is based largely on US production, and this shows no signs of slowing. Metals have had a healthy second half to the week as Copper has pushed higher with a little more verve through the USD2.60 mark. The gains today have been matched by Zinc and Nickel, the former up 8% from the early Jun lows. Gold is now edging higher to settle into a near term range circa USD1250-65, having based off the low USD1240’s and reacting to recent, but modest USD weakness.

Looking at the day ahead, we’ll also receive the flash PMIs along with new home sales for June. Away from the data a busy week for Fedspeak continues with Bullard (11.15am), Mester (12.40pm) and Powell (7.15pm 2;15) all scheduled to speak. It’s worth noting that Dudley will also speak this Sunday.

US event calendar

• 9:45am: Markit US Manufacturing PMI, est. 53, prior 52.7
  • Markit US Services PMI, est. 53.5, prior 53.6
  • Markit US Composite PMI, prior 53.6
• 10am: New Home Sales, est. 590,000, prior 569,000; New Home Sales MoM, est. 3.69%, prior -11.4%
• 11:15am: Fed’s Bullard Speaks about Monetary Policy in Nashville
• 12:40pm: Fed’s Mester Speaks in Cleveland
• 2:15pm: Fed’s Powell Speaks in Chicago on Central Clearing

* * *

DB’s Jim Reid concludes the overnight wrap

Today is a bit of a landmark day. Indeed it is exactly one year since the UK held the historic referendum vote on EU membership. Whether you think that has passed quickly or not probably depends on if you’re a Sterling FX trader, in which case it’s more than likely been a long year. It’s been an impressive rally for risk despite an outcome which has seen political Europe enter unknown territory. On that any hopes that the UK political situation would be resolved or at least stabilise essentially came to an end following the snap election earlier this month. The possibility of another election in the future hasn’t necessarily gone away either while the Conservatives and DUP parties are still to come to an agreement. What that means for Brexit talks is also still a bit of an unknown which is why there is a fair bit of focus on the two-day EU summit which kicked off yesterday. This is the first summit since the election for Theresa May and also coincides with Brexit negotiations having kicked off on Monday. Yesterday May proposed a “fair and serious” offer to guarantee the rights of EU citizens living in Britain, telling leaders of the EU that no EU citizens living in Britain lawfully at the time in which Britain leaves the EU would be asked to leave. The Austrian Chancellor was noted after the meeting saying that many of the details are still however left open so negotiations still have a long long way to go. Germany’s Merkel also reiterated this point. It’s worth noting that May is due to make a statement to Parliament on Monday afternoon.

The summit continues for a second day today so it’s worth keeping an eye on any further headlines which emerge from that. Also of note today are the global flash PMIs for June. These should provide an early indication of how the global economy has tracked into the end of Q2. The market consensus is for a very modest decline in the manufacturing reading for the Euro area (-0.2pts to 56.8) while the US is expected to show a slight improvement (+0.3pts to 53.0). This morning in Japan the manufacturing reading was revealed as declining 1.1pts in June to 52.0 and to the lowest since November last year.

Over in markets yesterday it had looked like US equities would finally snap back following two consecutive days of declines but markets seemingly ran out of steam in the final hour of trading with the S&P 500 (-0.05%) and Dow (-0.06%) both slipping to small losses. A decent rally for Biotech stocks (Nasdaq Biotech +1.30% and the highest in 18 months) helped after the long awaited US healthcare proposal for replacing Obamacare was issued and indicated an additional $50bn in spending over four years to stabilize insurance exchanges. However four Republican senators also immediately opposed the bill which threatens to derail the passage to clearing the Senate with Republicans only able to afford to lose two GOP votes.

In other markets yesterday Oil prices finally stabilized (WTI +0.49%) although still remain well down over the week. European equities were also little changed (Stoxx 600 +0.01%) after recovering into the close while sovereign bond markets were quiet with 10y Treasury and Bund yields finishing 1.6bps and 1.3bps lower, respectively. This morning in Asia markets have been fairly directionless. With Oil stabilizing for a second day (WTI just below $43/bbl) the Hang Seng (+0.28%), Kospi (+0.07%) and ASX (+0.03%) are a touch firmer and the Nikkei and Shanghai flat to very slightly lower. Elsewhere US equity index futures are +0.10% after the Fed Bank Stress Test results last night revealed that all 34 of the largest banks in the US had passed.

Moving on. Following a quiet week there was a reasonable amount of data out yesterday although none of which particularly moved the dial. In the US the Kansas City Fed’s manufacturing index in June jumped 3pts and more than expected to +11. The conference board’s leading indicator rose +0.3% mom which lifted the six-month annualised growth rate to a new high. Initial jobless claims were confirmed as edging up a modest 3k to 241k last week and finally the FHFA house price index rose +0.7% mom in April. Meanwhile in Europe the European Commission’s flash consumer confidence index for June rose 2pts to -1.3 and in doing so hit a fresh 16-year high. Confidence indicators in France also tracked higher while in the UK the CBI Industrial Trends survey revealed that total orders rose to 16 in June (from 9) and in fact hit their highest since 1988. The export gauge is also now at the highest reading in 22 years. Before we wrap up, there was a bit of Fedspeak to note yesterday too. Governor Powell spoke on bank regulation in front of the Banking Senate Committee and said “we should assess whether we can adjust regulation in common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness”. Meanwhile the Fed’s Bullard (a non-voter) argued that the projected path of tightening is aggressive and also that the softness in inflation is more widespread than expected.

Looking at the day ahead now. This morning in Europe we’ll be kicking off with the aforementioned flash PMIs for June where the consensus is for a very modest decline in the composite PMI of the Euro area to 56.6. Away from that we’ll also get the final Q1 GDP revisions in France this morning. This afternoon in the US we’ll also receive the flash PMIs along with new home sales for June. Away from the data a busy week for Fedspeak continues with Bullard (4.15pm BST), Mester (5.40pm BST) and Powell (7.15pm BST) all scheduled to speak. It’s worth noting that Dudley will also speak this Sunday.