Greetings,

We begin with the United Kingdom where the EU referendum concerns are front and center again. The Brexit risk now dwarves the Scottish independence vote and the UK general elections (the CBOE British Pound Implied Volatility Index shown below).

Similarly, the 1-month GBP risk reversals are at levels we haven't seen even during the 2008 financial crisis. 

Source: @auaurelija, Risk Reversal = Implied Volatility on OTM Call – Implied Volatility on OTM Put (vol "smile" asymmetry)

The British pound is down for the second day.

Source: @barchart

The yield on longer-dated gilts fell sharply on heightened risk aversion.

As a result of the above, the UK longer-dated inflation expectations have dropped to the lowest level in over a year. The market sees Brexit as being deflationary for Britain.

Soirce:  @ecoeurope, @anoojad

The betting markets-based Brexit spread is still quite wide but has been tightening in the past couple of days.

Source: @PredictWise

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Separately, UK mortgage approvals and the overall mortgage lending slowed. The stamp duty hike has pulled a significant amount of the house purchase activity forward.

As discussed yesterday, one of the EU nations that will be significantly impacted by Brexit is Ireland. We already see Ireland's manufacturing activity softening at least in part due to Brexit concerns. 

Source: Tradingeconomics.com, @MarkitEconomics

Source: @MarkitEconomics

Elsewhere in Europe, the Swiss 10yr government bond yield is hovering near the lows. Swiss GDP growth and retail sales came in below consensus on Wednesday and concerns about deflationary pressures persit.

In the Eurozone, Germany sold 5-year government bonds at record low yield - deep in negative territory.

In fact, 70% of German government paper now has negative yields.

Source: @BarkowConsult 

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It doesn't look as though Greek banks will be able to access cheap LTRO/MRO financing by pledging Greek government bonds - at least for now.

Source: Reuters

Greek banks desperately need access to this financing after last year's sharp drop in deposits.

Source:  ‏@fastFT

It seems that the Japanese government decided to wait on implementing another consumption tax hike. Dollar-yen dropped in response (yen rose), sending the Nikkei lower.

Source: @barchart

Before starting with emerging markets, here is an interesting chart showing household debt-to-GDP ratio for Canada, Australia, and the US.

1. We start the EMG set with China where the broad (M2) and the narrow (M1) money supply growth has diverged. Will the recent Beijing-engineered liquidity boost make it into the "main street" economy or stay within the financial system?

2. China's effort to internationalize the yuan is failing. The offshore yuan deposits have declined sharply due to further devaluation concerns. Given Beijing's crackdown on yuan shorting, hedging yuan-denominated portfolios has become difficult. Welcome to the "unintended consequences" of blunt regulatory intervention.

Source: ‏@fion_li, @business, @frostyhk

3. It seems that China saw a significant increase of residential properties coming market. Will there be sufficient demand?

Source: ‏@MatsGlettenberg 

4. Russia's factory activity has (almost) stopped contracting, with the manufacturing PMI coming in better than expected. Signs of stabilization?

Source: Tradingeconomics.com, @MarkitEconomics

5. The EU is annoyed with Poland where the executive branch has been pressuring the main national court.

Source: theindychannel.com

6. India had a bit of a scare after rumors spread that the RBI governor Rajan may not seek a second term. That would be a serious blow to confidence for India. Rajan had skillfully navigated the central bank since "taper tantrum" put severe pressure on the rupee and the nation's FX reserves.

The rupee fell in response to the rumors (chart shows US dollar rising against the rupee).

Source: @MattJones2401

 7. A weak peso is helping Mexico's economy as more of US manufacturing shifts south of the border. The manufacturing PMI beat consensus. 

Source: @MarkitEconomics

8. Brazil is undergoing the worst recession in recent history as the GDP continues to contract. Private consumption and investment are shrinking rapidly. Exports have been the only positive component of the GDP, with the weak real helping the nation compete internationally.

Source: @FT, h/t ‏@pdacosta

Source: @fastFT, @CapEconEmerging 

Moreover, Brazil's manufacturing sector decline has accelerated.

Source: @MarkitEconomics

Speaking of manufacturing, factories are struggling globally. The JPMorgan Global Manufacturing PMI has "flatlined".

Source: @MarkitEconomics

There seems to be a strong relationship between the JPMorgan global manufacturing index and US longer-term treasury yields. That would suggest that as long as long as global manufacturing activity remains in the doldrums, longer treasury yields will stay low (even as the Fed raises rates). That would argue for a further flattening of the treasury curve.

Source: ‏@boes_ 

1. Back in the United States, another measure of manufacturing activity, the ISM PMI, came in somewhat stronger than expected.

While the situation has improved somewhat, the US continues to lose manufacturing jobs (employment index below 50).

One surprising component of the report was a greater than expected increase in manufacturing prices paid. While an increase was projected due to higher fuel costs, this size jump in the index is unusual. Inflation is waking up?

2. US construction spending unexpectedly declined on a month-over-month basis.

Broadly, US private residential construction spending remains subdued.

3. May auto sales were down 6% with sedan sales especially weak. US automakers' shares took a hit.

Source: Google

4. As discussed before, a number of communities in the US are struggling as a result of falling oil and gas activity. Here is the unemployment rate in Stephens County, Oklahoma for example.

5. The Atlanta Fed GDPNow declined to a more realistic level. Most economists see Q2 GDP below 2.5% and GDPNow is likely to decline further.

Source: @AtlantaFed

6. The 3-month US LIBOR is now pricing in a summer rate hike.

Source: @stockchartscom

7. The treasury curve has flattened further.

Source: @SoberLook

1. Switching to credit, the Merrill Lynch US CCC corporate bond index yield has dropped sharply as the market gets more comfortable with defaults.

2. US leveraged finance issuance accelerated over the past couple of weeks.

Source:  ‏@lcdnews

3. Globally, corporate bond issuance in 2016 saw the 3rd highest YTD volume in 22 years (according to Dealogic).

Source:  ‏@Dealogic 

4. Investment banking revenue from IG bond issuance YTD hit a record.

Source: @Dealogic 

5. Bank loan-loss provisions rose - mostly as a result of struggling energy names.

Source:  ‏@MKTWeconomics 

6. Mezz (BB) CLO tranche spreads have tightened in spite of rising loan (collateral) defaults.

Source: ‏@jake_f

By the way, here is why BB CLO spreads are tightening. The combination of high-yield and floating rate coupon is attractive in a rising rate environment. 

Source: ‏@jake_f 

Finally, we look at several commodities markets.

1. The popular lithium ETF recovery continues as trading volume jumps. This ETF invests in various lithium projects/companies, including mining, suggesting renewed investor interest in the sector.

Source: @barchart

2. US soybean rally continues on increased China demand (and potential weakness in Argentina's crops).

Source: @barchart

Meanwhile in China, the imported soy contract on the 英文/DaLian Commodity Exchange takes off.

Source: @barchart

3. Hedge funds are moving into corn futures.

Source: @barchart

4. US oil reserve replacement ratio tanks with falling investment.

Source: @EIAgov

5. US uranium production is near all-time lows on cheap imports as uranium prices remain depressed.

Source: @EIAgov

Turning to Food for Thought, we have 5 items this morning:

1. Sales of safes in Japan in response to negative interest rates.

Source: Deutsche Bank, @chartoftheday, Business Insider

2. ‏A new law in Kansas, which demands citizenship proof, could keep many from participating in the elections. Will the courts reverse this?

Source: ‏@JmBadalamenti, @pdacosta

3. Cash on corporate balance sheets by firm.

Source: @StatistaCharts, ‏@JmBadalamenti

4.  The global auto production.

Source: ‏@JmBadalamenti, @vexmark

5. An unprecedented demographic shift is about to take place. 

Source:  ‏@wef