Let’s deal with the start of the results season and then briefly cover Brexit and how markets immediately reacted to the result of the vote. JP Morgan reported earnings that missed expectations, the first time for 15 quarters. In contrast, Citi earnings beat market analysts estimates, and the shares rallied. CEO Michael Corbat said management "clearly" saw "a disconnect between what we see in our business and what the markets are saying," adding that they found no evidence of a significant slowdown. JP Morgan share price initially dropped then recovered, Citi rallied as much as 4%. This start appeared to reassure equity investors.
Overnight on Monday, the Chinese policymakers announced they are taking action to prevent a further slow down of the Chinese economy. This came after some disappointing import-export data from the region on Monday. The Chinese Finance Ministry pledged to cut taxes for small businesses and plans to step up fiscal expenditure. This news boosted equity markets in Asia. Market economists are reducing the probability the Fed will increase rates this year, we now have China adding stimulus to that economy. Historically these measures should continue to support risk assets.
Now we turn to Brexit and the much-anticipated vote on Theresa May’s Brexit deal. The outcome was never much in doubt, the size of the defeat and the consequences were of more interest. Europe, aside from Brexit, is not without its internal problems and the reason many Brexiteers feel vindicated in their views. The latest German economic data suggests that the economy is not far from entering a recession, as growth hits a five-year low. This is despite the economy continuing to benefit from the euro. The Greek government faces a vote of no confidence prompted by the departure of the right-wing Independent Greek party. Italian banks fell again on Tuesday as the European Central Bank asked them to put more capital aside to cover bad loans.
The vote went against Theresa May by a more significant margin than had been predicted; the pound fell ahead of the vote. The prime minister’s inability to win a substantial majority at the last election continues to haunt her. Immediately as the news of the vote was announced, Theresa May challenged Jeremy Corbyn to pledge a vote of no confidence. Jeremy Corbyn took up the gauntlet. Overall the initial reaction of the capital markets to this news was muted. After falling during the day below 1.27 to the dollar, an hour after the vote the pound was back close to 1.29. The FTSE 100 futures fell modestly. The pound also rallied against the euro.