U.S. stock index futures are indicating a lower open after being closed yesterday for July 4. The "risk-off" sentiment follows a strong rally last week that saw major indexes turn positive for 2016. Reasons for the drop are stemming from uncertainty in the U.K.: The prime minister vote, Brexit timing, bank capital requirements, a new corporate tax rate, trimmed growth forecasts and the future of the European Union (see all below).

Economy

Britain's ruling Conservative Party begins the first round of selecting the nation's new prime minister today after the five leadership candidates outlined different ways to manage withdrawal from the EU. While Home Secretary Theresa May secured the most public endorsements and is the bookmakers' favorite, Energy Minister Andrea Leadsom on Monday topped a poll of party members and won the backing of former London Mayor Boris Johnson.

The Bank of England has taken steps to shore up the U.K. economy following Brexit, warning that the outlook for the stability of the financial system has become "challenging." The decision to reduce the so-called countercyclical capital buffer to zero will allow British banks to lend an extra £150B to U.K. businesses and households, keeping the economy flush with credit. Sterling is at a fresh 31-year low of $1.3114.

As part of his new five-point plan to energize the economy, U.K. Chancellor George Osborne has proposed slashing the corporate tax to less than 15% (down from 20% now) in an effort to woo businesses deterred from investing in a post-Brexit Britain. Such a sharp cut in business taxes would also take Britain close to the 12.5% tax rate in Ireland and would likely anger EU finance ministers who fear a race to the bottom.

Nigel Farage, one of the most well-known proponents of the Brexit movement, announced his resignation as head of the U.K. Independence Party on Monday. The news prompted a flurry of Tweets questioning Farage over largely precipitating the political uncertainty brought about by the EU referendum and not sticking around "to sort out the crisis." Adding to the Brexit turmoil, S&P cut its growth forecasts for the U.K. and eurozone next year and 2018.

The leaders of France and Germany have assured prospective EU members in the Balkans that the British vote to leave the union won't threaten eventual enlargement of the bloc. Although the EU last week delayed further membership talks with Serbia, French President Francois Hollande insisted, "the British decision does not in any way put into question commitments made toward countries in the Balkan region."

Eurozone business growth held steady in June, as a solid expansion in Germany offset a contraction in France. Markit's final composite Purchasing Managers' Index for the bloc was 53.1, beating a flash estimate of 52.8, but unchanged from May. "The survey is signaling GDP growth of just 0.3%, similar to the sluggish trend recorded over the past year," said Chris Williamson, chief economist at Markit.

A fresh reading on China's services sector for June showed the mainland's rebalancing away from the manufacturing sector was continuing apace. The Caixin/Markit services PMI climbed to 52.7 from 51.2 in May, marking the fastest increase in 11 months. "Service sector growth is now supporting the overall economy," said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group.

Australia's central bank held its cash rate today at a record low of 1.75%, a widely expected decision given political uncertainty and a lack of timely information on domestic inflation. The country still doesn't know who won Saturday's general election and final results may not be known for another week. While Australia's triple-A rating is not under immediate threat, the top three credit agencies said it could be if the new parliament finds it harder to wind down the budget deficit.

Treasuries began a holiday-shortened week right where they left off, with 30-year yields sliding to an unprecedented 2.15% and the 10-year falling to a record 1.378%. "It's quite difficult to judge how low is too low for yields amid a slower outlook for global growth," said Tomohisa Fujiki, strategist at BNP Paribas. "Prior to the U.K. referendum, this [Friday's] payrolls report was considered one of the most important events to watch." According to fed fund futures data, the probability of a U.S. rate hike by year-end now stands at 12%, from 59% a month ago.

The U.S. holds more oil reserves (264B barrels) than Saudi Arabia (212B) and Russia (256B), the first time it has surpassed those held by the world's biggest exporting nations, according to a new study by Rystad Energy. The analysis of 60K fields worldwide, conducted over a three-year period, shows total global oil reserves at 2.1T barrels. That is 70x the current production rate of about 30B barrels of crude per year.

Stocks

A bidding war with Salesforce.com (NYSE:CRM) forced Microsoft (NASDAQ:MSFT) to pay nearly $6B extra last month to seal its planned takeover of LinkedIn (NYSE:LNKD). Details of the frenzied bidding were revealed in a filing with the SEC ahead of a shareholder vote to approve the transaction. A month-long back-and-forth between the two rivals pushed the value of the all-cash deal to $26.2B, making it the third-largest acquisition in the tech industry.

Finding Dory dominated over a trio of new releases at the Independence Day weekend box office, including The Legend of Tarzan (NYSE:TWX), The Purge: Election Year (NASDAQ:CMCSA) and Steven Spielberg's The BFG. The movie picked up $49.7M over the four days, bringing its domestic total to $380M after just 18 days in release. By next week, Dory will overtake Toy Story 3 ($415M) as the highest grossing Pixar (NYSE:DIS) movie of all-time at the domestic box office.

Besides the barbecue and fireworks show yesterday, another celebration took place in a room filled with NASA engineers. The agency's Juno spacecraft, built by Lockheed Martin (NYSE:LMT), ended a five-year, 1.8B-mile journey to Jupiter, with a do-or-die engine burn to sling itself into the planet's orbit. Juno will spend the next 20 months studying what lies beneath the gas giant's thick clouds and measure its gravity, magnetic fields and water content.

Poland has made significant progress in its talks with Raytheon (NYSE:RTN) over a Patriot missile system valued at an estimated €5B. According to Defense Minister Antoni Macierewicz, the country is ready to move ahead with the plan because Raytheon pledged that 50% of the missile system spending would be "done in Poland by Polish arms firms."

Citing strong demand and market conditions, Line Corp. (Pending:LN) is hiking the price of its initial public offering to raise as much as ¥116B ($1.1B). The operator of Japan's most popular messaging service increased the price range for shares to ¥2,900-¥3,300 from an earlier target of ¥2,700-¥3,200. Line is offering 35M shares in its debut, including a so-called greenshoe option.

Telecom talk... Iliad (OTCPK:ILIAY) is reportedly in exclusive talks with Hutchison (OTCPK:CKHUY) and Vimpelcom (NASDAQ:VIP) to buy wireless assets in Italy, marking founder Xavier Niel's third attempt to expand his business outside of France. A deal would create a fourth mobile operator in the country and pave the way for CK Hutchison and Vimpelcom to merge their 3 Italia and Wind units.

UBS has been ordered by Switzerland's tax agency to provide France with fiscal information and expects other countries to file similar requests. "It concerns a number of UBS account numbers pertaining to French domiciled clients and is based on data from 2006 and 2008," UBS said in a statement. Switzerland's tradition of bank secrecy has helped make it the world's biggest offshore financial center, with more than $2T in foreign wealth.

Three former Barclays traders have been found guilty of Libor manipulation almost four years since the bank paid out hundreds of millions of dollars in fines for fixing the key benchmark rate. Days after the British firm became the first to settle, its Chief Executive Officer, Bob Diamond, lost his job and regulators eventually imposed roughly $9B in penalties on the financial industry. BCS -2.9% premarket.

The ECB has asked Italy's third-largest lender, Banca Monte dei Paschi di Siena (OTCPK:BMDPY), to slash its bad debts by 40% over three years, heaping more pressure on Rome and Brussels to stabilize the country's banking system. In Italy, 17% of lenders' loans are sour. That is nearly 10x the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%.

London Stock Exchange shareholders approved a $27B merger with Deutsche Boerse (OTCPK:DBOEF) yesterday despite renewed uncertainty following the Brexit vote. The two exchanges insisted that their all-share merger to create the world's biggest bourse by revenue was essentially "Brexit proof," but Germany's markets watchdog cast a shadow over LSE's (OTCPK:LDNXF) deal last week.

While Hershey's board of directors unanimously rejected Mondelez's (NASDAQ:MDLZ) $23B bid on Thursday, its once impenetrable defenses are now looking weaker, Reuters reports. With the Hershey Trust (NYSE:HSY) under investigation and the Pennsylvania AG's office probing how much it spends and how long its directors have served for, some analysts feel there is a chance the trust could be more open to a sale of the confectioner in the future.

Although their growth is set to slow, Renault's (OTCPK:RNLSY) carmaking alliance with Nissan (OTCPK:NSANY) achieved record savings of €4.3B last year. Renault-Nissan SVP Arnaud Deboeuf also told reporters it was too early to assess Brexit effects on Nissan's operations in the country. Since its creation in 1999, the Franco-Japanese alliance has combined some vehicle architectures, manufacturing assets and corporate functions.

Volkswagen has rejected calls to compensate customers in Europe over the 'Dieselgate' emissions scandal like its $15B deal in the U.S. "You don't have to be a mathematician to realize that compensation at arbitrarily high levels would overwhelm VW (OTCPK:VLKAY)," CEO Matthias Mueller was quoted as saying by Welt am Sonntag. Brand chief Herbert Diess added that the automaker's reputation will take 12-18 months to recover from the crisis, but a strategic turnaround could take up to 14 years.

Tesla Motors ramped up production in the second quarter, churning out 20% more cars than it did during the first three months of the year, but delivered fewer cars than expected. Global sales rose 25% to 14,370, missing its prediction of 17K. Tesla (NASDAQ:TSLA) indicated that it exited Q2 producing nearly 2,000/week, and believes it can hit 2,200/week during Q3 and 2,400 in Q4 (supporting its previous H2 forecast).

Today's Markets

In Asia, Japan -0.7% to 15669. Hong Kong -1.5% to 20750. China +0.6% to 3006. India -0.4% to 27167.
In Europe, at midday, London +0.6%. Paris -1.1%. Frankfurt -1.4%.
Futures at 6:20, Dow -0.5%. S&P -0.6%. Nasdaq -0.6%. Crude -2.6% to $47.72. Gold +0.6% to $1347.60.
Ten-year Treasury Yield -8 bps to 1.38%

Today's Economic Calendar

8:30 Gallup US ECI
10:00 Factory Orders
12:30 PM TD Ameritrade IMX
1:00 PM Gallup US Consumer Spending Measure