I am and always have been a fierce anti-federalist; I don’t need or want even the most well-meant, over-civilized person imposing their view of life on me. All that said, I’m 100% in the “Bremain” camp simply because the EU has been a formidable force in delivering an unprecedented 70 years of peace and prosperity to all of Europe. Bottom line: It would be good business for the UK to stay and ill-advised business to leave.
The EU, for all of its misgivings, is like any government or quasi-government edifice and it’s crucial not to misunderstand its objective, or you will be surprised by its action. What should be expected of the EU is not deceit but unconscious interference, an infallible reflex for doing the wrong thing at the wrong time. Like any man made structure, the EU isn’t inherently malicious – it’s just not teachable.
Sturdily reliable bodies including the IMF, OECD, and Bank of England have all issued cautions of an abrupt U.K. recession in the event of Brexit. That is indeed possible but it must be said that all of these entities have been extremely poor at forecasting anything! If they are right – and they sure could be – it would be a first!
Layer on top of that the eurozone is a monetary union without a political, fiscal, or full banking union. The U.K. has its own treasury, its own currency, and its own monetary policy making board. Imagine the complexity of the U.S. Federal Reserve being coerced by Canada or Mexico. Brexit: It’s complicated!
Anyway, at 10:00pm (GMT) on Thursday June 23 the UK polling stations will officially close. Votes cast will be counted and declared individually in 382 ‘counting venues’. So, all going according to plan, we should know the consensus outcome approximately the same time that markets open in London.
The crusade to leave this 43-year membership has been simmering for years, as there is growing resentment towards the U.K.’s estimated £13 billion per year payment into the EU budget – all without any sort of democratic accounting. The temperature of the argument has been raised several degrees by the migration crisis.
Bottom Line: Although I do believe the risks and consequences of Brexit are vastly inflated I am very concerned that this referendum is happening at a time when the global economy is exceptionally fragile – ranging anywhere from being very soft to being barely stable. Although a vote to “leave” will not mean immediate “cut-and-run” from the EU, it will indeed mean uncertainty and that could be just enough to knock over our fledgling global recovery.
Life after June 23: Short-term markets will not provide much compassion – the most likely outcome is a much weaker British Pound, fear, and hence slower growth post a leave vote. Save your confetti – especially if the remain vote is close – as the globe will be mired in heightened political risks and uncertainty in the near-term. This could wind up being a case where consensus is right; one where the British pound will weaken no matter what the outcome happens to be.
Immediate term reactions are typically wrong providing multiple knee-jerk reactions and therefore potential trading opportunities. Below is a list of how to think rightly no matter what the referendum outcome.
FTSE 100 Equity Index: Although I am far from bullish on equities – particularly U.K. equities – I would be tempted to” bottom fish” if the FTSE 100 index drops more than 2.5% only because more than two-thirds of its earnings are derived outside of the U.K.
Copper: through a myopic, historical lens, copper has shown to be the most adversely affected to moves in the U.S. dollar and/or economic cycles. July copper closed yesterday at $2.1295 a pound, its year-to-date high was $2.3290. In a “stay” vote, the U.S. dollar should ratchet higher and may cause copper to fall without any regard to its fundamentals. I would recommend buying the metal on any initial, significant knee-jerk down move.
Gold: On January 4, August gold futures hit a year-to-date low of $1065.70 a troy ounce in concert with my FBN column “Warning about Tomorrow: A 2016 Forecast” where I conjectured that the U.S. dollar would fall and gold would climb. Mid-year and pre-Brexit I’m currently afraid gold has overshot; it’s gone too far too fast. My best thinking would be to fade (i.e. buy if it drops significantly and sell if it rallies significantly) the first move and view your trade as a trade – not an investment.
I’m firmly convicted that the referendum could cause a wave of short-term market aberrations and volatility. However, the difficulty is predicting the market’s magnitude and duration. Harder still is estimating how much a “Bremain” or “Brexit” outcome is now inherent in an assets current trading price.
No matter what, eventually, markets will decide the problem should be contained to its locality. From June 23 on out the consensus will shift their sights on global growth, equity valuations, and earnings.
U.S. equity markets found unexpected upward momentum on Monday as fears about a potential so-called Brexit event on Thursday waned. A poll released over the weekend in the U.K. suggested sentiment there was shifting back to “remain” at the outcome of the vote later this week.
Traders on Wall Street followed global markets higher as they ditched last week’s cautious sentiment, diving back into traditionally riskier assets. The major averages capped the day well off session highs, but still solidly in positive territory.
At the closing bell, the Dow Jones Industrial Average closed up 130 points, or 0.74%, to 17805. The S&P 500 gained 12 points, or 0.58% to 2083, while the Nasdaq Composite gained 36 points, or 0.77%, to 4837.
Bob Doll, chief equity strategist at Nuveen Asset Management, said the move higher was due largely to traders reversing last week’s positions.
“We’re back to where we started [at the beginning of last week],” he said. “Nothing particularly new is overtaking market sentiment, we overdid it on the downside last week.”
The rush out of safe havens was apparent as gold shed 0.19% on the session, though it had been down more than 0.5% in midday trading. The precious metal settled at $1,290 a troy ounce. Meanwhile, alongside a move higher in British and German government bond yields, the 10-year U.S. Treasury bond yield, which moves inversely to its price, rose to 1.67%, while the VIX volatility index, was down more than 9% as it saw its biggest drop since March.
Elsewhere, oil prices rallied as U.S. crude jumped 2.90% to settle at $49.37 a barrel, while Brent crude spiked 3.01% to $50.63 a barrel.
“That such shifts in global markets can be occasioned by shifts in polling of a few thousand people in just one nation seems odd, but such is the importance of the Brexit referendum to global markets that all other concerns have been cast aside, at least for now,” Chris Beauchamp, senior market analyst at IG said.
Nine of 10 S&P 500 sectors posted gains on the session as energy, industrials and consumer discretionary led the way higher, while utilities lagged. Doll said while it may be tempting for investors to get caught up in the “silly season” of Brexit, those looking for long-term gains should resist the temptation to move assets around based on daily market gyrations.
“Figure out what your long-term objective is. If it’s to add to equities, don’t chase them, but take advantage of the downside. If you have money to take off, take it in the top,” he advised. “Trying to trade this for anybody is difficult”
An absence of economic or fundamental factors helped drive market sentiment on Monday. Beauchamp warned that euphoria could fade on Tuesday as the Federal Reserve comes back into focus. Fed Chief Janet Yellen is set to appear in front of the Senate Banking Committee to testify on monetary policy. After a June Federal Open Market Committee that yielding no chance in interest-rate policy, market watchers will keep a keen focus on any change in sentiment from Yellen both during her remarks and the question-answer period that follows.
“As with chances of a rate hike this year having crashed, she may take the opportunity to turn a little hawkish, just to prevent markets from becoming too complacent. There is still a long week ahead of us,” Beauchamp cautioned.
Also on the docket for the remainder of the week are key economic data releases including existing and new home sales figures, as well as updates to durable goods orders and consumer sentiment.
At the closing bell, the Dow Jones Industrial Average plunged 611 points, or 3.39% to 17399. The S&P 500 dropped 76 points, or 3.60% to 2037, while the Nasdaq Composite shed 202 points, or 4.12% to 4707.
The major averages ended just off the lows of the session, which saw the Dow drop more than 647 points – the index’s worst one-day point decline since 2011. Meanwhile, the S&P 500 saw itsworst point performance in four months, while the Nasdaq’s suffered its most severe point decline in more than 16 years. To illustrate the rush on Wall Street, the Vix, which measures expected volatility over the next 30 days, jumped 43% during the session to 24.74.
“We expect the next several days to be as turbulent as other major market shocks of the last 15 years: September 11, the Lehman bankruptcy in 2008, the 2011 U.S. debt downgrade…and the 2015 China slowdown,” Erik Oja, banking analyst at S&P Global Market Intelligence said. “Once the dust settles, investors will have a clearer view as to the longer-term effects of Brexit.”
On a weekly basis, the major averages each fell more than 1.5%, while Friday’s action pushed the S&P 500 to join the Nasdaq in negative territory for the year.
Investors worldwide struggled to identify what the referendum’s results would mean for the slow-growing world economy as they parsed statements from prominent officials including U.K. Prime Minister David Cameron, who said he would step down from his post in the aftermath of the vote, and as central bankers pledged to do what they could to help keep liquidity from drying up.
Global stocks suffered steep losses in overnight trading. The pan-European Euro STOXX 600 dropped 7.03%. Meanwhile the U.K.’s FTSE 100 shed 3.15% –a less sharp decline compared to French and German indexes, which dropped 8.04% and 6.82% respectively as market participants feared the U.K.’s decision could open the floodgates for other EU nations to break their memberships. Markets in Asia leveled out before the close of trade, though Japan’s Nikkei ended down 7.92%.
Meanwhile, currency traders hammered the British pound, which plunged more than 10% overnight to a 1985 low as referendum returns hit the tape. By Friday afternoon, sterling was down 8.24% to $1.36 against the U.S. dollar. The move was a spectacular reversal from the rally seen just before the close of trade in the U.S. Thursday in which the British currency crossed $1.50, its highest level since December.
Global financial stocks were among those slammed in the widespread selloff amid unprecedented uncertainty about the effects of Britain’s exit from the EU. Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), Morgan Stanley (MS), and Goldman Sachs (GS) all skidded more than 6%. The financial sector led Wall Street lower on the session as it dropped 5%.
Commodities also saw substantial losses as traders worried how the so-called Brexit would impact the global economy. West Texas Intermediate crude prices fell 4% to around $47, while Brent, the international benchmark also slid 4% to $48.
As traders fled high-risk assets, they sought cover in traditionally safe-havens including U.S. government debt and gold. The precious metal rallied 4.66%, jumping to $1,320 a troy ounce. Elsewhere, as the price climbed on the 10-year U.S. Treasury bond, the yield dropped 0.164 percentage point to 1.575%. The Yen also saw a big boost on Friday thanks to its safe-haven status. Against the dollar, the Japanese currency rose 3.67% in recent action.
While risk-off sentiment clearly dominated markets across the world, Deutsche Bank Chief International Economist Torsten Slok,said in a note Friday, the impact on the U.S. economy depends on how much financial conditions tighten.
“The shock we have seen so far in markets is not enough to push the U.S. economy into a recession. That said, if growth abroad weakens and financial conditions tighten further, then …the negative impact on the U.S. economy would be growing over time,” he said.
Chris Gaffney, EverBank World Markets president explained that the U.K.’s decision has essentially frozen the Federal Reserve on tentatively planned interest rate increase this year. He projects better odds the U.S. central bank will move to slash rates rather than raise them as the global environment becomes more unclear and rates in the U.K. and the ECB could move more negative.
Outside the financial world, Gaffney added the Brexit vote could potentially set off a chain reaction as other unsatisfied European Union members look for membership exit doors themselves.
“Scotland is looking to possibly break away from the U.K. and other peripheral countries in the EU may now look to have their own referendums regarding membership in the EU. Spanish elections this weekend throw another bit of uncertainty into he European markets,” he said
The unexpected decision by Britons to break away from the world’s biggest trade bloc raised the specter of a slower global economy and sent stocks and currencies plunging by historic amounts on Friday.
Friday’s 3.6 percent slump erased the S&P 500’s gains for 2016. But even as the index suffered its worst one-day drop in 10 months, some U.S. investors looked for reasons to expect more upbeat trading next week.
They pointed to expectations that U.S. interest rates would remain low, that upcoming reports would show U.S. corporate earnings had recently improved and that Britain’s breakup with the EU would be gradual, and not economy-wrecking.
“I don’t think this is a catalyst that’s going to cause a bear market in this country at all. People should not be going ‘the world is coming to an end.’ It’s not,” said Ken Polcari, director of the NYSE floor division at O’Neil Securities in New York.
U.S. companies do stand to lose from Britain’s divorce from the EU, a process expected to take two years to negotiate.
Britain was the fifth-largest buyer of U.S. exports last year, with $56 billion in purchases, according to U.S. Census Bureau estimates. A stronger dollar versus the pound and other currencies would inevitably hurt U.S. companies selling abroad.
“There’s going to be a lot of reconsideration, pausing, certain deals that were contemplated are going to change,” said Steve Massocca, chief investment officer at Wedbush Equity Management. “But ultimately, this is not going to have a fundamental impact on how the world goes about doing business.”
Fed Chair Janet Yellen is scheduled to speak at an event in Portugal on Wednesday and investors will want to know how she sees the so-called Brexit changing the outlook for the U.S. economy and interest rates.
Traders have completely priced out any chance of a Fed rate hike this year and are even weighing the possibility of a rate cut, federal funds rate futures suggest.
“This event pretty much ensures that unless something dramatic changes, interest rates in this country are going nowhere for the foreseeable future, and that is at the end of the day a positive scenario for the stock market,” said Ted Weisberg, a trader with Seaport Securities in New York.
On Tuesday, the U.S. Commerce Department plans to release its final gross domestic product estimate for the first quarter of 2016. That and a slew of other economic data, including the Conference Board’s read on June consumer confidence, could sway investor sentiment at a time when the health of the U.S. economy has become a more critical question for investors.
The second-quarter earnings season hits full force in mid-July. Improved earnings reports from U.S. companies could be good news for stocks, as they would make higher share prices justifiable on a price-earnings basis.
S&P 500 companies on average are expected to report a 3.9 percent decline in second-quarter earnings from the same quarter a year ago and a 2.3 percent increase in September-quarter earnings, according to Thomson Reuters data. However, estimates for multinationals could be cut due to the Brexit vote.