TradeTheNews.com Weekly
Market Update: Brexit Turmoil Fades, For Now
Fri, 01 Jul 2016 16:30 PM EST
Global markets began the week under a dark cloud of uncertainty in the wake of
the UK voters' decision to leave the EU. On Monday investors continued to flee
from risk assets as ratings agencies cut the UK's sovereign ratings, European
banking stocks got pummeled, and the British Pound hit new 30 year lows.
Uncertainty persisted about the timing and path forward on separation from the
European Union, and the leadership transition in the Conservative Party (and
perhaps also the Labour Party) dominated the conversation in London along with
the markets' reaction. The S&P traded down through the 200 day moving
average for the first time since March and money surged into global bonds
markets sending US Treasury yields to levels not seen since 2012. The Brexit
vote propelled gold to a new 15-month high above $1,300, and pound sterling
remained under pressure. Cooler heads prevailed by the end of the week and
stocks reversed higher. For the week the DJIA gained 3.1%, the S&P500 rose
3.2%, and the Nasdaq added 3.3%, while the UK's FTSE-100 surged over 7%,
notching its best performing week in nearly five years.
At the opening bell on Tuesday, though, confidence was resurfacing as investors
took a step back to fully evaluate the landscape. Despite somewhat tougher talk
by European officials it was becoming clear that the UK government had no
intention of invoking article 50 before a new PM is installed. Hope built that
the resulting 2+ years before any agreement needs to be reached should allow
cooler heads to prevail and officials to hammer out a mutually beneficial trade
pacts. Policymaker responses also went a long way to underpin improving
sentiment. Central bankers from around the world chimed in they were prepared
to take measures to ensure liquidity and proper functioning of financial
markets. South Korea announced a $17B stimulus package and China's president Li
pledged he won't allow a rollercoaster ride in Chinese capital markets.
Importantly, despite the surge in volatility there were no reports of
dislocations in the capital markets or the global banking system. On Thursday
the BOE's Carney plainly stated that further easing was likely this summer and
that only solidified the growing belief the US Fed was likely on hold through
year end. The notion the UK vote would keep central banks rates lower for even
longer than previously thought helped fuel a dramatic rebound in equity
markets.
By Friday most major stock indices had returned to levels seen heading into the
UK vote but the flow of money into government bond markets had yet to really
subside. The FTSE was the first to recapture its post Brexit losses while the
GBP remained devalued by ~13%. The 10-year GILT went for wild ride and by weeks
end the yield touched record lows below 0.9%. German Bund yields fell further
into the negative territory while the Euro rebounded from a 1.09 low to
stabilize around 1.11. US stocks surged into the end of the quarter aided
calming words from central banks and a slew of M&A announcements. The US
10-year yield slipped more than 10 basis points since Friday's close to trade
sub 1.5%, and remains down more than 20 basis points from where it stood before
the UK vote. The US Dollar index is holding up about 2.5% since the Brexit
vote.
Asia's FX flows were just as volatile as the Brexit effects played out. The
USD/JPY after briefly trading below 99 on Friday, retraced back above 103 on
improving risk sentiment. Verbal intervention remained heavy in Japan, where PM
Abe held a meeting with BOJ Deputy Governor Nakaso and Finance Minister Aso.
The PBoC's first fixing after the Brexit set the Yuan at 6.65, the lowest
setting since Dec 2010. An intraday spike up above 6.70 sparked rumors that
PBOC officials were willing to tolerate USD/CNY as high as 6.75.
Data for the week was mixed and ultimately overshadowed by the Brexit news in
terms of any market-moving effect, but some key data points were notable. The
US Markit services PMI report was a bit more subdued than estimated, noting any
rebound in the economy from the weak first quarter was largely confined to
April, and that growth has since faded again. The Commerce Department revised
first quarter GDP growth upwards from an annual rate of 0.8% to 1.1%, which is
still the weakest pace in a year, portending the US economy remains vulnerable
to global externalities. On the other hand, the Chicago PMI reading surged in
June to its highest reading since January 2015, with managers noting improved
production and new orders. US initial jobless claims came in slightly above
estimates but remained at a level consistent with a healthy labor market, as
the reading remained below 300K for the 69th consecutive week. US consumer
confidence rebounded in June according to the Conference Board; however, it's
important to note this data was gathered up to a week before the Brexit vote.
In deal news this week, it was disclosed that Hershey was in talks with
Mondelez but it rejected a $107/share offer of equally proportioned cash and
stock and determined that the offer "provided no basis for further discussion."
Nevertheless, shares of Hershey and other US foods producers rose sharply on
Thursday on the prospects of more M&A in the sector. After years of winking
at each other Lionsgate and Starz finally tied the knot, in a $4.4B merger deal
creating a bigger player in the content world. Private equity also got into the
act this week as Apollo Global bought Diamond Resorts for $2.2B, paying a 26%
premium.
