Market Update

• Markets rally as polls suggest Britain to remain in EU.Risk assets are on the upswing this morning, brushing off a disappointing last week, as weekend polls pointed to an increased likelihood that the U.K. votes to stay in the European Union (EU). Asian markets closed up across the board, with the Nikkei posting its largest daily gain in two months; in afternoon trading, many European markets are up as much as 3%, led by financial stocks. Strength in the pound has the U.S. Dollar Index moving lower, and WTI crude oil is up nearly 2%. Meanwhile, safety trades are being unwound as COMEX gold is moving slightly lower and the yield on the 10-year note has jumped back to 1.67%.

Macro View

• Dollar already a tailwind as Q2 winds down. The U.S. dollar, which was a 15-20% headwind to commodity prices, earnings, exports, and overseas sales throughout 2015, is now turning into a tailwind. Quarter to date in Q2 2016, the dollar is down 2% from Q2 2015; and if the dollar just holds its current level, it will be a 3-4% tailwind by Q4 2016 or Q1 2017. The last time the dollar provided that large of a tailwind to commodity prices, exports, and overseas earnings was 2011.

• Big down week. The S&P 500 lost 1.2% last week as Brexit fears swirled. This was the first 1% weekly drop since late April. On the week, the defensive areas of utilities and telecom led, while tech, financials, and healthcare all lagged. The S&P 500 did manage to close off its lows for the second day in a row though, suggesting that some were looking to buy the weakness late last week. Technically, the S&P 500 closed just beneath its 50-day moving average on very high volume. It is worth noting that Friday was options expiration and this can greatly skew the volume statistics.

• Fear is everywhere, but should it be? In the Weekly Market Commentary, due out later today, we look at three reasons to be fearful of future economic and stock market returns, and three reasons maybe the fears are overblown. With Brexit fears abound the past few weeks, the list of investor worries are piling up–yet the S&P 500 is just 3% away from a new all-time high. We take a closer look at the Brexit, the huge weakness in European banks, and the sudden strength in the Japanese yen as legitimate reasons to worry. The good news is, we also note three reasons to expect a better economy and stock market gains for the second half of the year: strong market breadth, extremely skeptical investor sentiment this close to new highs, and the potential for a strong earnings rebound thanks to a weaker U.S. dollar and stabilizing oil. The fears get all the headlines, but maybe there are reasons to avoid all the gloomy outlooks.

• Thursday’s Brexit vote. In this week’s Weekly Economic Commentary, also due out later today, we take one last look at issues related to the Brexit before Thursday’s vote. We look at the U.K.’s trading relationship with the EU as both a driver of the Brexit movement and the area most likely to be affected by any change in the U.K’s status. The U.K.’s deficit in trade in goods with the EU has grown since the Great Recession, but it maintains a surplus on trade in services.

• Week ahead. The Brexit vote, Federal Reserve Bank (Fed) Chair Janet Yellen, and June Purchasing Managers’ Index (PMI) data highlight an otherwise quiet economic calendar. As was the case in the past few weeks, the week ahead is likely to be dominated by concerns of the result of the Brexit vote in the U.K. (see the recent Weekly Market Commentary). The vote is Thursday, and markets should begin to see preliminary results by 7 p.m. ET that day and final results are likely at around 2 a.m. ET on Friday, June 24. Earlier in the week, testimony from Fed Chair Yellen on monetary policy to the U.S. House and Senate will draw most of the attention. Data on June manufacturing in the Eurozone, U.S., and Japan are due on Thursday. It’s a relatively quiet week for central banks and for Chinese economic data.

Monitoring the Week Ahead

Monday

• ECB’s Draghi Speaks in Brussels

Tuesday

• Yellen (Dove)
• Germany: ZEW (Jun)

Wednesday

• Existing Home Sales (May)
• Yellen (Dove)
• Japan: Nikkei Mfg. PMI (Jun)

Thursday

• Initial Claims (6/18)
• Markit Mfg. PMI (Jun)
• Eurozone: Markit Mfg. PMI (Jun)
• “Brexit” Referendum in UK (First Results Around 7 P.M. ET; Final Results at 2 A.M. ET Friday 6/24)

Friday

• Durable Goods Orders and Shipments (May)
• Germany: Ifo (Jun)

Click Here for our detailed Weekly Economic Calendar

 

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

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High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

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