Market Update

• Equities rise as Britain votes. Equities in both the U.S. and Europe are moving higher as the vote to decide whether the U.K. will remain in the EU is officially underway. Yesterday’s session in the U.S. saw a similar open, but stocks fell throughout the day and closed in the red. This risk-off attitude extended to Treasuries, as the 10-year yield fell 0.03% to 1.68%; however, those gains are being retraced this morning. Overnight, Asian equities finished mostly higher, though the Shanghai Compositelost 0.6% amid reports of slowing industrial investment demand. Elsewhere, WTI crude oil is moving higher, COMEX gold is down slightly, and the pound is making a 2016 high against the dollar.

Macro View

• New claims for unemployment fell 18,000 to 259,000 in the week ending June 18, as claims stabilize near 40-year lows after recent distortions. More distortions loom, however, as the end of the school year and the annual auto plant shutdowns are on the horizon. Claims are down 10,000 from their level 26 weeks ago. In the past, claims need to rise more than 75,000 over a six-month (26-week) period to indicate a recession, so clearly there is no recession signal from claims. The level of claims continues to point to a solid labor market, but we will continue to watch it closely.

• Manufacturing PMIs for June in Eurozone and Japan show some stability, but no reacceleration. ThePurchasing Managers’ Indexes (PMI) for manufacturing are the first look at global manufacturing activity each month. They get a lot of attention because they are timely (today’s data were for June), and because manufacturing activity is highly correlated with earnings growth, the ultimate driver of stock prices. At 52.6, the PMI in theEurozone was above expectations (51.4) and higher than the May reading of 51.5. A reading above 50 indicates expansion in manufacturing. The 47.8 reading in Japan was slightly above May (47.7) but below 50, reflecting the still weak state of Chinese manufacturing activity, given Japan’s strong link to China in that area.

• Bank stress test results due out today after the market close. The Federal Reserve Bank (Fed) will announce the first round of results from its latest stress tests today, followed by the related results from theComprehensive Capital Analysis and Review (CCAR) next week (June 29) when the banks have their capital distribution plans approved (or rejected). These reviews have been getting almost no attention amidst the sea of Brexit talk; however, they are important for the banks because they determine dividend policies, the amount of capital they must hold (which is a key driver of bank profitability), and help shore up investor confidence in bank balance sheets. We have been cautious on financials, including banks, ahead of the Brexit vote and due to low interest rates (and the related flat yield curve), but we see the group as a good short-term trade on a potential “remain” vote for the U.K. Banks remain attractively valued.

• British stocks continue to rally. The London FTSE 100 is higher for the fifth consecutive day for the first time this year. Also, the five-day return as of this morning was 6.4%, which is the best five-day return since coming off of the February lows. The British pound is breaking out to its highest level in 2016 as well. The polls are saying the U.K. staying is a coin flip, but markets are feeling more confident.

• How worried are you? Yesterday was a very rare day, as the CBOE Volatility Index (VIX) jumped 14% while the S&P 500 fell only 0.2%. You have to go back 19 years to see another day like that. The bottom line is, investors are paying up for protection ahead of Brexit and any potential post-vote volatility. Today on the blog we will take a closer look at the past 20 days. Heading into the Brexit vote, there have been some very interesting and rare developments that we will examine more closely.

Monitoring the Week Ahead

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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