Market Summary
As we said last week “…Uncertainty
about the Fed and Brexit will cap upside movement until there is clarity on
both,” said Uri Landesman, president of Platinum Partners. Investors are
nervous so the market is likely to remain depressed for now, he added…”
MarketWatch.com reported how as global markets plunged in the aftermath of the
victorious “leave” vote in the U.K.’s referendum on EU membership, investors
rapidly adjusted their expectations for the Fed. Markets are now projecting
that the central bank won’t raise U.S. rates until early 2018. What’s more,
minorities of fed-funds futures traders are now betting that the U.S. central
bank could actually cut interest rates at its next meeting, in July. “We walked
in this morning and the probability of a rate cut at any of the upcoming
meetings from July to November was at 15%,” said Anthony Valeri, investment
strategist at LPL Financial.
Britain’s decision to exit the European Union in a referendum spread chaos through markets on Friday, but the shock isn’t likely to amount to echo the 2008 “Lehman moment” that left the global financial system on the brink of collapse. Britain’s Brexit vote does not require the government to pull the trigger immediately because the referendum is not legally binding. And just how long the U.K. might wait has grown as a key tactical debate in the few days since Thursday’s vote to leave the trading bloc.For the U.S. economy, the consequences of Brexit
should be minimal, but it might not turn out that way. Policy makers and
business leaders are subject to overreact to political issues. The real risk of
Brexit is that emotion overwhelms fundamental logic, causing one irrational
decision to beget another until we really do have the recession or growth
slowdown that seemed implausible before the vote. In the chart below investors
are trading “risk-off” assets during the current period of market uncertainty.
Trading Strategy
Last week’s analysis played out as exactly as advertised
where we said “…An article published in
MarketWatch.com reported on how the long-anticipated “Brexit” referendum on the
U.K.’s membership in the European Union is set for Thursday. Polls released in
recent weeks showed gathering support for the “leave” vote, an outcome that
many economists say would spark widespread turmoil in global markets and
possibly sink the U.K. into a recession...the week after Triple-Witching Day is horrendous. This week has experienced DJIA losses in 23 of the last 26 years with average losses of 1.1%. S&P 500 and NASDAQ have fared slightly better during the week after over the same 25 year span, declining 0.7% and 0.2% respectively on average…” We also said “…If the market does pull back, that might be a good opportunity to “buy the dip” with shares in the leading sectors…” Now the question is where will the market bottom out? The best bet is that investors overreacted to the Brexit vote and stocks will eventually bounce back, especially since some pundits believe there is a possibility the FOMC could lower rates at one of their upcoming meetings.
By Gregory Clay
Investment Strategist
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gregoryclay@nellaadvisors.com
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