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The S&P 500 took a 3.59% nosedive on Friday, after the British unexpectedly voted to leave the European Union in a non-binding referendum, meaning the U.K. Parliament has the final say, not the voters. There could be more referendums coming. The British government now has to notify other EU members of its intention to activate Article 50, which gives the U.K. two years to negotiate a “withdrawal agreement.” Roughly two-thirds of all the laws that apply in the U.K. are linked to the
EU, so that too needs to be resolved before the U.K. may begin to renegotiate its trade deals with countries around the world.
The S&P ratings agency already said it will cut the British bond, or U.K. Gilt, rating from AAA. Financial institutions will begin to layoff their U.K. workers and leave London for Paris and Frankfurt. The transition will take years, while foreign investments in the U.K. will grind to a halt due to uncertainty. The move by the British voters wiped out about $2 trillion of global assets on Friday, as the markets are repricing U.K. risk.
For the week, the S&P 500 pulled back 1.63%, closing at 2,037.41 on Friday. The best performing S&P 500 sector for the week was again Telecommunication services, up 1.36%. The worst performing sectors for the week were Materials, Financials and Industrials, which were down 2.55%, 2.44% and 2.40%, respectively. The S&P 500 Biotechnology subsector sold off again, down 2.76% for the week, as the political dark cloud hanging over prescription drug prices remains.
Ahead of the U.K. Brexit vote, U.S. Federal Reserve Chair Janet Yellen told Congress, during her semi-annual testimony on Tuesday and Wednesday, that she was decidedly less optimistic about the outlook for the U.S. economy and the prospect for higher U.S. interest rates than she was only a month ago. Back then, she boldly predicted that interest rate hikes were likely "probably in the coming months". Yellen noted that overseas developments continued to cast a cloud over the U.S. economic outlook, including a decision by U.K. voters to leave the European Union and slowing economic growth in China.
The IMF said on Wednesday that it now expects the U.S. GDP to grow 2.2% this year, down from its 2.4% forecast in April, and slower than last year’s pace. The fund kept its forecast for 2017 at 2.5%, but said that the Federal Reserve should stay its hand on interest rates for a while, according to the Wall Street Journal. IMF economists said a strong dollar could remain a problem for the U.S., as the dollar is 10-20% higher than economic conditions warrant, and a British vote to exit the EU on Thursday could fuel a further rise in the greenback.
More bad news came from the U.S. Commerce Department on Friday, after the department reported that new orders for durable goods—airplanes, industrial machinery and other products that are designed to last at least three years—decreased a seasonally adjusted 2.2% in May from the prior month. Economists were expecting just a 0.4% decline, according to the Wall Street Journal.
The U.S. dollar index spiked 3.39% to an intraday high of 96.700 on Friday, before pulling back to close at 95.574. For the week, the U.S. dollar index was up 1.31%. The yield of 10-year U.S. Treasury Notes tumbled 9.77% on Friday to close at 1.57%, a level not seen since mid-2012. The global financial markets are nervous about what will happen next in the U.K., as the 10-year Japanese government bond (JGB) yield dropped to negative 0.18% at the close on Friday, while the 10-year German bund yield printed at negative 0.033%, both near record lows.
Since August 2015, the S&P 500 has been positively correlated with the WTI crude oil price. Traders, including algorithmic and high-frequency traders (HFT), may be creating greater profit opportunities by coupling the volatility and price swings in the crude oil futures market with the S&P 500 index.
The WTI crude oil spot price was down 2.64% for the week, closing at $47.57 per barrel on Friday, while the Brent crude price was down 1.86% for the week to close at $48.44 per barrel, after mixed weekly crude oil inventory reports and risk repricing resulting from Thursday's U.K. referendum “leave” vote.
The Energy Information Administration (EIA) weekly U.S. oil inventory report on Wednesday showed a decline of 0.9 million barrels to 530.6 million barrels in the week ending June 17, compared to analysts’ expectations for a drawdown of 1.62 million barrels. The American Petroleum Institute (API) inventory data on Tuesday showed U.S. crude inventories surprisingly fell by 5.2 million barrels.
Separately, the EIA said the weekly U.S. crude oil production decreased by 39,000 barrels per day (bpd) for the week ending June 17, 2016, to 8.677 million bpd. Weekly U.S. crude oil output has fallen about 9.71% from the peak level of 9.61 million bpd during the week ending June 6, 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count was down 7 from the previous week, for the third straight week, at 330, but still down 79.49% from the peak number of 1,609 in October 2014.
From our technical viewpoint, the S&P 500 fell back to the retest the trendline resistance of the descending wedge, and the 100-day moving average. Algorithmic and high-frequency traders may want to take the index down further to the 200-day moving average. There are several supports between 2,041 and 1,987, where the S&P 500 can bounce off.
S&P 500 Summary: –0.32% YTD as of 06/24/16
Barclay Hedge Fund Index: +0.72% YTD
Outperforming Sectors: Telecommunication services +17.80% YTD, Utilities +16.42% YTD, Energy +10.99% YTD, Materials +5.67% YTD, Consumer staples +5.04% YTD, and Industrials +1.97% YTD.
Underperforming Sectors: Consumer discretionary –2.47% YTD, Information technology –3.47% YTD, Healthcare – 3.72% YTD, and Financials –7.42% YTD. |
