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The Brexit Crush: Is this Panic Selling or a Steady Selloff?

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July 6, 2016

(Wednesday Market Open) The Brexit rally is crushing in a big way as markets across the globe tumble, bond yields collapse to levels never seen before and the pound plunges.

That was what investors gnawed through Tuesday when the markets snapped a four-day winning streak after a long Fourth of July weekend. They appear to be chewing through a second day of that today as fears over the global economic fallout of Britain’s stunning decision to exit the European Union stoked the markets. In the early going, the arrows were all pointing downward, following pronounced market declines across the globe. Is this panic selling or a steady decline in the markets?

Many analysts said to blame much of this Brexit-tied crash on the Bank of England, which yesterday sent fears soaring after warning about economic struggles related to bank lending. It eased regulations to keep that lending going forward when three U.K. real-estate funds halted selling. But it didn’t help that the U.S. orders for manufactured goods retreated in May after two straight month of advances, the Commerce Department reported.

As the Volatility Index (VIX), the market’s fear gauge, jumped better than 5% Tuesday, the three major benchmarks slumped. It was sprinting ahead again this morning, up better than 9% in the early going to 17.01.

The Dow Jones Industrials (DJIA) came off intraday lows yesterday but still wiped out 108 points, or 0.6%, to finish at 17,840, and was headed down that same path in the early going.  The closely watched S&P 500 (SPX) slumped 14 points, or 0.7%, to settle at 2,088, bouncing back from an intraday trough of 2,080. Energy, financials and materials led the way. With interest rates so low, how will the financials be able to recover? The Nasdaq Composite Index (COMP6) sunk by 39 points, or 0.8%, to end at 4,822.

The session was marked by striking new depths that might better be forgotten as investors scrambled for safe-haven assets like U.S. government bonds and the dollar. That safety-over-yield mindset sent the 10-year U.S. Treasury bonds to close at a then-record low of 1.37%, only to dive deeper in Asian markets to 1.34% and heading to the downside again this morning. The British pound dropped to a 31-year low of $1.27 before settling at $1.28.

Crude oil prices also kept their ties with the SPX, backtracking nearly 5% to close at $46.35 amid worries that economic woes would quash demand even when oil fields were closing in Nigeria. Prices were sinking again this morning. And, in keeping with safe havens, investors bid up gold prices to $1,369.40, rising 0.8% to touch its highest levels in two years, and moving upward again today.

S&P 500

FIGURE 1: WHERE TO NOW?

The S&P 500 (SPX), plotted through midday Tuesday on the TD Ameritrade thinkorswim platform, took a turn to the downside with the broader markets. Where's the support now? Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

The Era of Great Uncertainty. That’s what Steve Blitz, chief economist at ITG Investment Research, called this age of economic ups and downs to MarketWatch. He hopes that Friday’s all-important jobs report is of the so-called Goldilocks style: not too cold or not to hot. According to MarketWatch, “A just-right jobs report would offer more evidence that the economy has recovered from an early-year swoon, but it would not be so strong as to put more pressure on the Fed to raise U.S. interest rates so soon after the Brexit vote.

“In that scenario the Fed is not going to feel it has to rush to do anything,” Blitz said. “Their nightmare right now would be seeing employment, wages and inflation accelerate right as the Brexit uncertainty hits the marketplace.”

What is “just right”? “Around 175,000 to 200,000 new jobs,” according to MarketWatch. “Such a gain would reflect a marked improvement upon tepid employment gains of 38,000 in May and 123,000 in April. The U.S. added an average of 81,000 jobs a month from March to May, the weakest three-month stretch since 2010.”

What Did the Fed See? We’ll find out this afternoon when the Federal Reserve’s minutes from its last policy meeting are released. Remember, the Fed’s decision not to raise interest rates in June or probably much at all this year was made before Britain voted to leave the European Union and hurled global markets into a frenzy. And recall, too, that Fed Chair Janet Yellen noted at the time that a Brexit vote “clearly could have consequences” on global economic and financial markets. Were the Fed governors mostly worried about the Brexit outcome? Or did they see something else triggering their uncertainty about where interest rates were headed? Where did they stand on employment?

You’re Investing More. Retail traders tracked by TD Ameritrade added to their stock market exposure in June, according to the Investor Movement Index®, or the IMXSM.  The IMX rose to 5.00 in June, up from 4.87 in May, a relatively small move after May recorded the largest single-month increase in the history of IMX. Retail traders were net buyers the first three weeks of June, but trimmed their exposure to equity markets the last week of the month amid a general flight to safety immediately after the June 23 Brexit vote.

Good Trading,
JJ
@TDAJJKinahan

Economic Report Calendar

FIGURE 2: THIS WEEK'S ECONOMIC REPORT CALENDAR.

Source: Briefing.com

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