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Brexit Revisited: British Pound Hits 31-Year Low as EU Exit Concerns Mount

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October 4, 2016

(Tuesday Market Open) Lovers of 1980s nostalgia are getting the chance to relive those days, as the British pound fell on Monday to its lowest level vs. the dollar since 1985.

The pound, which is down 1.5% so far this week, fell after British prime minister Theresa May renewed concerns over Brexit when she said Sunday that the country’s European Union exit process would start in Q1 of 2017. Recently, the pound traded at $1.2742. The last time it hit those levels? Back when Ronald Reagan and Margaret Thatcher were in office in June 1985.

Why should U.S. investors care what the pound is doing? Often, the most direct exposure Americans have to a weak British currency comes if they’re traveling to England. But it’s also worth checking the portfolio for any stocks of companies that do a lot of business in England, because the weak pound could make their products more expensive there. Among others, some financial firms have exposure to the British economy. British stocks have rallied as the pound sank, because the weaker pound has the effect of making stocks cheaper to buy relative to other things.

As the pound fell and the dollar rose, gold also took a hit. The metal is now down four of the last five days. Gold fell below $1,300 early Tuesday for the first time since late June. It was the Brexit vote back then that helped gold scamper up to two-year highs over the summer.

Technical levels in the S&P 500 Index (SPX) are another story Tuesday, as the 2150 mark seems to be developing as a key support point. The market fell on Monday, and the question Tuesday is whether it can hold support at 2150. Resistance remains at 2177.

A Fed rate hike seems a long way off, at least judging by the futures market, but that’s unlikely to stop investors from taking a listen whenever a Fed official speaks. Today brings two such occasions; one early this morning when Richmond Fed President Jeffrey Lacker addressed the economic outlook, and one this evening when Chicago Fed President Charles Evans speaks on monetary policy and the economy. Lacker, a non-voting member, said, "Pre-emptive increases in the federal funds rate are likely to play a critical role in maintaining the stability of inflation,” according to CNBC.

On Monday, voting member Cleveland Fed President Loretta Mester said on Bloomberg that November would remain a compelling option for raising rates if data were to come in as expected.

Plenty of new data came in on Monday, but it was all over the map and didn’t seem to point toward any easy conclusions about the economy. The ISM manufacturing index, which provides a reading of the manufacturing sector, was at 51.5 for September, slightly higher than the consensus of 50.2, and an improvement from the contraction posted in August. Any number above 50 indicates expansion. But construction spending in August declined 0.7% from July, missing expectations. Auto sales also don’t tell a simple story, with Toyota (TM) posting stronger numbers in August but General Motors (GM) and Ford (F) sales weakening.

The big economic report of the week comes Friday with Non-farm payrolls, and the market could trade with a cautious tone as that gets closer, with investors not wanting to commit too far toward one side or the other. Keep in mind that at the end of the day, the Fed won’t make a decision on rates based on this one report.

Over in Europe, Deutsche Bank (DB), which weighed on the market last week, was back to trading Tuesday, with shares moving higher. Investors await details of a possible fine on the company from the U.S. Justice Department that could reach billions of dollars.

U.S. Treasury yields reached 1.62% for the 10-year note early Tuesday, compared with lows below 1.56% last week back when concerns about DB hit the market. Some of the strength early this week may stem from the positive reading on ISM manufacturing on Monday. Any signs of improvement in the economy may be read as boosting the case for a possible Fed rate hike later this year.

S&P 500

FIGURE 1:

The S&P 500 (SPX), plotted through Monday on the TD Ameritrade thinkorswim® platform, seems stuck in the middle of its recent trading range that spans between roughly 2150 and 2175. Support is down around the 2150 level, and key resistance remains at 2177, an area last tested more than 10 days ago. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

SPX Posts Fourth-Straight Positive Quarter: The S&P 500 Index (SPX) registered a nearly flat September and a 3.3% rise for the Q3, making Q3 the best quarter so far in a year that’s seen the SPX rise about 6.1%. It was the fourth-consecutive quarterly advance for the index, and a quarter marked by strong performance from the technology sector, which saw some bellwether names like Alphabet (GOOG), Apple (AAPL) and Microsoft (MSFT) deliver big gains. Tech companies on the whole beat the overall SPX by 9.1 percentage points in Q3, Bloomberg reported. In fact, investors seemed to shift toward riskier stocks like financials and information technology during Q3, a change of pace from earlier in the year when safe stocks like utilities led the charge. The utilities sector fell 6.7% in Q3. One quarter doesn’t tell the entire story, naturally, but it could be interesting to see if this trend toward investors seeking more aggressive sectors continues in Q4.

Health Sector Losing Luster? Another sector sometimes seen as a smart play in volatile times is health care, but, like utilities, health care has come back to earth a bit recently. Though the sector rose almost 40% over the last three years, a pace well above the SPX, it’s down slightly over the last month, and volatility increased in Q3. One reason for the recent weakness could be the growing national focus on high drug prices, accompanied by both presidential candidates agreeing that prices are too high, said S&P Capital, in a note to investors Monday. This scrutiny on the industry may be delaying companies’ plans to raise drug prices, something that could factor into earnings results, S&P added, since price increases are a large part of organic growth for many companies.

The analysis firm forecasts 4% earnings per share growth for health care in Q3, which would be the smallest gain for the sector since Q2 of 2013. The weakness may extend across different sub-sectors of health, including biotech, pharmaceutical, and health care providers, S&P Capital said. Hospitals have seen falling admissions rates in recent months.

The Market Range that Wouldn’t Leave: Back in the 1970s, the late comedian John Belushi played a rude houseguest who refused to depart when the evening ended, much to the chagrin of his hosts. This brings to mind the current trading range of the SPX, because it seems like the index just refuses to leave this 2150 to approximately 2190 level it’s been stuck in for months. In fact, since July 1, the SPX has closed below that range on just nine days, eight of which occurred in consecutive sessions ended Sept. 20, back when fears of a Fed rate hike pinned down the market. It’s never surpassed the 2193 mid-session peak of Aug. 15 that marks its all-time high.

Monday’s close of 2162 marked the fifth-straight session back in the range, with support now seen at 2150 and resistance still at 2177, a level last touched on Sept. 22. We saw similar range-bound trading last spring, when SPX got stuck between 2050 and 2100. Often, the big round numbers can pose a psychological barrier of sorts, and 2200 has certainly seemed to be a challenge.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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