The Week In Review

6/24/16

The major averages ended a tumultuous session on a sharply lower note, selling off after the United Kingdom surprised markets by voting to leave the European Union. The move had widespread implications throughout capital markets as the S&P 500 (-3.4%) tumbled 75 points, losing the most points since September 1, 2015. Today's trade featured a flight from risk assets, a bid in safe havens, and the underperformance of the heavily-weighted financial (-5.4%), technology (-4.3%), industrial (-4.0%), and consumer discretionary (-3.6%) sectors. The Nasdaq Composite (-4.1%) ended its day behind the S&P 500 (-3.6%) and the Dow Jones Industrial Average (-3.4%).

Global equity markets tumbled overnight as participants reacted to a surprise result from yesterday's Brexit vote. The "Leave" camp carried the referendum after receiving 51.9% of last night's vote. In response, European indices paced the retreat as investors looked ahead to the multi-year legal process of withdrawing the UK from the EU. Additionally, foreign exchange markets were in focus as the pound sank to a three-decade low (1.3231) against the dollar.

The major U.S. averages gapped lower at the beginning of the session as the heavyweight financial (-5.4%), technology (-4.3%), and industrial (-4.0%) sectors dragged on the broader market. To be fair though, all six cyclical sectors experienced heavy selling pressure as a flight from risk assets resulted in losses between 3.5% (energy) and 5.4% (financials). A downturn in crude oil added to the negative tenor as a rally in the buck weighed on the dollar-denominated commodity. For its part, WTI crude ended its pit session lower by 5.0% ($47.60/bbl; -$2.52). The S&P 500 (-3.6%) ended off its worst level of the day, but below prior technical support at the 2050 price level.

The economically-sensitive financial sector (-5.4%) moved lower in sympathy with European banking names as Deutsche Bank (DB 14.72, -3.12) experienced its largest daily point loss since 2008. Elsewhere, Lloyds Banking (LYG 3.33, -1.01) and Royal Bank of Scotland (RBS 5.43, -2.06) lost 23.3% and 27.5%, respectively. On the home front, Dow component Goldman Sachs (GS 141.86, -10.80) ended its day at the bottom of the price-weighted index. The broader sector fell 5.4% today, extending its yearly loss to 7.4%.

The high-beta chipmakers demonstrated relative weakness, evidenced by the 5.8% decline in the PHLX Semiconductor Index. The growth-sensitive group experienced pressure as Skyworks (SWKS 61.61, -5.60) plunged 8.3%. In the broader technology sector (-4.3%), large cap component Microsoft (MSFT 49.86, -2.05) fell 4.0%.

In the consumer discretionary space (-3.6%), retail names ended ahead of the broader sector as the SPDR S&P Retail ETF (XRT 41.10, -0.90) declined 2.1%. On the flipside, PVH (PVH 93.55, 9.19) fell 8.9% after the company reported that net revenue generated from inside the United Kingdom constituted 3.0% of its total net revenues. Separately, travel names weighed as large cap component Priceline (PCLN 1232.14) fell 11.4%.

The U.S. Dollar Index (95.48, +1.95) ended broadly higher as the euro and the pound finished with substantial losses against the buck. The euro/dollar pair declined 2.4% (1.1111) while sterling plunged 8.1% against the dollar (1.3676).

The Treasury complex settled off its session high as the yield on the 10-yr note finished lower by 17 basis points at 1.57%.

Today's participation was above the recent average as more than 1.1 billion shares changed hands on the NYSE floor. The Russell 2000 (-3.7%) likely contributed to the increased volume ahead of this evening's annual rebalancing.

Today's economic data was limited to Durable Orders for May and the final reading of Michigan Consumer Sentiment for May:

The advance report on durable goods disappointed as new orders declined 2.2% month-over-month (Briefing.com consensus -0.6%) while orders excluding transportation declined 0.3% (Briefing.com consensus +0.1%).

The disappointment is deep-seated for several reasons.

First, orders declined in almost every category.

Secondly, business investment continued to flag, evidenced by a 0.7% decline in new orders for nondefense capital goods excluding aircraft, which followed a 0.4% decline in April.

Third, shipments of nondefense capital goods excluding aircraft, which factor into the GDP report, were down 0.5%, reversing most of a 0.6% increase in April.

On a year-over-year basis, new orders excluding transportation are down 0.5% while orders for nondefense capital goods excluding aircraft are down 3.5%.

The decline in May featured a 34.1% drop in orders for defense aircraft and parts. Overall, though, new orders for transportation equipment declined 5.6%, led by a 2.8% drop in orders for motor vehicles and parts.

Some other prominent order declines were seen in primary metals (-1.4% after a 0.7% decline in April), fabricated metal products (-0.3% after a 3.6% increase in April), machinery (-0.2% after a 2.0% decline in April), electrical equipment, appliances, and components (-0.1% after a 0.2% decline in April).

The final reading for the University of Michigan Consumer Sentiment Survey revealed a dip to 93.5 from the preliminary reading of 94.3. The Briefing.com consensus estimate was pegged at 94.0.

The final reading for June was below the final reading of 94.7 for May and below the 96.1 reading seen for June 2015.

It was said in the release that consumers were a bit less optimistic in late June due to rising concerns about prospects for the U.S. economy.

Those concerns showed up in the Index of Consumer Expectations, which slipped to 82.4 from 84.9 in May.

The Current Economic Conditions Index actually ticked up to 110.8 from 109.9. That is the highest reading for this index since January 2007.

Separately, consumers' inflation expectations for the next 12 months were left unchanged at 2.4%.

Monday's economic data will be limited to the International Trade in Goods Report for May, which will be released at 8:30 ET.

Nasdaq Composite - 6.0% YTD

Russell 2000 -0.7% YTD

S&P 500 -0.3% YTD

Dow Jones -0.1% YTD

Week in Review: Brexit Spoils Bull Party

The stock market gallivanted higher though the first four days of the week, but the upbeat attitude dissipated on Thursday evening after it became clear that the British referendum on membership in the European Union ended with a 51.9% victory for the 'Leave' camp. The resulting Friday selloff sent the S&P 500 lower by 3.6%. The index slid below its 50-day moving average (2080), surrendering 1.6% for the week.

Although the weekly decline in the S&P 500 did not look particularly concerning, the moves that unfolded in the foreign exchange market caught the attention of many.

The final set of polls released ahead of the referendum pointed to a growing edge for the 'Remain' camp, which lulled some market participants into a false sense of security. The pound notched a fresh six-month high against the dollar at 1.5018, but reversed in a flash after actual results began pouring in.

The first signs of an impending reversal in the foreign exchange market began appearing around 18:00 ET on Thursday when the pound started backing away from its high. This took place after it was reported that the 'Remain' camp secured just a slight victory in Newcastle, where status quo was expected to prevail by a large margin. Subsequent vote counts hinted at a much closer result than it was first expected, which invited risk-off positioning into capital markets.

At its lowest point, the pound was down nearly 11.0% against the dollar, but that decline was narrowed to 8.0% by the end of Friday. The volatility left the pound down more than 1,000 pips versus the dollar for the day, which is a move that would be expected to unfold over a few weeks under typical conditions.

U.S. Treasuries surged in reaction to the developments, pressuring the 10-yr yield to 1.40%--its lowest level since mid-2012.

The defensive finish to the week weighed on rate hike expectations, and the fed funds futures market now sees a higher chance of a rate cut in July (7.2%), September (7.2%), or November (7.0%) than that of a hike in November (1.9%). Looking farther out, the likelihood of a hike in February 2017 sits at a lowly 22.3%.