Monthly Archives: June 2016

Market Insights 6/30/2016

Global Markets Continue to Recover

U.S. equities were again solidly higher, joining their foreign counterparts in recovering from the post-Brexit malaise, amid signals of further stimulus measures from the Bank of England, and despite a halt in crude oil’s latest march upward.

Equity news was a mixed bag, headlined by the results of the Fed’s stress test results of the banking sector, as well as confirmation from Hershey that Mondelez offered to acquire the chocolate giant.

Treasuries finished higher, with yields continuing to drift lower, amid a rise in jobless claims and a strong regional manufacturing activity report, while the U.S. dollar and gold were higher.

The Markets….

The Dow Jones Industrial Average rose 235 points (1.3%) to 17,930

The S&P 500 Index gained 28 points (1.4%) to 2,099

The Nasdaq Composite added 63 points (1.3%) to 4,843

In heavy volume, 1.3 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil fell $1.55 to $48.33 per barrel and wholesale gasoline was $0.04 lower at $1.50 per gallon

The Bloomberg gold spot price gained $2.65 to $1,321.80 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 96.04

Jobless claims rise, while regional manufacturing activity jumps

Weekly initial jobless claims rose by 10,000 to 268,000 last week, versus the Bloomberg estimate calling for claims to increase to 267,000, as the prior week’s figure was downwardly revised by 1,000 to 258,000. The four-week moving average was unchanged at 266,750, while continuing claims fell by 20,000 to 2,120,000, south of the estimated level of 2,151,000.

The Chicago Purchasing Managers Index snapped back into expansion territory (above 50), jumping to 56.8 in June—the highest since January 2015—from 49.3 in May, and versus expectations of a modest rise to 51.0. New orders and production both improved month-over-month, while employment declined.

Regional manufacturing reports for June have mostly signaled expansion, ahead of tomorrow’s reads on national manufacturing activity in the form of the ISM Manufacturing Index and Markit’s Manufacturing PMI Index, with both forecasted to show 51.3 levels and denote expansion. Most agree that the U.S. economy is fairly healthy and should manage to stay out of recession territory in the near term, although risks have risen. The corporate side of the U.S. private sector continues to struggle to gain momentum, and manufacturing continues to flirt with contraction. The uncertainty associated with Brexit has caused the U.S. dollar to surge again and could exacerbate the manufacturing sector’s problems at least in the short-term. The other item on tomorrow’s economic calendar is construction spending, forecasted to have risen 0.5% m/m during May after declining 1.8% in April.

Treasuries finished higher, as the yield on the 2-year note dropped 5 basis points (bps) to 0.59% and the yield on the 10-year note dipped 3 bps to 1.48%, while the 30-year bond rate was 2 bps lower at 2.30%. Bond yields remain above the lows hit in the aftermath of the U.K. Brexit vote.

Please note: The bond markets will close early tomorrow at 2:00 p.m. ET in observance of the upcoming July 4th holiday.

Europe continues rally as Brexit fallout eases, Asia mostly higher

The European markets finished higher, adding to their three-day rally, despite a pullback in crude oil prices from their recent jump, while the markets continue to recover from the fallout from last week’s vote in the U.K. to leave the European Union. Stocks got an intra-day boost and the British pound and euro both fell as Bank of England Governor Carney said the central bank will likely need to deploy stimulus measures in the wake of the Brexit vote.

U.K. political uncertainty ramped up, exacerbated by the announcement from former London Mayor Boris Johnson that he will not run to become the U.K.’s next prime minister. Bond yields in the region were mostly lower. Financials lagged the broad-based advance after the U.S. subsidiaries of Deutsche Bank AG (DB $14) and Banco Santander SA (SAN $4) failed the Federal Reserve’s stress tests. In economic news, the Eurozone consumer price inflation estimate came in slightly hotter than expected for June.

Stocks in Asia finished mostly to the upside to conclude a mixed quarter in the region, on the heels of yesterday’s continued recovery in the U.S. and Europe from last week’s U.K. Brexit vote shock. Japanese equities ticked higher, though some late-day strength in the yen capped gains, along with a preliminary report showing the nation’s industrial production fell more than expected in May. Mainland Chinese issues ticked slightly lower, while those traded in Hong Kong jumped, as did markets in Australia, with healthcare, oil & gas and financial issues leading a broad-based advance. South Korean stocks rose on the heels of a much stronger-than-expected May industrial production report, and Indian securities moved higher, to complete its best quarter since 2014, bolstered by eased U.S. rate hike concerns and the Brexit recovery, along with recent measures by the government to bolster the economy.

A slew of economic data from the Asia-Pacific region will dominate tomorrow’s international calendar, with items scheduled for release to include CPI, personal income, consumer confidence, wage data and the Tankan Index from Japan, CPI from South Korea, and trade figures from China. In addition, the manufacturing PMIs for the Asian nations will be reported, along with those of most of the European countries, while from across the pond will come PPI from the Eurozone and housing data from Italy.

Market Insights s 6/29/2016

Stocks Rally for a Second Day

U.S. stocks notched a second day of solid gains, recouping some of the losses incurred post-Brexit, with financials leading the way. Treasuries were slightly lower, having oscillated between the plus-and-minus sides throughout the day, while crude oil prices tacked on to their upward march, gold was also higher, and the U.S. dollar was lower.

In economic news, personal income and spending mostly matched expectations, while pending home sales and weekly mortgage applications slumped.

The Markets…

The Dow Jones Industrial Average jumped 284 points (1.6%) to 17,694

The S&P 500 Index gained 35 points (1.7%) to 2,071

The Nasdaq Composite rallied 87 points (1.9%) to 4,779

In heavy volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil rose $2.03 to $49.88 per barrel and wholesale gasoline was $0.02 higher at $1.54 per gallon

The Bloomberg gold spot price gained $6.36 to $1,318.15 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 95.83

Personal income and spending rise, pending home sales and mortgage apps decline

Personal income was 0.2% higher month-over-month n May, slightly lower than the Bloomberg forecast of 0.3% and below April’s upwardly revised 0.5% increase. Personal spending came in 0.4% higher m/m last month, matching expectations and versus April’s upwardly revised reading of 1.1%. The May savings rate as a percentage of disposable income declined to 5.3% from April’s 5.4% rate. The PCE Deflator rose 0.2% m/m, matching forecasts. Compared to last year, the deflator was 0.9% higher, just shy of estimates calling for a 1.0% increase. Excluding food and energy, the PCE Core Index was 0.2% higher m/m, matching expectations, and the index was up 1.6% y/y, in line with estimates.

Pending home sales fell 3.7% m/m in May, versus projections of a 1.1% decline and following the downwardly revised 3.9% gain registered in April. Compared to last year, sales were 2.4% higher, versus forecasts of a 4.6% increase. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose in line with expectations for May.

The MBA Mortgage Application Index declined 2.6% last week, after increasing 2.9% in the previous week. The decrease came as a 2.4% decline for the Refinance Index coupled with a 3.0% decrease for the Purchase Index. The average 30-year mortgage rate lost 1 basis point (bp) to 3.75%.

Treasuries finished slightly lower, as the yield on the 2-year note rose by 2 bps to 0.63%, while the yields on the 10- year note and the 30-year bond gained 4 bps to 1.51% and 2.32%, respectively.

Tomorrow, the economic calendar will offer weekly initial jobless claims, forecasted to move higher to a level of 267,000 from the surprising drop to 259,000 in the prior week, as well as the Chicago Purchasing Managers Index, with economists expecting a reading of 51.0 for June, up from the 49.3 posted in May, with 50 the demarcation point between expansion and contraction in activity.

Europe rallies for second-straight day, Asia notches gains as well

European equities traded higher, with the U.K. FTSE 100 Index erasing losses that developed after the Brexit vote, as stocks in the region managed a second-straight day of solid gains after tumbling following Britain’s vote to leave the European Union (EU). EU leaders continued a two-day summit in Brussels today, without the U.K., to discuss the Brexit process, which they have noted would be preferable to do orderly and quickly so as to avoid entering into a prolonged period of uncertainty. The concern that a timely, organized exit may not occur has been magnified by the fact that U.K. Prime Minister David Cameron announced his resignation following the successful ‘leave’ vote, and he stated that the exit process should be triggered by his successor, who may not be selected until September. In economic news in the region, Germany reported an unexpected improvement in consumer confidence, as well as national and regional consumer price inflation reads that were mostly in line with estimates. Also, the U.K. matched economists’ estimates when it reported a larger expansion of consumer credit than occurred the previous month.

Stocks in Asia finished higher as the global equity rally continued on some optimism that policy makers may introduce measures aimed at limiting any economic fallout following the U.K. Brexit vote. Japanese securities surged, with financial companies and steel producers leading gains, even as the yen rose versus the U.S. dollar. After meeting with the Governor of the Bank of Japan, Prime Minister Abe told journalists he will mobilize all possible measures after the Brexit vote, while Governor Kuroda also informed the media that the central bank can add funds to the market as needed.

Chinese equities, and those traded in Hong Kong moved higher, as the world’s second largest economy will begin to release June economic data on Friday starting with manufacturing and non-manufacturing PMI releases. Australia’s markets increased, with energy issues leading gains, while South Korean listings advanced, while the won gained for a second day after the Korean government said yesterday that it plans to spend more than 20 trillion won, or approximately $17 billion, on a stimulus package to support jobs and growth. Finally, Indian stocks also increased nicely.

On tomorrow’s international economic calendar, investors will be treated to industrial production from South Korea and Japan, while the island nation will also report construction orders and housing starts, credit statistics will come from Australia, retail sales and employment data from Germany, consumer spending, CPI and PPI from France, and the U.K. will release final 1Q GDP figures.

Market Insights 6/28/2016

Two-Day Sell-off Ends

U.S. equities were able to climb out of their two-day hole to finish with solid gains, as investors snapped up beaten-down issues in the aftermath of Friday’s Brexit vote.

Equity news was sparse, while on the domestic economic front 1Q GDP mostly matched expectations, consumer confidence jumped and a regional manufacturing report surprised to the downside.

Treasuries were modestly lower, gold and the U.S. dollar also lost ground, while crude oil prices finished higher.

The Markets…

The Dow Jones Industrial Average (DJIA) jumped 269 points (1.6%) to 17,409

The S&P 500 Index gained 36 points (1.8%) to 2,036

The Nasdaq Composite rallied 97 points (2.1%) to 4,692

In heavy volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.52 to $47.85 per barrel and wholesale gasoline was $0.03 higher at $1.52 per gallon

The Bloomberg gold spot price fell $11.64 to $1,312.96 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% lower at 96.10

Final read on Q1 GDP mostly in line with expectations

The final look (of three) at Q1 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 1.1%, revised upward from the 0.8% and the 0.5% expansion reported in the second and first revisions, respectively. This compared to the Bloomberg forecast of a revised 1.0% pace of growth. Q4 GDP expanded by an unrevised 1.4% rate. Personal consumption came in at a 1.5% gain for Q1, down from the preliminary estimate of 1.9%, while forecasts called for an upwardly revised 2.0% pace of growth. Personal consumption grew by an unrevised 2.4% in 4Q.

**Click to Enlarge**

gdp

On inflation, the GDP Price Index was revised to a 0.4% gain, versus forecasts of an unrevised 0.6% increase, while the core PCE Index, which excludes food and energy, was adjusted down a tick to a 2.0% rise, versus expectations for it to remain at 2.1%.

The Consumer Confidence Index jumped to 98.0 in June from the downwardly revised 92.4 level in May and compared to the estimated rise to 93.5. The sentiment towards the present situation rebounded nicely after last month it registered the lowest level since November, while expectations of business conditions also saw solid improvement. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—inched higher to 0.1 from the 0.0 posted in May.

The Richmond Fed Manufacturing Activity Index unexpectedly fell deeper into contraction territory (a reading below zero), dropping to -7 in June from the -1 posted in May, while economists had anticipated the index to move back into an expansionary state to a reading of 3.

The 20-city composite S&P/Case-Shiller Home Price Index showed a gain in home prices of 5.4% y/y in April, roughly matching expectations. Month-over-month (m/m), home prices were up by 0.5% on a seasonally adjusted basis for April, slightly below forecasts of a 0.6% increase.

Treasuries finished slightly lower, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, all rose 1 basis point to 0.61%, 1.46% and 2.27%, respectively.

Tomorrow’s economic calendar will begin with a report on personal income and spending, forecasted to show income rose 0.3% m/m during May and that spending increased 0.4%, followed by pending home sales, with economists expecting a 1.1% m/m decline, as well as MBA Mortgage Applications.

Europe bounces after two-day rout, Asia higher too

European equities finished solidly to the upside, snapping their worst two-day losing streak since 2008, following the U.K.’s vote to exit the European Union (EU), known as ‘Brexit’, with the pound advancing as investors may have regained a bit of their appetite for risk assets. EU leaders met in Brussels for the start of a two-day summit to discuss Britain’s decision to leave the group, while the bloc’s lawmakers have said the U.K. should trigger the process for seceding from the EU as soon as possible, a process that may be difficult to achieve due to the complexity of the British political system.

In economic news in the region, import prices for Germany increased more than expected m/m, rising 0.9% versus the forecasted 0.6% gain, while France and Italy reported a m/m decline in consumer confidence as the latter also reported an improvement in manufacturing confidence but a decline in economic sentiment for June.

Stocks in Asia finished mostly to the upside as global investors continued to look for signs that central banks and governments may help to ease the recent market turmoil in the wake of the U.K.’s vote in favor of leaving the European Union. Japanese equities ticked slightly higher, with construction companies, warehouse stocks and food producers leading gains, while exporters mostly fell. Prime Minister Abe noted they would continue to monitor the markets closely and the island nation’s Finance Minister said he’s watching currency moves with a sense of urgency and will take action as needed.

Mainland Chinese stocks advanced amid speculation of whether or not the People’s Bank of China (PBoC) may step in to slow the yuan depreciation that has occurred since the Brexit announcement, posing challenges to the PBoC in terms of its policy direction, while listings in Hong Kong pared a sharp morning decline to finish slightly lower, with speculation about a long-awaited Shenzhen-Hong Kong link increasing trading volumes in the region. Indian’s markets gained ground, as investors looked to invest in companies that would benefit from Prime Minister Modi’s growth-boosting policies and have no business links with Europe. Finally, stocks in South Korea increased, while those traded in Australia declined.

Market Insights 6/27/2016

Downside Volatility Continues to Start Week

U.S. stocks continued Friday’s sell-off in the aftermath of the U.K.’s vote to leave the European Union, with financials and technology issues responsible for the brunt of the decline.

Treasury yields continued lose ground, while a preliminary read on services sector activity was unchanged from the previous month and some regional manufacturing data remained in contraction territory.

The U.S. dollar surged to the upside and gold was also higher, while crude oil prices were lower.

The Markets….

The Dow Jones Industrial Average fell 261 points (1.5%) to 17,140

The S&P 500 Index lost 37 points (1.8%) to 2,001

The Nasdaq Composite tumbled 114 points (2.4%) to 4,594

In heavy volume, 1.3 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq

WTI crude oil dropped $1.31 to $46.33 per barrel and wholesale gasoline was $0.04 lower at $1.53 per gallon

The Bloomberg gold spot price rose $7.40 to $1,329.80

Preliminary services sector read unchanged, regional manufacturing remains in contraction

The preliminary Markit U.S. Services PMI Index in June was unchanged from May’s final reading of 51.3, with a level above 50 indicating expansion in activity, and compared to the Bloomberg forecast calling for a modest rise to 52.0. The release is independent and differs from the Institute for Supply Management’s (ISM) report, as it has less historic value and Markit weights its index components differently.

The Dallas Fed Manufacturing Index ticked slightly higher to -18.3 for June from May’s unrevised -20.8 level with economists forecasting an improvement to -15.0. A reading below zero denotes contraction.

Treasuries were decidedly higher, with uncertainty remaining after Friday’s Brexit vote as the yield on the 2-year note fell 3 basis points (bps) to 0.60%, the yield on the 10-year note declined 10 bps to 1.46%, and the 30-year bond rate decreased 13 bps to 2.28%.

Tomorrow, the U.S. economic calendar will commence with the release of the third and final reading of Q1 GDP, with economic output expected to have ticked higher to a 1.0% quarter/quarter annualized rate of expansion, from the 0.8% pace announced in the second release, while personal consumption is expected to be adjusted higher from a 1.9% to a 2.0% q/q increase. Investors will also get a look at the S&P/CaseShiller Home Price Index, forecasted to show home prices in the 20-city composite rose 5.41% y/y during April, and were 0.58% higher m/m on a seasonally-adjusted basis. Finally, after the opening bell, the Consumer Confidence Index and Richmond Fed Manufacturing Index are scheduled for release.

Brexit fallout continued to weigh on Europe, Asia mostly higher despite yen strength

European equities finished lower, extending the severe losses seen last Friday in the wake of the U.K.’s stunning vote to leave the European Union (EU)—known as a Brexit—that sent shockwaves through the global markets with U.K. banks taking the brunt of the burden. Adding to the uncertainty, Scottish First Minister Sturgeon said that a second independence referendum for Scotland was “very much on the table.”

U.K. Chancellor Osborne delivered a speech ahead of the market’s open in an attempt to calm nerves, saying that despite the uncertainty, “you should not underestimate our resolve” in navigating the unchartered waters ahead. Meanwhile, later in the day in speaking to Parliament, Prime Minister Cameron rejected pleas for a “do-over” Brexit vote, instead appointing a group of officials to prepare for the withdrawal from the EU. The Conservative Party also accelerated the time-frame for a new leader, pulling the timetable back by nearly a month to September 2. The British pound was lower, adding to its record loss on Friday, and the euro saw pressure versus the U.S. dollar, while bond yields in the region were lower.

Stocks in Asia finished mostly higher, being the first to “dip its toe” in the uncertainty of the aftermath of Friday’s severe rout in the wake of the decision by the U.K. to quit the European Union. Japanese equities rallied, despite the yen showing strength, and after an emergency meeting between Japanese policymakers. Prime Minister Abe, Finance Minister Aso and Bank of Japan (BoJ) deputy governor Nakasone concluded their meeting without any substantive moves, but with a pledge to act if necessary, fueling speculation of some sort of intervention by the BoJ with either more stimulus, a BoJ easing, or a combination of the sort. Mainland Chinese stocks advanced and those trading in Hong Kong were flat, with Premier Li saying despite the risks of the Brexit fallout, he still expects to achieve their growth targets.

Global Weekly Commentary

Value in a post-Brexit world

KEY FACTS

*Indiscriminate selling after the U.K. Brexit vote may create opportunities in assets with positive fundamentals and relative value (such as quality and dividend-growth stocks).

*The U.K.’s shock decision pummeled global risk assets and the British pound, and buoyed safe-haven assets.

*We expect economic data this week to show poor U.S. jobs growth in May wasn’t a harbinger of a U.S. recession.

A British vote to exit the European Union (EU) has spurred a flight to safety, potentially creating opportunities. With most asset valuations looking fair to expensive, however, it’s important to focus on relative valuations.

**Click to Enlarge**

current-valuations-vs-historical-norms-2016

Prior to Brexit, there was a wide range of valuations but few cheap assets globally, as shown above. Modest economic growth, low inflation expectations and easy central bank policies have sent yields lower, intensifying flows into income-oriented assets. This partly explains acute valuation differences between equities and government bonds. Political concerns in Europe have exacerbated other extreme differences.

Selectivity and caution are key

Valuations tell us little about short-term returns but can potentially shed light on medium-term returns. Starting valuations explain roughly 10% of U.S. equity market returns over the following year but 87% of returns over the next 10 years, according to our analysis back to 1988.

Valuations also show the risk of owning bonds (and bond proxies) could rise further, as market uncertainty and easy monetary policy potentially drive valuations of interest-rate-sensitive assets higher. Some assets may be cheap for a reason, reflecting structurally challenged businesses for instance.

The big takeaway for those seeking to buy into market weakness: Be wary of notionally cheap assets that face challenges (e.g., domestically focused European assets like U.K. real estate and European banks), and instead focus on assets with relatively attractive valuations and positive fundamental drivers, such as quality stocks, dividend-growth stocks and investment-grade bonds. Indiscriminate selling of risk assets could translate into buying opportunities in these assets, including in U.K.-listed stocks that benefit from pound depreciation (72% of FTSE 100 revenues are earned abroad). Bottom line: Post-Brexit, selectivity and caution are key.

*The U.K. vote to leave the EU pummeled global risk assets and the British pound and drove down safe-haven yields.

*The vote set in motion a long period of political, economic and market uncertainty for the U.K. and the EU.

*Expectations of additional monetary stimulus in the U.K. and the EU rose, while the odds of a July Federal Reserve (Fed) rate increase plummeted.

Market Insights 6/24/2016

Stocks Go So Low as U.K. Sets To Depart EU

U.S. stocks erased 2016′s gains, joining a global rout for equities and the British pound traded to lows not seen in more than 30 years in the wake of the U.K. voting to leave the European Union.

Financial and Technology stocks were the largest decliners, while the aftermath of the Brexit vote made it difficult to assess the possible market impact of lower-than-expected reads on domestic durable goods orders and consumer sentiment.

Treasuries, gold and the U.S. dollar rallied and crude oil prices experienced a large, sharp drop.

The Markets…

The Dow Jones Industrial Average tumbled 611 points (3.4%) to 17,400

The S&P 500 Index fell 76 points (3.6%) to 2,037

The Nasdaq Composite plummeted 202 points (4.1%) to 4,708

In heavy volume, 2.5 billion shares were traded on the NYSE and 3.8 billion shares changed hands on the Nasdaq

WTI crude oil dropped $2.47 to $47.64 per barrel and wholesale gasoline was $0.07 lower at $1.54 per gallon

The Bloomberg gold spot price rallied $62.56 to $1,319.41 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 2.1% to 95.50

Markets were lower for the week, as the DJIA and the S&P 500 Index decreased 1.6% and the Nasdaq Composite fell 1.9%

Durable goods orders lower than forecasts, consumer sentiment ticks lower

May preliminary durable goods orders fell 2.2% month-over-month (m/m), compared to Bloomberg’s estimate of a 0.8% decline and April’s upwardly revised 3.3% gain. Ex-transportation, orders declined 0.3% m/m, versus the 0.1% forecasted increase, and April’s unrevised 0.5% gain. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, declined 0.7%, compared to projections of a 0.4% increase, and following the upwardly revised 0.4% dip in the month prior.

The final June University of Michigan Consumer Sentiment Index (chart) was revised to 93.5 from the preliminary level of 94.3, and compared to expectations of a slight dip to 94.1, as the expectations and current conditions components of the report were both revised downward. The index was also lower compared to May’s level of 94.7, where it sat at the highest level since June 2015. The 1-year inflation outlook rose to 2.6%, from May’s 2.8% rate. The 5-10 year inflation forecast also moved higher to 2.6% from May’s 2.3% level.

Treasuries were decidedly higher, with the yields on the 2-year note and the 30-year bond falling 13 basis points (bps) to 0.64% and 2.43%, respectively, while the yield on the 10-year note lost 17 bps to 1.57%.

U.K. vote shocks world, markets in Europe and Asia plunge

European equities finished deep in the red, after the U.K.’s stunning vote to leave the European Union (EU)—known as a Brexit—after four decades sent shockwaves through the global markets—a complete about-face from yesterday’s optimism that the U.K. would vote to remain in the EU. The final vote tally was 52% for an exit, 48% against—a close election, as many had expected, however not the outcome that investors had banked on yesterday. In the wake of the results, Prime Minister David Cameron stepped down, saying, “The British people have made a very clear decision to take a different path, and as such I think the country requires fresh leadership.” Cameron said he will remain at 10 Downing Street for the next three months, with a new Conservative leader to be appointed by October.

Financials were in the eye of the storm, with the European bank index falling the most ever, while the British pound tumbled to touch a level not seen in over 30 years. Amidst the turmoil, and following Cameron’s announcement, Bank of England (BoE) Governor Carney issued an early-morning statement, saying the BoE will pledge 250 billion pounds ($345 billion) to the financial system in what he called, “a period of uncertainty and adjustment.” The BoE had previously supplemented funding auctions this month for lenders. Meanwhile, central banks across the globe have shifted to crisis-management mode, as the Swiss National Bank intervened in order to prevent a surge in the franc, the European Central Bank (ECB) said it stands ready to provide liquidity in euros or other currencies, and Bank of Japan Governor Kuroda said the central bank will do its best to provide cash.

Economic news in the region took a backseat to the developments surrounding the Brexit, with France’s final GDP data unrevised from previous reports, Italy’s retail sales rising less than expectations and Germany’s Ifo Business Climate Index was slightly better than forecasts. The euro pared solid early losses, but did finish firmly lower versus the U.S. dollar, while bond yields in the region were negative.

Stocks in Asia finished sharply lower, being the first to react to the decision by the U.K. to quit the European Union, with Japanese equities posting their largest decline in more than 15 years, and triggering a circuit-breaker on Nikkei futures. Japan’s Nikkei 225 Index tumbled 7.9%, with the yen surging against its foreign counterparts. Stocks in mainland China lost ground, but were somewhat insulated from the fray after policymakers in the nation championed their management of corporate debt, saying that defaults would not pose a systemic threat as long as the economy continues to be within an acceptable range. Meanwhile, securities trading in Hong Kong snapped a five-session winning streak, while equities in Australia, India and South Korea were sharply lower.

Market Insights 6/23/2016

Exit or Not

U.S. stocks rallied and the European markets finished to the upside, despite the palpable uneasiness as to the outcome of the Brexit vote, with current expectations seemingly leaning toward the U.K. remaining in the EU.

Domestic economic news was mixed, as jobless claims fell more than expected and new home sales dropped, while a preliminary read on manufacturing bested expectations.

Treasuries were lower, crude oil prices were higher, while gold and the U.S. dollar dipped.

The Markets….

The Dow Jones Industrial Average jumped 230 points (1.3%) to 18,011

The S&P 500 Index rose 28 points (1.3%) to 2,113

The Nasdaq Composite rallied 77 points (1.6%) to 4,910

In moderate volume, 837 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.98 to $50.11 per barrel and wholesale gasoline was $0.02 higher at $1.61 per gallon

The Bloomberg gold spot price moved $2.03 lower to $1,266.09 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.2% at 93.52

Jobless claims fall, new home sales retreat from 8-year high

Weekly initial jobless claims dropped by 18,000 to 259,000 last week, versus the Bloomberg estimate calling for claims to decrease to 270,000, as the prior week’s figure was unrevised at 277,000. The four-week moving average declined by 2,250 to 267,000, while continuing claims decreased by 20,000 to 2,142,000, south of the estimated level of 2,150,000.

New home sales declined 6.0% month-over-month in May to an annual rate of 551,000 after reaching the highest level since February 2008 last month, and compared to forecasts of 560,000. The median home price rose 1.0% y/y to $290,400. The supply of new home inventory increased 14.6% m/m to 4.7 months at the current sales pace as sales fell m/m in the Northeast and West, dipped in the South, and rose solidly in the Midwest. New home sales are based on contract signings instead of closings.

The Conference Board’s Index of Leading Economic Indicators (LEI) declined 0.2% m/m in May, versus the projected 0.1% increase, and compared to April’s unrevised 0.6% gain. Support came from the component pertaining to the yield curve, while jobless claims weighed on the index.

The preliminary Markit U.S. Manufacturing PMI Index for June improved to 51.4 from May’s 50.7 level, and above the forecasted modest rise to 50.9, with a reading above 50 denoting expansion in activity.

The Kansas City Fed Manufacturing Activity Index for June improved to 2 from May’s -5 level, where it was expected to remain, with a reading north of zero depicting expansion.

Treasuries were lower, as the yield on the 2-year note increased 2 basis points to 0.77%, while the yields on the 10-year note and the 30-year bond gained 5 bps to 1.73% and 2.55%, respectively.

Tomorrow’s economic calendar will offer the preliminary durable goods orders report, with economists forecasting a 0.6% m/m decline for May, while ex-transportation, orders are expected to inch 0.1% higher. Rounding out the day will be the final University of Michigan Consumer Sentiment Index, anticipated to fall slightly to a level of 94.0.

Europe rallies on optimism, Asia mixed, as Brexit vote arrives

European equities traded nicely higher, with optimism that the U.K. will vote to remain in the EU fueling a fifth-consecutive session of gains. Financials were one of the best performers and the British pound rose versus the U.S. dollar as the U.K. is voting today on whether to remain or leave the EU—known as a Brexit—with results likely being announced early Friday morning. The issue of a Brexit may not be put to rest entirely as EU member parliaments must also agree to the changes being proposed. Nevertheless, the British understand the key role trade has always played in their economy. The British may resent bailed-out banks and bureaucrats in Brussels, but we believe economic considerations will favor the U.K. remaining within the EU.

In economic news, the preliminary Markit Eurozone Composite PMI Index—a gauge of business activity in the manufacturing and services sectors—declined to 52.8 in June, from 53.1 in May, and compared to expectations of a dip to 53.0. However, a reading above 50 denotes expansion. The euro gained solid ground on the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished mixed with volumes on the lighter side as the global markets awaited the results of today’s U.K. Brexit vote. Japanese equities rose, with the yen holding steady during the session, while securities traded in Hong Kong posted a fifth-straight session of gains. Meanwhile basic materials stocks weakened to pressure mainland Chinese securities, as the sector was bogged down by reports that the U.S. may raise duties on some steel products. Finally, markets in Australia and India moved higher, but South Korean equities declined.

While all eyes will likely be on the results of the Brexit vote, other items on the international economic calendar for tomorrow include inflation figures from Japan, trade data from China, GDP from France, retail sales from Italy, and the Ifo Business Climate Index from Germany.

Market Insights 6/22/2016

Fence-Sitting Ahead of Brexit Vote

U.S. equities finished lower in cautious, choppy trading, with the shadow of tomorrow’s U.K. Brexit vote hovering over the markets. Energy stocks suffered following a bearish Department of Energy report, while earnings reports from FedEx and Adobe, along with guidance from HP, were met with disappointment.

Fed Chair Yellen concluded her two-day monetary policy report to Congress, while existing home sales rose to their highest level in more than nine years. Treasuries finished modestly higher, while gold and the U.S. dollar lost ground.

The Markets…

The Dow Jones Industrial Average fell 49 points (0.3%) to 17,781

The S&P 500 Index lost 3 points (0.2%) to 2,085

The Nasdaq Composite finished 10 points (0.2%) lower at 4,833

In moderate volume, 812 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.72 to $49.13 per barrel and wholesale gasoline was unchanged at $1.59 per gallon

The Bloomberg gold spot price moved $2.03 lower to $1,266.09 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.3% at 93.74

Existing home sales rise roughly in line with forecasts

Existing-home sales in May rose 1.8% month-over-month to a 5.53 million annual rate—the highest annual pace since February 2007—compared to the Bloomberg forecast of a 5.55 million pace. April’s figure was revised downward to a 5.43 million annual rate. Compared to last year, sales were 4.5% higher and the median existing-home price was up 4.7% at $239,700—an all-time high. Housing supply came in at a 4.7-month pace at the current sales rate. Sales were higher in the Northeast, South and West, while the Midwest fell. Single-family and condominium and co-op sales both rose.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said the primary driver of the increase in sales was homeowners realizing the equity they have accumulated in recent years and finally deciding to trade-up or downsize, though first-time buyers are still struggling. “Barring further deceleration in job growth that could ultimately temper demand from these repeat buyers, sales have the potential to mostly maintain their current pace through the summer,” Yun added.

The MBA Mortgage Application Index rose 2.9% last week, after declining 2.4% in the previous week. The increase came as a 6.5% jump for the Refinance Index more than offset a 2.4% decline for the Purchase Index. The average 30-year mortgage rate fell 3 basis points to 3.76%.

Federal Reserve Chairwoman Janet Yellen concluded her two-day semiannual monetary policy report to Congress, speaking to the House Financial Services Committee shortly after the opening bell. Her prepared remarks did not differ from yesterday’s testimony to the Senate, where she noted that the economy has made further progress. “However, the pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach to adjusting monetary policy remains appropriate,” she added. Yellen also stressed that the Central Bank believes the recent slowing in employment growth is “transitory” but it is watching the job market carefully. Moreover, she said a U.K. vote to exit the European Union (EU)—known as a Brexit—”could have significant economic repercussions.” Yellen concluded by saying the path of the fed funds rate will depend on economic and financial developments. The global markets are paying close attention to the Q&A session that is underway.

Treasuries finished slightly higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, lost 2 basis points (bps) to 0.75%, 1.68% and 2.49%, respectively.

Tomorrow’s economic calendar will be the busiest of the week, beginning with weekly initial jobless claims, forecasted to decline to 270,000 from the prior week’s 277,000, as well as Markit’s preliminary Manufacturing PMI, with economists anticipating activity to move higher into expansionary territory (a reading above 50) for June to a level of 50.9 from May’s 50.7. After the opening bell, investors will get a look at new home sales, with forecasts calling for a 9.5% m/m decline for May to an annual rate of 560,000 units, as well as the Leading Index, expected to have gained 0.1% m/m during May, following the 0.6% increase posted in April. Finally, the Kansas City Fed Manufacturing Activity Index will round out the day.

Europe higher, Asia mixed as Brexit vote draws closer

European equities traded mostly higher, as optimism appeared to be holding that the U.K. will vote to remain in the EU, despite recent polls suggesting it remains too close to call. Financials led the markets higher and oil & gas issues contributed modestly to the advance, with crude oil prices flirting with the $50 per barrel mark before some bearish U.S. inventory data.

Tomorrow the U.K. will vote on whether to remain or leave the U.K., with results likely being announced early Friday morning. In our opinion, no matter the outcome, the issue of a Brexit may not be put to rest entirely as EU member parliaments must also agree to the changes being proposed. Nevertheless, the British understand the key role trade has always played in their economy. The British may resent bailed-out banks and bureaucrats in Brussels, but we believe economic considerations will favor the U.K. remaining within the EU. The euro and British pound gained ground on the U.S. dollar, while bond yields in the region finished mixed, with earnings and economic data on the light side.

Stocks in Asia finished mixed as the global markets grapple with uncertainty ahead of tomorrow’s Brexit vote in the U.K., while digesting testimony from U.S. Fed Chair Yellen to Congress, where she offered little new clues about the timing of future rate hikes. Japanese equities declined, after rallying the past three sessions, with the uncertainty toward the U.K. likely fostering some afternoon strength in the yen. Meanwhile, stocks in Australia and India declined, however those traded in South Korea, mainland China and Hong Kong all gained ground.

A host of manufacturing and services PMI readings from across the globe will be released tomorrow, while Japan will also release its Leading Index, and industrial sales will come from Italy.

Market Insights 6/21/2016

Gains Continue

U.S. equities slightly added to yesterday’s rally, with technology issues leading the way, while energy stocks were resilient amid a modest decline in crude oil prices.

Brexit uncertainty continued to swirl around the market ahead of Friday’s vote, and Fed Chair Yellen offered little new information in her first day of testimony before Congress.

Treasuries were nearly unchanged and the U.S. dollar was higher, while gold lost ground.

The Markets….

The Dow Jones Industrial Average rose 24 points (0.1%) to 17,830

The S&P 500 Index added 6 points (0.3%) to 2,089

The Nasdaq Composite finished 7 points (0.1%) higher at 4,844

In moderate volume, 836 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil lost $0.11 to $49.85 per barrel and wholesale gasoline added $0.01 to $1.59 per gallon

The Bloomberg gold spot price tumbled $24.23 to $1,265.67 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.5% at 94.05

Fed Chair Yellen takes to the Hill

Federal Reserve Chairwoman Janet Yellen kicked off her two-day semiannual monetary policy report to Congress, speaking to the Senate Banking Committee. In her prepared remarks, she noted that the economy has made further progress. “However, the pace of improvement in the labor market appears to have slowed more recently, suggesting that our cautious approach to adjusting monetary policy remains appropriate,” she added. Yellen also stressed that the Central Bank believes the recent slowing in employment growth is “transitory” but it is watching the job market carefully. In addition, she said a U.K. vote to exit the European Union (EU)—known as a Brexit—”could have significant economic repercussions.” Yellen concluded by saying the path of the fed funds rate will depend on economic and financial developments. Traders are paying close attention to the Q&A session following her remarks. Yellen will conclude her testimony tomorrow in front of the House Financial Services Committee.

Treasuries were little changed, while the U.S. economic calendar was dormant today. The yields on the 2-year and 10-year notes were flat at 0.76% and 1.69%, respectively, while the 30-year bond rate dipped by 1 basis point to 2.49%.

Tomorrow, the economic front will awaken with the release of existing home sales, projected to rise 1.8% month-over-month to an annual rate of 5.55 million units in May. In our opinion, investors should remain patient as positive signs are emerging. For the frustration in the stock market to end, we believe businesses need to pick up their capital spending but for now a relatively healthy consumer and housing are keeping the U.S. economy afloat.

Europe modestly adds to recent rally, Asia mixed

European equities finished modestly higher, coming off a strong two-day rally, with financials continuing to move upward and oil & gas issues showing some resiliency in the face of a retreat in crude oil prices from their run the past two days.

European stocks have rallied as of late, fueled by eased concerns about a U.K. Brexit after polls over the weekend suggested the June 23 vote could favor the nation remaining in the EU. For our latest analysis on the Brexit issue ahead of Thursday’s key vote read our article, Will the UK Stay or Go? Markets Wait for Brexit Vote at www.schwab.com/insights. However, the newest Brexit polls fostered some uncertainty and the markets focused on today’s monetary policy testimony on Capitol Hill from U.S. Fed Chair Yellen, where she warned of possible “significant economic repercussions.” The euro and British pound lost ground versus the U.S. dollar, while bond yields in the region mostly ticked higher.

Stocks in Asia finished mixed as some caution ahead of today’s testimony from U.S. Fed Chair Yellen met recently eased concerns about a U.K. Brexit, which fueled a global market rally yesterday. A weaker yen helped lift Japanese equities higher, mainland Chinese securities declined as volatility fell and data remained light, while stocks traded in Hong Kong advanced. Australia’s markets gained ground, as traders digested the minutes from the June monetary policy meeting from the Reserve Bank of Australia (RBA), where it kept its policy stance unchanged. The RBA noted some positive signs of economic activity, notably in non-mining, while adding that inflation was expected to remain low for some time. Meanwhile, stocks in India traded lower on the heels of yesterday’s announcement that Reserve Bank of India Governor Rajan will step down at the end of his term in September.

Market Insights 6/20/2016

Stocks Rally to Start Week

U.S. stocks rallied on the heels of broad-based advances in Asia and Europe, with global risk aversion pulling back amid eased U.K. Brexit concerns following new polls over the weekend ahead of Thursday’s vote.

Financials and technology issues saw solid gains, while a jump in crude oil prices powered the energy sector. Treasuries, gold and the U.S. dollar were lower, while the domestic economic front was quiet today.

The Markets…

The Dow Jones Industrial Average rallied 130 points (0.7%) to 17,805

The S&P 500 Index jumped 12 points (0.6%) to 2,083

The Nasdaq Composite finished 37 points (0.8%) higher at 4,837

In moderately-heavy volume, 892 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil increased $1.40 to $49.96 per barrel and wholesale gasoline added $0.07 to $1.58 per gallon

The Bloomberg gold spot price decreased $8.98 to $1,289.67 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% lower at 93.67

Economic calendar dormant today

Treasuries were lower, while the U.S. economic calendar was void of any major releases today. The yield on the 2-year note rose 4 basis points to 0.73%, while the yields on the 10-year note and the 30-year bond gained 6 bps to 1.67% and 2.48%, respectively. Bond yields rebounded somewhat from their recent fall as the Fed suggested that it is still in a “wait-and-see” mode, remaining data dependent in the wake of May’s severely disappointing labor report, while growth concerns and uncertainty regarding a U.K. exit from the European Union (EU), known as a Brexit, have also applied pressure. Recent pressure on global bond yields has amplified the uneasy sentiment, with rates in Germany, Japan and the U.K. hitting record lows, while the U.S. 10-year Treasury yield touched to a four-year low.

This week’s economic front will start slow but pick up steam tomorrow as Federal Reserve Chairwoman Janet Yellen will begin her two-day semiannual monetary policy report to Congress. Yellen’s testimony will be accompanied by some key reads later this week on housing in the form of existing and new home sales reports, as well as manufacturing, with preliminary releases of durable goods orders and Markit’s Manufacturing PMI Index. Other notable domestic reports due out this week include: the Leading Index and the final June University of Michigan Consumer Sentiment Index.

Europe and Asia gain ground as Brexit fears recede

European equities moved broadly higher, with global sentiment being soothed by eased concerns about a U.K. Brexit on the heels of new polls over the weekend suggesting the “remain” camp gained ground ahead of Thursday’s vote. Financials rallied to lead the advance and higher crude oil prices lifted the energy sector, while the British pound surged versus the U.S. dollar. The euro rose versus the U.S. dollar and bond yields in the region were mixed. In economic news, Eurozone construction output declined in April.

The U.K. FTSE 100 Index was up 3.0%, France’s CAC-40 Index jumped 3.5%, Germany’s DAX Index and Spain’s IBEX 35 Index rallied 3.4%, Italy’s FTSE MIB Index advanced 2.5%, and Switzerland’s Swiss Market Index increased 2.4%.

Stocks in Asia finished broadly higher with global risk aversion waning as recent polls are easing concerns about a U.K. Brexit ahead of Thursday’s vote. The yen gave back some of its recent rally to boost Japanese equities, despite a report showing the nation’s exports fell more than expected in May. Chinese stocks battled back from some early weakness to finish higher, aided by an upbeat read on the country’s May property prices. Australian securities advanced, led by strong gains in the heavy weight oil & gas, basic materials and financial sectors, while South Korean listings also rose. Indian stocks moved higher, with the announcement that Reserve Bank of India’s Governor Rajan will step down at the end of his term in September being overshadowed by the eased Brexit concerns and the announcement that India’s government relaxed foreign direct investment rules.