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Brexit Market Week

A Look at the Week of the Brexit (as of market close June 24, 2016)

The Brexit referendum vote sent a tidal wave of negative returns throughout the world's stock markets, including the indexes listed here. The large-cap Dow lost over 270 points on the week and, along with the S&P 500, dropped over 1.50% from the prior week. In fact, with this week's performance, gains that had been made over the close of 2015 have been given back as each of the indexes listed here are below their 2015 closing values.

In addition to stock markets around the world being battered, European currencies took a hit, particularly the British pound, which dropped by more than 11.0% compared to the dollar. Yields on long-term government bonds also fell. The price of gold followed the prior week's gains with another week of increasing value.

Crude oil (WTI) closed at $47.57 a barrel last week, down $0.69 from the previous week. The price of gold (COMEX) rose to $1,319.10 by late Friday afternoon, up from the prior week's price of $1,301.60. The national average retail regular gasoline price decreased for the first time in six weeks to $2.353 per gallon on June 20, $0.046 under the prior week's price and $0.459 below a year ago.

Last Week's Headlines

•British Prime Minister David Cameron vowed to resign following Britain's surprise referendum vote last week to exit the European Union. Stock markets around the world plummeted, and the British pound fell by as much as 11% following news of the vote. Roughly 17.4 million United Kingdom voters chose to exit the European Union by 51.8% of the vote. With the vote, the UK has two years to negotiate its withdrawal from the EU. To formally exit the EU, the UK must invoke Article 50 of the Lisbon Treaty. Since Article 50's adoption in 2009, no member country has exited the EU, so how the process will work is relatively unknown as this is the first time Article 50 will be invoked. Until then, EU treaties and laws will continue to apply to the UK.
•Basically, the EU is an economic and political partnership of 28 countries operating as a single market, which allows free movement of goods, services, money, and people within the EU as if it were a single country. With the EU's second-largest economy voting to exit the EU, many issues remain to be resolved, including determining the status of UK citizens working in the EU and vice versa, whether travel restrictions will apply to UK citizens seeking to move about the EU, trade ramifications between the UK and the EU, and the status of Scotland and Northern Ireland, both of which voted to remain in the EU. Finally, it is important to note that the referendum vote is not legally binding. Parliament must pass laws to formally withdraw from the EU. In short, much is still to be determined, meaning Brexit will be in the news for quite some time to come.
• It was a busy week for FOMC Chair Janet Yellen, who appeared before the Senate Banking Committee and the House Financial Services Committee. Submitting identical remarks before both committees, Yellen reiterated the need to maintain a cautious monetary approach regarding the economy. Citing the Brexit vote, China's economic situation, stalled labor growth, and inflation that remains below the Fed's target 2.0% rate, Yellen said the expectation is that the economy will improve over time. However, the pace of improvement is uncertain, so the timing of interest rate adjustments is not on a preset or predictable course.
•Falling durable goods orders in May provided some justification for the Fed's cautious stance on projected economic growth. New orders for durable goods (expected to last at least three years) fell 2.2% to $230.7 billion following two consecutive months of gains. According to the Census Bureau, excluding transportation, new orders decreased 0.3%. Excluding defense, new orders decreased 0.9%. Durable goods shipments (-0.2%), inventories (-0.3%), and new orders for nondefense capital goods (-0.8%) each fell short of their April totals. But the biggest impact on May's orders was felt in new orders for defense capital goods, which dropped 28.0%. Businesses are not upping investment in durable goods, presumably because there is no need to ramp up sales to meet consumer demand. But it is worth noting that overall durable goods orders are up 1.7% for the first five months of 2016 compared to the same period last year.
•Existing home sales picked up the pace in May, according to the National Association of Realtors®. Total existing home sales grew 1.8% to a seasonally adjusted annual rate of 5.53 million, up from a downwardly revised 5.43 million in April. Sales are 4.5% ahead of the May 2015 rate, and are at their highest annual pace since February 2007. The median existing-home price for all housing types in May was $239,700, up 4.7% from May 2015. Total housing inventory jumped 1.4% to 2.15 million existing homes available for sale, which represents a 4.7-month supply--the same as April.
•On the other hand, new home sales edged downward in May, according to the latest report from the Census Bureau. Sales of new single family homes fell 6.0% in May to an adjusted annual rate of 551,000--35,000 below April's revised annual rate of 586,000. May's figure is still 8.7% above May 2015. While the pace of new home sales clearly slowed in May, sales are still moving at a favorable pace, particularly compared to April, which marked the fastest sales pace since February 2008. The median sales price of new houses sold in May 2016 was $290,400; the average sales price was $358,900. The seasonally adjusted estimate of new houses for sale at the end of May was 244,000. This represents a supply of 5.3 months at the current sales rate.
•Consumers are a little less confident in the economy moving forward, according to June's Surveys of Consumers from the University of Michigan. The Index of Consumer Sentiment fell to 93.5 in June from 94.7 in May and 96.1 in June of 2015. The Current Economic Conditions Index, and indication of spending, was positive, as June's reading of 110.8 was greater than May's 109.9. Generally, consumer sentiment has remained strong over the last 18 months, particularly bolstered by positive assessments of personal finances.
•In the week ended June 18, the advance figure for seasonally adjusted initial unemployment insurance claims was 259,000, a decrease of 18,000 from the previous week's unrevised level of 277,000. The advance seasonally adjusted insured unemployment rate remained at 1.6%. The advance number for seasonally adjusted insured unemployment during the week ended June 11 was 2,142,000, a decrease of 20,000 from the previous week's revised level.

Eye on the Week Ahead

The last week of the month and quarter is highlighted by the final estimate of the first-quarter GDP and the latest figures on personal income and outlays. Particular attention will be paid to personal consumption expenditures (PCE)--an important measure of inflation according to the Federal Open Market Committee. It will be interesting to see how Wall Street responds following the upheaval caused by the Brexit vote.

Key Dates/Data Releases

6/27: International trade in goods

6/28: GDP, consumer confidence

6/29: Personal income and outlays

7/1: PMI Manufacturing Index, ISM Manufacturing Index

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.


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