The week saw a wild ride landing about 1% lower than the week before. Most of the turbulence came from England’s impending referendum on Brexit…
For most of the week markets shed weight in anticipation of the referendum in England. The vote being on whether or not to exit the European Union (EU). Throughout the week Polls were indicating that a ‘leave’ vote was gaining steam. A ‘leave’ vote would cause short-term turbulence in the markets as trade agreements with the rest of the EU would be terminated and new agreements would need to be formed. Once formed, turbulence should dissipate.
A ‘stay’ vote would likely result in a short term market rebound as sell sides have been more abundant in anticipation of the Brexit risk.
US Data
The consumer stood strong early in the week as retail sales gained .5% month over month (MoM)[1]. A strengthening consumer would strengthen GDP and make potential headwinds less likely to draw us into a stall style recession.
The Federal Reserve Board (FRB) meeting a was practical non-event. They met investor expectation of no rate hike and reduced hawkish perspective for future rate hikes. Little was expected from the FRB one week prior to the Brexit vote. The combined impact of a rate hike and Brexit would have been more than the markets could have handled.
The lack of a rate hike is good and bad. On the good side, this leaves accommodative monetary policy in place to allow our economy to rebound from the shock wave felt from China last August. On the bad side, rates are still extremely low, leaving the FRB very little in the way of fire power in the event of a recession.
International Data
Industrial production for the EU was strong MoM, at 1.1% in April. The problem is persistently low inflation, which came in at -.1% year over year (YoY)[2].
The ¥ continues to drag down equity markets in Japan. The concerns over a Brexit and the lack of a rate hike in the US have caused the currency to surge against its counterparts. This leaves future GDP growth very much so in question.
Conclusion
A ‘stay’ vote is viewed as the base case scenario by investors. The likelihood of a ‘leave’ vote has increased as polling has become more and more indecisive. The vote occurs on Thursday June 23 and market response will be on Friday the 24th…
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[1] www.investing.com – economic calendar
[2] www.investing.com – economic calendar