The fallout from Britain’s vote to leave the EU continued overnight with stocks, commodities, bond rates, sterling and the Aussie dollar all lower.
While I’d argue that markets are overplaying the actual economic impact of Brexit, the reality is that irreducible uncertainty is just that. It’s irreducible and the reasons given by S&P for taking away the UK’s AAA rating neatly summarise why markets are in a funk.
No one is really sure what the ultimate political reverberations will be and as a result we can’t be sure what the fund flows across markets will be either.
So traders are selling risk assets which have been rallying recently and buying safe havens like bonds, gold and utility stocks.
Looking at our day, the SPI 200 is off 67 points, 1.3%, as a result of falls in the UK, Europe and the US. That’s still an outperformance so the risk is of further falls in coming days even though the ASX 200 is remote from the direct impacts for the most part.
The Aussie dollar is under pressure, along with sterling, and crude has collapsed but is off its lows.
Here’s the scoreboard (7.57am):
- Dow: 17140 -260 (-1.5%)
- S&P 500: 2000 -36 (-1.81%)
- SPI200 Futures (September): 5,001, -67 (-1,3%)
- AUDUSD: 0.7327 -0.093 (-1.7%)
Now, the Top Stories
1. Barclays warns clients to stay out of the stock market. This is not Lehman, but because the last battle was the Lehman-induced GFC means the generals of global finance are acting like it might be again and fighting that war. That and the irreducible uncertainty of what Brexit actually means and when the UK might have a new prime minister, new opposition leader, and trigger Article 50 is hurting market psyche.
That weighed on stocks again overnight and Barclays Bank – whose stock itself collapsed again overnight – issued a warning to clients saying they should not buy the dip yet. Bob Bryan reports Ajay Rajadhyaksha, head of Macro Research at Barclays, gave 3 cogent reasons why prudence is warranted.
It takes time for shocks to fade, stocks are still expensive, and there is more political uncertainty. Oh, by the way, Rajadhyaksha’s note was titled ‘Don’t be a hero’.
And on a related note, Morgan Stanley said yesterday the FTSE is going to 5,000. That’s not as far as it was last Thursday now that the FTSE fell another 2.55% and under 6,000 to 5982 overnight.
2. The collapse in the pound has dragged the Aussie and Kiwi dollars with it – 0.7140 anyone?. So, any notions that the Aussie dollar might be a safe harbour appear to have evaporated pretty quickly in the past 24 hours with the Aussie down 1.73% this morning at 0.7327.
A big part of that is the sell-off in commodity prices which has negative reverberations for sentiment toward the Aussie dollar and is also a big input into most folks’ coincident fair value models. Equally it seems interest rate expectations are moving toward RBA rate cuts (see item 4 below) and a collapse in the 10-year bond rate in Australia.
Last night we saw new record lows for gilts, bunds and the US 10-year rallied an incredible 12 points to 1.43%. Australian 10s are now entrenched below 2% and Stephen Roberts, chief economist at Alexander Funds Management, said when I was co-hosting on Sky Business last night that he thinks the 10 will collapse toward the US 10-year rate. In my experience, no pick-up in Aussie debt over US debt is a disaster for the currency.
So maybe the Aussie is headed lower. Technically, which is also an important driver, the Aussie has broken its recent uptrend and some chartists are now looking for a retest toward the recent low at 0.7140.
3. Australia’s banks might be about to break into a new and much lower trading range. Financial stocks, banks, were under acute pressure in overnight trade again last night. That’s likely to spread the acute weakness in our session again today from just the UK specific financials such as Henderson and BT Investment Management to the financials index more broadly.
That’s important for the individual stocks and it’s important for the ASX 200 given the weight of the big four banks. Already the banks have been facing the regulatory and economic headwinds but the outlook is doubly important, and dangerous, for the big four because they are sitting at the bottom of the recent range and a break could usher in a shift to a much lower price range.
Each of them have their own level but for me the key to watch is the $66 level for the CBA. A test toward there seems possible in the current environment. But a break would suggest a much bigger fall.
4.An August rate cut by the RBA is a certainty. 23 of 24 economists polled by Bloomberg recently said that they thought the RBA would be cutting rates at its August meeting after the inflation data is released on July 27. Since Friday, that expectation has been firming up and yesterday Westpac chief economist Bill Evans doubled down saying another rate cut from the Reserve Bank of Australia is now a near certainty given the outcome of the UK Brexit referendum.
He’s probably right.
5. The Fed will not be raising rates and will need to cut. Former Minneapolis Federal Reserve president Narayana Kocherlakota thinks the Fed is going the wrong way and Brexit proves it Bob Bryan reports.
“Britain’s vote to exit the European Union and the reaction in global markets offer important lessons for the Federal Reserve,” wrote Kocherlakota. “It should be easing policy in the near term.”
Kocherlakota said that the UK’s decision to leave the European Union means that uncertainty will reign over markets for the foreseeable future. This can weigh on economic activity and employment, and thus, the Fed should cut rates in order to support the labour market and shaky economy.
Yep. It’s kind of also why the warning from Barclays about stocks is on the money for a little while yet as well.
6.Traders are not autobots – that’s why this market funk is not over. One of the best things about being a behavioural economics and finance guy is that I have the practical and – crucially – theoretical underpinnings to argue against those finance types who think that markets are efficient and humans are utility maximising automatons. Similarly having been doing this banking and finance thing for 30 years and traded or managed money for most of those, I also know that any notions that traders are rational, or unemotional, is bunkum. It has made me and those I work with a gazillion dollars over the years.
That’s all by way of introduction to a piece Linette Lopez has written overnight. About trading and emotion. She’s framed it in a way I don’t like in suggesting traders don’t know that emotions play an important part in their process – George Soros’ back pain anyone? I’d argue real traders, proper ones who actually make decisions in trading and investing do know this. But that said, it’s still an important piece and a must read with some great nuggets. One of my favourites is a quote from Dr. Antonio Damasio, a professor of neuroscience at UCLA who says it’s important to say “that you cannot have normal decision making without the emotional factors and certainly not by the time you’re an adult without having all that wisdom that comes from your accumulated experience and that categorization of what is good and bad, not only factually and emotionally”. Amen to that. It’s that very process that helped me tweet that the pound was going down hard when it was sitting at 1.45ish on Friday. It’s also why I talked about the “psychological overhang” in yesterday’s note. Anyway, here’s the tweet.
— Greg McKenna (@gregorymckenna) June 24, 2016
Key data for the past 24 hours (with thanks to BNZ markets)
NZ: Trade balance ($m), May: 358 vs. 182 exp.
US: Advance trade balance ($b), May: -60.6 vs. -59.4
US: Markit services PMI, Jun P: 51.3 vs. 52.0 exp.
UK cut to AA from AAA by S&P; outlook negative
You can catch me on Twitter.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Wesfarmers (WES: ASX)
Markets have some concerns about Wesfarmers but there’s a lot to like about it as well.
Relentless price competition amongst supermarkets is the biggest concern. However, Bunnings, Officeworks and Kmart are strong businesses.
The fact that Target has been brought under the wing of the proven Kmart management team looks like a plus. Despite Brexit, acquisition of the UK Homebase hardware group looks much more of an opportunity than a risk. Bunnings management are taking a cautious approach; applying their proven expertise to turn around a company with an existing revenue stream and scalable infrastructure.
The recent sell-off sees Wesfarmers back to around 19 times F16 earnings and a dividend yield of 5.1%. That’s good enough value to make chart support around $32.25-$32.50 look interesting, I reckon. This support consists of the 78.6% Fibonacci retracement and a harmonic AB=CD pattern. These harmonic patterns have been a regular feature of the Wesfarmers chart in recent times.
As usual with this type of support it’s wise to let the market show some signs of rejecting it. If in these volatile times, the share price just drops straight through the support, even lower levels may yet be on offer.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC