- Stocks open down following extended weekend. U.S. equities are following global markets lower this morning, as safe-haven assets rally and WTI crude oil prices are sliding nearly 3%. The S&P 500 finished the prior week on a strong note, with four consecutive daily gains, mostly led by the higher-yielding sectors as bonds also advanced strongly. The yield on the 10-year Treasury Note is resting on its all-time low at 1.39%, and the pound/dollar pair is down to 1.31, a level not seen since 1985. Overnight, Asian markets finished mostly lower, though the Shanghai Composite closed up 0.6%; and in afternoon trading European markets are solidly in the red, led by France’s CAC and the German DAX, which are both shedding about 2%. Meanwhile, COMEX gold is up about 1% amid the heightened volatility.
- U.K. stocks have recovered; the pound is lighter. U.K. stocks have largely recovered from the shock of the “leave” vote on the Brexit referendum on June 23. However, the pound continues to hit fresh lows against both the U.S. dollar and the euro. Since the Brexit vote, the pound is down about 10% against both currencies. The Bank of England (BOE) reduced reserve requirements on U.K. banks, allowing them to increase lending and thereby support the economy. BOE Governor Mark Carney noted in a press conference this morning that the U.K. is “entering a period of uncertainty.”
- Best week of the year for equities. The S&P 500 gained on Friday for the fourth consecutive day, marking the first four-day winning streak since late March. It hasn’t had a five-day win streak in four months. Last week was the best week of the year for the S&P 500, as it gained 3.2%. In fact, the last time it gained more during a week was a 3.3% weekly gain, which took place after the terrorist attack in Paris. It is worth noting that the last eight times the S&P 500 has gained more than 3% during a week, it was higher the following week all eight times. This win streak goes back more than four years.
- Welcome to July. As the summer months roll along, we head into July, which is historically the strongest month during the normally weak summer months. In fact, going all the way back to 1928, no month has a better average monthly return than July’s 1.5% return. This tops the usually strong December’s return of 1.4%. With the S&P 500 up four straight months, some type of a pullback in July could be possible. What is interesting here is recently, when July is lower, it isn’t lower by much. Since 1980, when the month of July is lower it is down only 2.3% on average. Only April and December have seen smaller drops when they are red. We take a deeper dive into the month of July on the LPL Research blog later today.
- Week ahead: Brexit aftermath, jobs, and the Fed. Starting today, the Conservative Party of the U.K. will begin the process of electing a replacement for U.K. Prime Minister David Cameron, and mid-week, the BOE will release its influential Financial Stability report. Late in the week, we’ll get the first read on post-Brexit vote consumer sentiment in the U.K. In the U.S., it’s all about jobs this week, with the release of the June Employment Report set for Friday. The Federal Reserve Bank (Fed) will release the minutes of its June meeting at mid-week–as will the European Central Bank–and New York Fed President Dudley is on the docket later today (Tuesday, July 5). China will begin releasing its June data set this week.
- Update on Brexit. This week’s Weekly Economic Commentary, due out later today, will provide an update on the Brexit situation in Europe, as the U.K.’s ruling Conservative Party begins the process of selecting a new Prime Minister this week. We’ll also provide an overview of (and relationships between) the nations in Europe as its leaders begin to map out the next steps.
- Better times ahead. In this week’s Weekly Market Commentary, we preview second quarter 2016 earnings, which will begin to be reported with a small handful of companies this week (July 5-8). The earnings recession will likely continue but better times lie ahead: U.S. economic growth has started to pick up, the drags from the U.S. dollar and oil are starting to abate, and Brexit is unlikely to hurt U.S. companies much.
- Another strong quarter for bonds. Central bank actions continued to drive the bond market in the second quarter, with the Barclays Aggregate returning 2.2%, and credit sensitive portions of the market, including high-yield corporates and emerging markets debt (EMD), seeing the strongest gains. Unhedged foreign bonds are the year-to-date leaders, gaining a very strong 13.5% driven by central bank buying, which resulted in negative yields across many developed nations. Central bank actions are likely to continue to be a force in the second half of the year, with many putting additional action on the table in the wake of Brexit.
- Credit rallies, Treasury yields still near lows. Following Brexit-inspired weakness, credit markets rallied into the long weekend, with the Barclays High Yield Bond Index ending the week with a 0.6% gain. Treasury yields remained near all-time lows, with the 30-year Treasury sitting near January 2015’s all-time low, and yield curve steepness (as measured by the 2- and 10-year Treasuries) ending the week just below 90 basis points. The message from the bond market continues to be one of lower long-term growth, though sentiment has improved since the immediate aftermath of Brexit.
- Inflation expectations off post-Brexit lows. Inflation expectations accelerated their recent decline in the wake of the Brexit decision, but have since moderated slightly. Expectations still remain very low on a historical basis, however, and well below the Fed’s 2% target. This is one reason that rate hike expectations remain near zero for the next two Fed meetings.
- Rate cut ahead for England? The Bank of England (BOE), which had been one of the few developed central banks in the world that were expected to raise rates, has switched camps post-Brexit, with markets now pricing in an 80% chance of a rate cut at one of the BOE’s next two meetings. Brexit was a major driver of the shift in sentiment, but a dovish speech from BOE Governor Mark Carney late in the week also helped boost expectations for a cut. Markets also began pricing in a small chance of a U.S. rate cut last week, but this trend has reversed with only a 3% chance of a cut priced in for the July meeting. Markets remain doubtful of a near-term hike though, with only a 22% chance of a rate hike priced in by the end of the year.
- Emerging markets debt shrugs off Brexit. EMD was the winner among bonds last week, with the JP Morgan Emerging Markets Bond Index gaining nearly 2.3% for the week. The prospect for a continuation of loose monetary policy from global central banks is a positive for EM countries, though continued slow growth in the Eurozone and a yield spread that has moved back below 4% (a level where buying interest has emerged historically) may act as headwinds going forward.
- Puerto Rico legislation signed, but doesn’t avert default. Puerto Rico defaulted on about half of the $2 billion that was due on July 1, and for the first time defaulted on general obligation debt, which carries stronger constitutional guarantees. However, on the same day, President Obama signed legislation that provides additional legal protections and establishes a Federal Oversight Board that will help with the island’s debt restructuring. This is an anti-bondholder development but prices largely continue to reflect a restructuring outcome.
- Dudley (Dove)
- UK: Conservative Party Begins to Elect a Successor to PM David Cameron
- UK: Bank of England Relseases Financial Stability Report
- ADP Employment (Jun)
- Eurozone: European Central Bank Releases Minutes of June Meeting
- Japan: Economy Watchers Survey (Jun)
- NATO Summit in Warsaw
- G-20 Trade Ministers Meeting in China
- China: CPI (Jun)