Brexit Breakdown Continues
Global stocks pounded again. The pound pounded again. Euro banks look dangerous. World leaders’ remarks (as in “Really?). SCOTUS strikes down Texas abortion restrictions. Panama remodels its canal. Waldorf Astoria goes condo.
Financial Review by Sinclair Noe for 06-27-2016
DOW – 260 = 17,140
SPX – 36 = 2000
NAS – 113 = 4594
10 Y – .12 = 1.46%
OIL – 1.31 = 46.33
GOLD + 8.50 = 1325.10
The aftershocks of the U.K.’s vote to leave the European Union reverberated across financial markets again today. The victory for Brexit tore through world markets on Friday, pummeling the pound and high-yielding assets as more than $2.5 trillion was wiped from global equity values. Prime Minister David Cameron resigned without spelling out when the U.K. intends to leave the EU and at least 30 members of Labour Party leader Jeremy Corbyn’s team quit amid calls for his ouster.
On Wall Street, the Dow Industrial average dropped about 300 points and then bounced around, adding to the 610 point loss on Friday. Meanwhile, 10-year U.S. Treasury yields have extended their fall to 1.46.
The pound is getting slammed all over again. It extended its record decline against the dollar, falling 3.1% to as low as 1.315. Cable — as the dollar/pound currency pair is nicknamed — is one of the biggest casualties of the global-market rout triggered late last week by Britain’s vote to leave the European Union. On Friday, the pound fell to a 30-year low versus the dollar in its biggest single-day collapse ever. UK 10-year Gilt yields have dropped below 1% for the first time to hit a new record low. The fall came after Moody’s downgraded its U.K. sovereign rating to negative from stable, citing diminished policy predictability and economic effectiveness. S&P Global Ratings cut the U.K.’s top credit grade by two levels, to AA from AAA.
British stocks were down 2.5% today. While the slide in Europe’s equity benchmark reached 11% over two days, the most since 2008. European bank stocks are still tumbling, too. Shares of RBS and Barclays were briefly halted for about five minutes in London as they plunged 10%. A gauge of European lenders headed for its biggest two-day drop ever. Many banks may move huge numbers of workers from their UK operations to elsewhere on the continent as the City of London’s role as the region’s financial hub becomes uncertain; at the very least, the UK will have to negotiate new agreements for handling financial transactions with the rest of the world. Barclays shares fell more than 17% for the second straight day, and the stock has now lost more than half its value in the last 12 months. RBS plummeted as much as 26% in London trading, reaching the lowest levels since January 2009. Lloyds fell 10% at 4 p.m. in London, while challenger banks Virgin Money Holdings, OneSavings Bank and Shawbrook Group all plunged more than 25%.
US bank shares have taken pretty big hits, down nearly 10% since the Brexit vote; but keep in mind US bank stocks have had an atrocious year to date. Since the start of the year, Citi is down 22%, BofA down 23%, JPMorgan down 10%, Goldman Sachs down 21%, and Morgan Stanley down 23%.
The next days and weeks will be key for central banks as they seek to limit volatility in financial markets. The European Central Bank was hosting a three-day meeting in Portugal that will include speeches from its president, Mario Draghi, and Federal Reserve Chair Janet Yellen, plus UK PM David Cameron, German Chancellor Angela Merkel and EU President Donald Tusk. The meeting was cancelled. They can’t even figure out if they want to talk to each other.
The Chinese yuan tumbled to a 6-year low against the dollar. This happened after the People’s Bank of China weakened the currency’s reference rate per dollar by 0.9%, the steepest devaluation since August. China weakened the yuan after Friday’s post-Brexit foreign-exchange action that sent the dollar flying. The Nikkei regained some lost ground overnight after Japanese Prime Minister Shinzo Abe instructed his finance minister to intervene in the currency markets if needed in the wake of Brexit.
The U.K. is ready to face the challenges thrown up by the vote to leave the EU, so said UK Chancellor George Osborne at a press conference today, but be cautioned it would not be “plain sailing” in the days ahead. “Our economy is about as strong as it could be to confront the challenge our country now faces,” he declared, adding that the result was not the one he “campaigned for” but the will of the people “had to be respected.”
Brexit comments from around the world… Boris Johnson: “I cannot stress too much that Britain is part of Europe, and always will be.” (Which is strange because Johnson was the leader behind the Leave movement), Nicola Sturgeon: “We will explore all possible options to protect Scotland’s place in the EU.” (And now we have leaders from Italy, France, Spain, and the Netherlands saying they want to explore their options), Francois Hollande: “What was once unthinkable has become irreversible.” (As in you Brexit, you bought it.) Angela Merkel: Exit talks “shouldn’t drag on forever.” (Meanwhile, Germany, France and Italy said the European Union won’t hold talks with the U.K. on its future relationship with the EU until the government in London formally asks to leave the bloc.) Barack Obama: “One thing that will not change is the special relationship that exists between our two nations.” (A marked changed from the claim that the Brits would be at the back of the queue.)
More remarks… Jean-Claude Juncker: I would like Brexit proceedings “to get started immediately.” (As in, “you want a divorce? All right, get out of the house.”) Christine Lagarde: Brexit fallout hinges on what “policy makers do in coming days.” George Soros: The decision makes “the disintegration of the EU practically irreversible.” (As in, “I tried to warn you.”) Deutsche Bank: London’s role as a financial center will “weaken, but won’t die.” (As in, we are going to poach as many clients as possible.) Goldman Sachs: The U.K. is now likely to enter a “mild recession” by early 2017. (As in be scared, be very, very scared.)
Adding to political uncertainty in Europe, Spain’s weekend elections delivered a hung parliament for the second time in six months. Acting Prime Minister Mariano Rajoy’s People’s Party again emerged with the single biggest bloc of seats but fell short of a majority, leaving the Eurozone’s fourth-largest economy at risk of another lengthy political stalemate.
So, the question is, what does Brexit mean? The answer is, no one knows. It might be the end of the European Union and the beginning of years of financial and political chaos in Europe which would undoubtedly wreak havoc with global markets. Or it might be the event that forces the EU to reorganize itself and take serious measures to ensure fairness among its members. Again, the truth is that we simply don’t know yet. What does it mean for you as an investor? It shouldn’t make much difference at all. You should already have a plan; that plan should guide you whether the markets are up or down or sideways. Whatever your plan indicates for you is what you should stick to doing. If your plan calls for rebalancing, then rebalance; if your plan calls for no change, then do nothing; if your plan calls for buying or selling, then do it. If your plan calls for market timing then pick some trades. If your plan calls for refinancing your mortgage, then refi. While market moves can be dramatic, there is no reason to get emotional about it. Stick to the plan, stick to your discipline. If you don’t have a plan, you shouldn’t be investing.
The Supreme Court struck down Texas abortion restrictions that had threatened to close three-quarters of the state’s clinics by putting new requirements on facilities and doctors. The 5-3 ruling is the court’s first abortion decision in almost a decade. It invalidates a law that required clinics to meet hospital-like surgical standards and forced abortion doctors to get admitting privileges at a local hospital.
Panama officially opened an addition to its legendary sea canal on Sunday, capping a nine-year, $5.4 billion expansion project that will double shipping capacity and affect global trade routes. A third lane has been added to the waterway that can accommodate a new generation of super cargo ships large enough to carry up to 14,000 containers, compared with around 5,000 currently.
Saudi Arabia has appointed JPMorgan, HSBC and Citi to arrange its debut international bond as the kingdom presses ahead with fundraising efforts amid an oil price slump. Lenders were summoned to Riyadh last month to submit proposals on how they would help the country to raise money internationally. At the time, bankers said that the kingdom was seeking to raise as much as $15 billion.
Research to be presented this week at a conference in San Antonio suggests that serious joint problems, seizures, vision impairment and other medical issues can be added to the list of risks from Zika exposure in the womb. The new findings also confirm that even when Zika-exposed babies are born without microcephaly, developmental delays may appear in the weeks or months following birth.
New York’s landmark Waldorf Astoria hotel plans to close for up to three years starting next spring so owner Anbang Insurance can begin converting most of its more than 1,400 rooms into luxury condominiums. Anbang and Hilton Worldwide, which will continue to manage the property when it reopens, are said to have reached severance agreements with hundreds of the hotel’s 1,500 employees at a cost of $100 million or more.