July 17, 2016
Weekly Market Outlook
By Keith Schneider
Equity markets worldwide roared this week. Most closed up around 2% on strong volume despite yet another horrible attack in France. Our sympathies go out to all those impacted by the senseless violence.
Two key benchmarks, the S&P 500 and the Dow Industrials, surged to new all-timehighs on Friday before retreating a little into the close. In the aftermarket, equities were down more after news of a coup underway in Turkey.
Meanwhile, the disparity between the Eurozone markets and the US is still very much alive. EU equity markets languished, ending the week down around -5.0% from the pre Brexit levels, and they remain in bearish phases well below highs set in 2014.
In Italy’s or Spain’s case, equities sit at levels seen in 2008 during the height of the financial meltdown. Additionally, the British Pound hovers at the lowest levels in 3 decades, and it has barely bounced.
The true reason for the Brexit was revealed this week when France’s scandal “de jour” Coiffure- Gate was disclosed. The President of France, Francois Hollande, admitted that he spends almost 10,000 euros per month of the state’s money on his hairdresser!
Brexit’ers can point out that such irresponsible behavior by an avowed socialist will inevitably trickle down, leading EU bankers to fund personal hairdressers for the entire EU population, including refugees who need a fresh cut and a shampoo the most. This all leads to more deficits and disequilibrium.
While the hair is still drying from Hollande’s last visit from his barber, a cooler head prevails in England as the new Prime Minister is not ready to pull the trigger on Brexit until all the terms are laid out. That includes what do with Scotland which voted to remain.
Pulling the trigger on the exit will take a while, or might never happen. Maybe, just maybe, Brexit is much ado about nothing and therein lies another potential reason for the recent melt up in many markets. A strong rally in British Pound from current levels would be supportive to this idea.
Meanwhile, the flight to US bonds cooled this week as did the sizzling gold market. However, industrial commodities such as steel roared along with Emerging markets.
Since rates are at historic lows and with so much cash on sidelines, the breakout to new highs should be able to gather some real steam after it works off some short term froth and negative short term trading patterns.
The bubble in rates could be popping or setting the stage for a final blow-off. However, at the moment there is a shortage of supply of debt fueling the rally. Even if rates rise modestly and at a slow pace, they would still be very low and supportive to equities.
As I write this, the situation in Turkey is still unfolding, but it highlights another festering geo-political uncertainty in a strategically critical area that directly impacts the macro picture. The Turkish people face a difficult choice between a secular backed military rule, or a democratically elected Islamist in the process of dismantling that same process that put him in power.
As US equity markets hit new highs, they seem disconnected from the obvious risks of Brexit, US presidential elections, terrorist attacks, negative yields, the coup attempt in Turkey, and more. However, risk-on plays continue to gather steam with junk debt and other more speculative instruments gaining as well.
Check out this week’s video explaining the market’s response to all the news, and discover the interesting short-term patterns driving the direction of several important markets affecting your trading.