The major stock market averages fell at the open (Dow -255 pts; SPX -1.8%). Materials, financials, energy, tech and industrials are leading the market lower. Telecoms and utilities are the only sectors in the green. Overnight, Asian markets were mixed and at the moment European markets are poised to close down by 2-3%. Today’s dip is largely expected, coming on the heels of a 3.6% dip in the SPX Friday in the wake of the “Brexit” vote. Commodities are mixed, with oil and copper lower and gold up nearly 5%. WTI crude oil is trading down to $46.30/barrel. Bonds continue to head lower as global investors pour money into “safe haven” assets. The 5 and 10-year Treasury yields are down around 1.0% and 1.48%, respectively. That’s the lowest 10-year yield going back to July 2012.
We know that currency volatility is largely behind the damage done to US stocks on Friday. The pound sterling fell 8% and the Euro was down 2.5% vs. the dollar. Again today, those currencies are weakening further vs. the dollar. So with a significantly stronger dollar (back to March levels) persisting longer than many investors expected, the projected improvement in US corporate earnings in the second half of 2016 may be muted. In addition, a stronger dollar usually means lower oil prices and we know that US stocks are following oil right now. And finally, more uncertainty regarding the global financial system is likely to keep the Federal Reserve on hold regarding interest rate hikes.
In a CNBC interview this morning, former Federal Reserve Governor Larry Lindsey asserted the main reason Britons voted to exit the European Union (EU) was a desire for better government through autonomy. He said the UK is tired of subjecting itself to an “overbearing bureaucracy” that makes decisions in an “incompetent” manner. On the other hand, CNBC contributor Jim Cramer believes the Brexit vote was a “colossal failure of thought by the British people,” and the country’s leaders were “stupid” not to adequately explain the implications of exiting the EU. And today, Goldman Sachs said it now expects a mild recession in the UK next year.
Markit Economics’ US Services PMI held steady at 51.3 in June. This is a gauge of business activity within the service sector, and any reading above 50.0 indicates growth. So we’re seeing very modest growth, but no acceleration this month.