On Friday the United Kingdom voted to leave the European Union and created havoc in equities and currencies. As investors "flee" equities in favor of "safe havens" like U.S. Treasuries and precious metals, the declines created the possibility of another wave of "liquidation" of risk assets such as equities. Margin calls will no doubt exacerbate the decline in values as liquidation to meet margin calls may cause throwing out the "baby with the bath water" so to speak and create further volatility. Even as "bargain hunters" seek to put money in the markets, any rally on shortcovering may be short-lived as the underlying factors I have indicated recently have not changed. The conservative approach during such times of high volatility is reminiscent of my admonition, "When in doubt, stay out."
Interest Rates: The 30-year Treasury bond rallied sharply on Friday as money moved to the "safe haven" of Treasuries pushing yields lower. The September treasury bond closed at 170 07/32nds up 4 and 4/32nds. The UK vote to leave the European Union created havoc in the global equity markets and turmoil in the Euro currencies. The yield on the 30-year bond declined by 13.1 basis points to 2.426%. As equity markets decline, bond prices rally. We await further market reaction to the overall global economic picture.
Stock indices: Right, but for the wrong reason….so far. Our expectation of a sharp decline in global equities while on track due to our view of global economic contraction was "upstaged" by the UK vote to leave the EU. The Dow Jones industrial average closed at 17,399.86, down 611.21 points. For the week the Dow lost 1.6%. The S&P 500 closed at 2,037.41, down 75.91 points after having been as much as 81 points earlier in the session and also lost 1.6% for the week. The only positive was the utility index. The Nasdaq lost 202.06 points or 4.1% lower to close at 4,707.98. The Nasdaq close was the worst since August of 2011 and for the week lost 1.9%. While the UK vote prompted the decline Friday, our overall view remains the same, a global economic contraction will continue to weigh on prices.
Currencies: The British pound declined to its lowest level in more than 30 years but managed a slight recovery to close Friday at a six year low against the U.S. dollar. The September pound closed at $1.3677, down 11.36c or 7.1%. The U.S. dollar closed at 95.825, up 2.1c. The Swiss Franc closed at $1.0392, down 99 points. The Japanese yen managed a gain of 319.5 points to 0.098015. Other currencies posted losses of 1.136c for the Canadian dollar at 77.02c and the Australian dollar 1.09c to 74.67c. The further impact of the British action keeps us on the sidelines for now.
Energies: A decline in energy demand prompted selling in the WTI crude oil closing at $47.65 per barrel, down over 5%. For the week crude lost 0.7%. We prefer the sidelines but feel further long liquidation tied to our view of an overall global economic contraction.
Precious Metals: As equity markets declined with possibly more "damage" going forward, August gold gained $59.30 per ounce or 4.7% closing at $1,322.40, it’s highest active month closing since July of 2014. At one point after the opening in equities gold traded $100 an ounce higher before settling back on pre-weekend profittaking. The potential "damage" from the UK vote to leave the Euro Union is yet to be assessed and we could see further price gains in gold and silver. July silver closed at $17.78 per ounce, up 42.5c. July platinum $985.70, up $20.40 per ounce with September palladium losing $17.90 per ounce to $548.00 per ounce. We prefer the sidelines after the dramatic move in metals which was a direct reaction to dollar strength and the angst tied to the future of the Euro.