The Brexit vote caused an earthquake in the currency markets and the damage may not be over. The British pound fell 8% and some analysts believe it could continue to fall from 18-25% from the pre vote levels. This is truly a seismic shift in currencies that normally move in only a few basis points a day. Singapore bank DBS warned the pound could decline to $1.15-$1.25 and could even overshoot as far as $1.05. Canadian based CIBC bank is predicting $1.15.
The risk in a continued decline is the corresponding spike in the dollar. This would make U.S. product significantly more expensive and would cause a new round of earnings warnings for currency translation issues. The dollar was up another 73 cents on the Dollar Index on Sunday night. The Chinese yuan hit a six-year low on Sunday.
The S&P futures opened -9 points lower on Sunday and then sank to -17 points before the Asian markets opened. When Asia opened mixed, the futures rebounded to -7 and are holding in that range. The Asian markets are trying to rebound from the beating they took on Friday. The Hang Seng is the only one down significantly.
The S&P futures traded down to 2,001 on Sunday evening before recovering to 2,011 and holding steady.
The S&P-500 closed just below strong support at 2,040 but has risk to 2020-2025 early this week. If the futures declined from their current -7 point drop it could put the S&P cash right in the 2,025 range where I would expect buyers to appear.
I am expecting a rebound this week because fund managers are sitting on nearly 6% cash and that is very high historically and Thursday is the end of the quarter.
The Dow closed right on strong support at 17,400 but a continued decline could easily test 17,135 or lower. The Dow stocks are all multinational companies and all will experience severe currency translation issues. While the Dow may rebound this week, the long term outlook would be negative as the earnings guidance in the Q2 cycle would be ugly.
The Nasdaq also stopped on strong support at 4,700 and a breakdown there would find a speed bump at 4,600 but that support is not very strong. The Nasdaq futures are down -14 points as I type this.
The calendar for next week is busy but only two events could be market moving. The first Yellen post-Brexit speech is on Wednesday and her guidance on future Fed policy will be critical. Nobody expects the Fed to hike in 2016 and should she confirm that fact it could be market positive. Should she continue the "appropriate to hike in the coming months" mantra the market could react negatively.
The ISM manufacturing on Friday is a national report for June and expectations are flat. If that report declines significantly it could move the market.
I personally believe we will see a market rebound this week. That opinion and $5 will buy you a cup of Starbucks coffee. I could be completely wrong but the end of quarter window dressing is a fact and they only have four days to accomplish that. Considering the declines from Friday there are plenty of bargains.
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