Market Analysis

Beyond the Number

Markets on Course for Sell-off on Brexit
6/24/2016 8:47 AM

The major U.S. index futures are pointing to a notably lower opening on Friday,  with the unexpected development of Britain's decision to quit the EU wreaking havoc on the markets. The pound, after initially pulling back to near a 31-year low, has trimmed loss., although it is still notably lower. The U.K is also facing political uncertainty, with Prime Minister David Cameron deciding to step down.

Meanwhile, the EU itself is facing uncertainty, as there might be calls for more nations looking to break free of the union. The domestic equity markets could also go down along with the rest of the risky assets. A report released short while ago showed weak durable goods orders.

U.S. stocks rallied strongly on Thursday amid expectations that the U.K.'s EU referendum will produce a favorable outcome. The major averages opened higher and moved roughly sideways and legged up further going into the close.

The Dow Industrials added 230.24 points or 1.29 percent before closing at a 1-month high of 18,011, the S&P 500 Index closed 27.87 points or 1.34 percent higher at 2,113, its highest closing level since June 9th, and the Nasdaq Composite ended at a 2-week high of 4,910, up 76.72 points or 1.59 percent.
Twenty-nine of the thirty Dow components closed higher for the session, while one stock retreated.

American Express (AXP), Caterpillar (CAT), Chevron (CVX), Goldman Sachs (GS), Intel (INTC), Visa (V) and JP Morgan Chase (JPM) were among the best performers of the session.

On the economic front, the Labor Department reported that jobless clams fell to 259,000 in the week ended June 23rd from 277,000 in the previous week. Economists expected a reading of 270,000 for the week. The 4-week average fell to 267,000 from 269,250. Continuing claims calculated with a week's lag declined 20,000 to 2.142 million in the week ended June 11th.

Markit's flash U.S. manufacturing PMI rose to 51.4 in June from 51 in May.

A Commerce Department report showed that new home sales came in at a seasonally adjusted annual rate of 551,000 in May compared to a downwardly revised rate of 586,000 for the previous month. Economists had expected a decline in new home sales to 565,000 from the 586,000 initially reported for April. The median price of a new home fell 9.3 percent month-over-month to $290,400, while annually prices were up 1 percent. Inventories measured in terms of months of supply rose to 5.3 months from 4.9 months.

The Conference Board reported that its leading economic indicators index fell 0.2 percent month-over-month in May following a 0.6 percent increase in April. This belied expectations for a 0.2 percent increase. Jobless claims dragged the index, while interest rate spread gave support.

Currency, Commodity Markets

Crude oil futures for August delivery are slumping $2.33 to $47.78 a barrel after declining $1.80 to $50.11 a barrel on Thursday.  Gold futures are currently trading at $1,328.80 an ounce, up $65.70 from the previous session’s close of $1,263.10 an ounce. On Thursday, gold rose $10.10.

On the currency front, the U.S. dollar is trading at 102.53 yen compared to the 106.16 yen it fetched at the close of New York trading on Thursday. Against the euro, the dollar is valued at $1.1073 compared to yesterday’s $1.1385.

With early results from the referendum pointing to victory for the 'leave' camp, Asian markets plunged steeply. The selling pressure was broad based, as weakness in risk assets such as commodities and strength in safe havens such as gold also produced secondary weakness.

The Japanese market slumped, as the yen rallied to a near a 2-year high. At one point, the yen strengthened below the 100 yen-level against the dollar.

The Nikkei 225 average that traded nervously till early afternoon trading fell steadily until late trading and moved roughly sideways around the lower levels for the rest of the session. The index ended down 1,286.33 points or 7.92 percent at 14,952, its lowest level since June 2nd, 2014. All index components retreated in the session.

Australia's All Ordinaries held barely above the unchanged line in early trading, retreated into negative territory and languished deeply in the red. The index ended 165.80 points or 3.09 percent lower at over a 2-month low of 5,193. Energy, financial, IT and material stocks plunged steeply.

Hong Kong's Hang Seng Index closed at 20,186, down 682.68 points or 3.27 percent and China's Shanghai Composite Index fell 37.67 points or 1.30 percent before ending at 2,854.

On the economic front, the Bank of Japan released its corporate service price index rose 0.2 percent year-over-year in May, ahead of the 0.1 percent increase expected by economists. On a monthly basis, the index was unchanged following a 0.1 percent drop in April.


European stocks plummeted at the open, with the major averages in the region now down notably, as Britain voted to exit the European Union. The pound plunged to over a 30-year low.

In major corporate news, Henkel announced a deal to buy laundry and homecare company Sun Products from Vestar Capital Partners for 3.2 billion pounds.

On the economic front, the results of a survey by the IfO Institute showed that business sentiment in Germany came in better than expected. The business confidence index was at 108.7 in June, while economists expected a reading of 107.4. The current conditions index and the expectations index were also better than expected.

The French economic growth improved in the three months ended March, as initially estimated, latest figures from statistical office INSEE showed. GDP advanced 0.6 percent quarter-over-quarter in the first quarter, confirming the second estimate, and followed a 0.4 percent expansion in the previous quarter.
U.S. Economic Reports

The Commerce Department reported that durable goods orders fell 2.2 percent month-over-month in May following a downwardly revised 2.2 percent increase for April. Economists expected durable goods orders to have declined by 0.7 percent month-over-month, reversing the previously published 3.4 percent increase for April.

Excluding transportation, orders fell 0.3 percent compared to expectations for a flat reading. Transportation orders fell 5.6 percent. Non-defense capital goods orders, excluding aircraft and parts, were down 0.7 percent and the shipment of this category of goods were also down.
 The University of Michigan is set to release its final U.S. consumer sentiment index for June at 10 am ET. Economists expect the index to be downwardly revised to 94 from 94.3.

Stocks in Focus

Sonic (SONC) reported below-consensus adjusted earnings and revenues for its third quarter and the company guided 2016 adjusted earnings per share growth to 20-25 percent.

Standard & Poor's announced that Albermale (ALB) will replace TECO Energy (TE) in the S&P 500 Index. S&P SmallCap 600 constituent EMCOR Group (EME) will replace Albermale in the S&P 400 Index. Inteliquent will replace EMCOR in the S&P SmallCap 600 Index after the close o trading on June 30th.
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