Thursday, June 30, 2016

Markets rally for a third day on central bank stimulus talks

Dow added 235 (closing at the highs), advancers over decliners more than 3-1 & NAZ gained 63.  The MLP index rose a fraction to the 318s & the REIT index gained 3+ to the 362s, a new record.  Junk bond funds edged higher & Treasuries declined.  Oil sank to the 48s & gold was off a tad (see below).

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Crude Oil Aug 16...48.40 Down ....1.48  (3.0%)

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Mark Carney signaled the Bank of England could cut interest rates within months as the central bank tries to shield an economy rattled by the shock of Brexit & the chaos engulfing Britain's political classes.  In his 2nd televised address since the country voted to leave the EU, the governor said that officials won't hesitate to act when it comes to safeguarding the economy or the resilience of the financial system.  The BOE will also continue its liquidity auctions for banks on a weekly, rather than monthly, basis & consider a “host of other measures.”  The £ slumped as investors increased bets on a rate cut by Aug.  “It now seems plausible that uncertainty could remain elevated for some time,” Carney said.  “The economic outlook has deteriorated and some monetary policy easing will likely be needed over the summer.”  The comments capped a day full of political shocks.  Boris Johnson pulled out of the race to be the next British prime minister after a savage attack from former Brexit ally Michael Gove, who will now compete for the job with Home Secretary Theresa May.  That creates more uncertainty at a time when the opposition Labour party is already in disarray & the UK remains in limbo regarding its trading relationship with its biggest market.

Carney Says Brexit Fallout Makes BOE Summer Stimulus Likely

UK consumer confidence dropped this week after the country voted to leave the EU.  YouGov & the Centre for Economics & Business Research said their daily tracker of sentiment has dropped to the lowest in more than 2 years.  From a level of 111.9 earlier in the month, it has since slumped to 104.3.  Also, a separate report from GfK showed that households faith in the economic outlook was shaky even before the Brexit referendum.  The vote has created uncertainty about the possible future relationship of the UK & the EU, further complicated by Prime Minister David Cameron's decision to resign & leave his successor to start formal exit negotiations.  That’s increased tensions with other European leaders, who excluded Cameron from a meeting in Brussels & want the process to start soon.  “Consumer confidence has collapsed since the vote,” YouGov Reports said.  “Four days of uncertainty has wiped out the gains made over the last three years. It has not yet reached the depths of the financial crisis in 2008 but we expect it to decline further as some of the consequences of Brexit kick in.”  GfK’s survey, conducted in the 2 weeks thru Jun 15, suggests sentiment was already becoming gloomier before the outcome.  Its headline consumer index remained at minus 1 this month, but the measure of how consumers view the 12-month economic outlook slipped to minus 14 from minus 13, down 18 points from a year earlier.  “One trend that continued in the run up to the referendum is a deepening pessimism over the general economic situation,” GfK said.  “In these extraordinary consumer circumstances, all bets are off until we all know more. We can expect plenty of volatility in consumer confidence at least until Brexit negotiations are under way.”  GfK questioned 2K for its survey & YouGov’s index is based on 7K online interviews per month.

U.K. Consumer Confidence Is Buckling Under Brexit Pressure

Standard & Poor's Global Ratings cut its long-term credit rating on the EU to 'AA' from 'AA+' after the UK voted to leave the bloc.  "After the decision by the UK electorate to leave the EU...we have reassessed our opinion of cohesion within the EU, which we now consider to be a neutral rather than positive rating factor," the agency said.

S&P Cuts Rating on EU to 'AA' After Brexit

Prices at the gas pump are expected to reach an 11-year low on the Fourth of July, just as a record number of Americans prepare to hit the road during the holiday weekend.  The national average is expected to fall 50¢ from last year’s Independence Day mark to $2.27 a gallon, the cheapest since 2005.  Just 2 years ago, the average price of regular gasoline was much higher at $3.66 a gallon.  However, there is one wrinkle to price forecasts this weekend: gas taxes.  Coinciding with the start of a new fiscal year, several states are hiking or cutting their excise taxes on gasoline starting tomorrow.  As a result, regional gas prices could fluctuate to kick off Independence Day weekend.  Tax increases are in the pipeline for Maryland & Washington.  Maryland will add 0.9¢ to its rate, increasing gas taxes in the state to 33.5¢ a gallon.  Washington State's gas tax will climb to 49.4¢  a gallon, up 4.9¢.  NJ could become the 3rd state to raise gas taxes this year.  A bill making its way thru the legislature includes a 23¢ hike that would take the gas tax from 14.5¢  to 37.5¢ a gallon.

Fourth of July Gas Prices Dip to 11-Year Low--But Watch for Tax Hikes

Gold closed out the month lower today, but still gained nearly 25% YTD, as investors continue to navigate financial volatility sparked by the UK's decision to leave the EU.  Aug gold fell $6.30 (0.5%), for the session to settle at $1320, pulling back after finishing at a nearly 2-year high a day earlier.  Futures prices were up about 6.9% for Q2 & have climbed roughly 24.6% YTD.

Gold Down For The Session, But Up Nearly 25% Year To Date

There is an old adage that chaos can bring opportunity.  That is in play in the stock market.  Maybe, maybe not.  The exit for UK, a major country in the EU, brings uncertainty, but caution has been thrown to the wind by stock traders.  In 3 days Dow has recouped about all of its 1K loss from the prior 2 days.  That's high volatility at a time when gold (a bet against higher stock prices) is rising.  Playing with fire can be dangerous!

Dow Jones Industrials


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