Week of July 4, 2016
Global markets were surprisingly positive last week as investors pushed equities higher following last Monday's continuation of selling pressure. The Dow Jones Industrial Average, NASDAQ Composite and the S&P 500 were all up over 3% with the NASDAQ Composite leading the way at 3.28%.
European and Asian equities all posted positive returns as well.
Market Update
Based on the market's reaction to the Brexit Vote, it didn't appear as though investors had priced in a "leave" outcome. Last Monday's dip was a continuation of Friday's, however, stocks rebounded on Tuesday following the head of the European Central Bank, Mario Draghi, making comments that hinted at coordinated central bank actions designed to calm the markets. The rally continued into the end of the week with almost all major international indices closing higher on Friday with the Dow Jones Industrial Average and the S&P 500 returning back to positive territory for the year. While that may be positive in the short-term, we continue to believe that the longer term focus will be on the political upheaval and renewed concerns over slowing global growth.
Source: Morningstar Direct
BoE Stimulus
Mark Carney, the governor of Britain's central bank, the Bank of England, has publicly stated that the bank will take "whatever action is needed to support growth". This will likely include additional stimulus and easing actions as the Bank of England's base interest rate has remained near historic lows following the global financial crisis. In response to the governor's comments and general market uncertainty, British government bond yields fell into the negative for the first time. Two year gilts, or British government bonds, fell more than 0.14% to hit -0.003%. This means Britain joins a small group of other countries with negative government bond yields, including Japan, Germany, France and Switzerland.
Banks' Credit
European banks and financial companies were some of the hardest hit in the aftermath of the Brexit vote. However, yields on sterling-denominated bank bonds fell since the results first came in a little over a week ago. The drop in yield means that prices went up, all else being equal, as investors sought the relative safety of those securities. European banks, in anticipation of a slowdown in the credit markets after the Brexit, refinanced their existing debt earlier in the year and were well-capitalized going into the June 23 referendum. Indeed, this was part of the reason investors reallocated to banking industry credit. Going forward, bank debt holders have said a continuous focus on the industry's capital and solvency is warranted as the ramifications of Britain's separation from the European Union are still unfolding.
Fun Story of the Week
According to an obscure EU regulation, all butchers in the European Union are required to sell meat using the metric system. At Gratton's Butchers in Barnstable, they decided enough was enough once they saw the results of the Brexit vote. The butchers, celebrating the referendum, are now selling their wares in both pounds and ounces as well as grams and kilograms, giving their customers the choice in how they buy their products. However, it is unlikely that the UK will go back to the imperial system as the switch to the metric system took place back in 1995. Indeed, many younger people were born after the law and have never had to learn the imperial system.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
DJIA
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
NASDAQ COMPOSITE
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Wall Street Journal, June 2016. http://www.wsj.com/articles/european-banks-credit-surviving-the-brexit-storm-1467140761
Financial Times, June 2016. http://www.ft.com/fastft/2016/06/30/gilts-join-negative-yields-club/
Financial Times, July 2016. https://www.ft.com/cms/s/0/ec42a3ba-3ed3-11e6-8716-a4a71e8140b0.html?ftcamp=crm/email//nbe/UKPolitics/product&siteedition=uk#axzz4DALNUF00
UK Independent, June 2016. http://www.independent.co.uk/news/uk/home-news/brexit-butcher-begins-to-sell-meat-using-imperial-system-a7103516.html