WALL STREET ANXIETY REMAINS POST-BREXIT
Market surges, but headwinds may stand in way
Brexit hysteria has abated. Investor panic has subsided. And the books have closed on a rocky but profitable second quarter for stocks.
So what can investors expect next from unpredictable markets that send out warning sirens one day and all-clear signals the next?
Hopefully, investors will be able to ride out the summer without a market-driven roller-coaster ride. The end of the second quarter saw a mini-crash and robust rebound in a span of five trading days after Britain shocked the world by voting to leave the European Union. The stock market also put a scare into investors in January and February, when U.S. stocks got off to their worst-ever start to a year.
Even though Brexit seems like old news, it might be premature to say the market is in the clear. That’s not to say stocks can’t build on their three-day Brexit bounce (the Dow gained 790 points in the past three sessions to finish the second quarter up 1.4%), just that headwinds are still there. But Brexit fears could resurface as new information and troubling headlines emerge.
“Brexit will be the gift that keeps on giving,” says Eric Wiegand, senior portfolio manager at Private Client Reserve at U.S. Bank. “We will be living that storyline for quite awhile.”
The narrative on Wall Street in the third quarter, which kicks off Friday, also will be driven by a shift in focus back to risks that worried traders pre-Brexit.
Wall Street will be watching incoming economic data to see if the U.S. economy is holding up under the weight of the uncertainty and expected growth slowdown caused by Brexit. The first big data point comes next Friday when the June jobs report is released. After two consecutive weak U.S. employment reports, investors will be looking to the June report to see if the recent slowdown is just a blip or a sign of trouble ahead.
“The data going forward will speak volumes,” says Tony Bedikian, managing director of global markets at Citizens Bank.
Markets also will be driven by policy moves and pronouncements from central bankers such as Federal Reserve Chair Janet Yellen, European Central Bank President Mario Draghi and Bank of England Governor Mark Carney. Markets are looking for support and stimulus from central bankers if it is needed. Stocks got a lift Thursday after Carney said it’s likely the BOE will ease policy further this summer to offset Brexit-related headwinds.
Wall Street will be closely watching the Fed’s next meeting July 26.
The post-Brexit world also collides with the start of the secondquarter earnings season. Corporate America is in an earnings recession, as profit growth for companies in the S&P 500 has contracted the past three quarters, and analysts see profit growth contracting again in the second quarter of 2016, earnings tracker Thomson Reuters says.
Wall Street was expecting a profit rebound in the second half of 2016. But after Brexit, investors will want to know if a second-half earnings bounce-back “is really the case,” Wiegand says.
There is concern that in a post-Brexit world the U.S. dollar will be viewed as a safe haven and will see sharp capital inflows, which could push up the value of the greenback vs. foreign currencies.
Bank earnings could also take a hit from Brexit, as it likely will put Federal Reserve interest rate hikes on hold, a development that will weigh on bank earnings.