Market Perspective for June 24, 2016

United Kingdom voters caught speculators off guard with Thursday’s vote to leave the European Union. Odds were overwhelmingly in favor of the Remain side throughout the week, which led to a great deal of re-pricing.  While markets predictably sold off on Friday, trading was well-controlled and the most severe declines occurred outside of the United States and United Kingdom.  The S&P 500 Index closed the week with a modest loss of 1.92 percent.

There were some significant moves in asset prices, but most of these were remarkable only because of the run up in prices ahead of the vote. iShares MSCI United Kingdom (EWU), for example traded higher today than a week ago:

Global markets trade in tandem, but fundamentally the U.S. is fairly immune to the effects of the British vote.

The British Pound saw a large overnight drop, at one point falling well over 10 percent versus the U.S. dollar, mostly a reversal of bullish bets on the pound in the prior week. The pound is trading a penny or two below where it traded on February 29.

The best buying opportunities are in markets not directly affected by the vote, such as the U.S. We may see some volatility stretch into Monday as China adjusts the yuan to these moves, but prices should be higher next week.

Federal Reserve Chair Janet Yellen did not give clear guidance on in her testimony before Congress, but did caution that slow economic growth might continue for the near future. The weekly mortgage application index rose 3 percent. Existing homes sales hit a 9-year high as buyers took advantage of lower rates. The Home Price Index rose another 0.2 percent last month. Overall, home prices are up almost 6 percent compared to a year ago. While oil inventories were down slightly on the week, there was a build in gasoline supplies, which is good news for summer driving. The number of Americans filing for first-time unemployment benefits fell to a near 43-year low. While analysts were expecting 270,000 new filings, the Labor Department reported 259,000 new claims. The flash PMI showed an improvement in the manufacturing sector, with new orders and hiring rising.

Adobe Systems, FedEx, Bed, Bath & Beyond and BlackBerry reported earnings this week. San Jose-based software company Adobe Systems (ADBE) beat analysts’ expectations with earnings per share of $0.71 on revenues of $1.4 billion. FedEx (FDX) posted a quarterly loss.  Although the company delivered EPS that beat the $3.28 estimate by 2 cents, cost adjustments associated with the firm’s pension and expenses related to the acquisition of Dutch company TNT resulted in a loss of $0.26 per share and unclear forward guidance relative to its pension costs and its TNT acquisition. Shares were sold as a result.

Bed, Bath & Beyond (BBBY) reported disappointing earnings Wednesday, but shares finished 1.5 percent higher following positive forward guidance. On Thursday, BlackBerry (BBRY) reported earnings per share of $0.00, which beat analysts’ expectations of a $0.08 loss. Its $424 million revenues missed consensus estimate. BBRY affirmed their full-year guidance and shares rallied on the news.

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