Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

A Post-Brexit Bounce – Though Challenges Remain

Global stock markets rebounded sharply from their Brexit lows set Monday. Indices in the US and in the UK led the charge higher, apparently upon word that central bankers (including the Fed) were ready to aid markets if things got ugly. With the promise of more liquidity dangling before speculators’ eyes, short squeezes were, I believe, the primary fuel that powered markets forward. In any case, the interesting thing still to share is that UK stocks outperformed the field again this week, and now trade at a rather convincing high for the year. Apparently, pre-Brexit, the UK ran a trade deficit of €70.0 billion per year with the European Union, and had to acquire nearly that much in debt every year to compensate. Now, with a subsequent fall in the pound sterling and an increase in the prospects for exports, that trade gap has begun to evaporate (theoretically). I believe this is why stocks there have behaved rather nicely, and may continue to do so in the near term, despite the myriad complaints and regrets voiced by special interest groups unnerved by the structural inconveniences created by the referendum.

Away from stocks, the action in US Treasuries, British Gilts, German Bunds, and Japanese government bonds could aptly be described as a blow-off to the upside, as corresponding yields were in free-fall. The 10-year JGB in particular posted a yield of negative 0.261%. The dollar was marginally weaker against most other paper except the yen, while the metals continued higher on the back of the easy talk from central banks. Gold saw a gain of 2.0% to silver’s 11.4%. Keep in mind that, following the Brexit outcome, central banks have only talked about stimulus and haven’t actually printed one incremental dime – as far as I know. So these outsized moves we’ve seen may consolidate (pull back) a little before advancing again in what I believe will be a rather disappointing earnings season.

Along those lines, we did hear a great deal from corporate America this week, except from the auto industry. That sector today reported that June sales results would miss estimates across most major manufacturers except for Nissan and Ford, which beat projections. Next week we’ll hear from Samsung Electronics (mobile device and chip maker for Apple), while we wait on pre-announcements, if any, from US corporations before the earnings season here officially kicks off on July 11th with Alcoa. The big question is, can the bulls “extend and pretend” with stocks after what has already been a 31% drop in S&P earnings since the third quarter of 2014, or not? I suspect not, but, regretfully, we’ll just have to wait for any clues we can obtain from the trading action over the next handful of days.

Best Regards,

David Burgess
VP Investment Management