The Overnight Report: Global Markets Vote Stay

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By Greg Peel

The Dow closed up 230 points or 1.3% while the S&P rose 1.3% to 2113 and the Nasdaq gained 1.6%.

Brexit

As I write, the polling stations are not long closed in Britain. I have no idea what the official result will be, but by the time you read this the first regional numbers may well be filtering through.

What I do know is that public exit polling was banned until polling stations were closed. The first exit poll since published suggested 52/48 to stay. Private exit polls were apparently being conducted over the day nonetheless, giving those prepared to pay for the privilege the inside running. Whatever the case, it appears the world decided last night that the “stay” vote would win, and wasn’t about to wait around for confirmation.

Such confidence was not the case in the southern hemisphere yesterday, thus the local market put in another “on hold” session. A 1.6% gain for the materials sector, thanks to a pop in the iron ore price, was about the only reason the index didn’t close completely flat.

Since the release this morning of that first public exit poll, the pound has jumped again, to US$1.49. When Brexit fear was at its peak a couple of weeks ago, the pound traded as low as 1.40.

Prior to the release of any public information, and with polling stations in full swing, the London stock market closed up 1.2%, Germany 1.9% and France 2.0%.

Wall Street then step-jumped higher on the open and largely held its ground for the session before kicking again at the death. The Dow closed above psychological resistance at 18,000. The S&P thundered through psychological resistance at 2100 to close at 2113 – only one percent below the all-time high.

The US dollar index is off another 0.5% at 93.15, on a combination of pound strength but also an unwinding of the safe haven trade. Brexit volatility is playing havoc with the Aussie, which is 1.5% higher at US$0.7632.

With commodity prices relatively stable of late and a belief the RBA may well cut its cash rate again in August still prevalent, the Aussie has managed to rise to 76 from 72 during this whole Brexit episode. Yet if Britain stays, nothing has changed.

And therein lies the rub. Assuming the “stay” vote wins, nothing will have changed. Yet Wall Street, for one, is now higher than it was before anxiety set in a couple of weeks ago. All agree that if by some miracle “go” gets over the line at the last minute, global markets would have apoplexy. But the prevailing view now is that “stay” is more than priced in, thus upside is limited. By tonight we may well be in for a “sell the fact” pullback.

But not on the local market today. The SPI Overnight closed up 60 points. That would take us to 5340 on the ASX200 and put 5400 resistance back in the sights. What could get us there? Global markets only started worrying about Brexit two weeks ago. There was plenty to keep us away from 5400 before then.

With Brexit out of the way, assuming “stay” indeed wins, one obstacle is removed for the Fed. If the June US jobs number is solid, we’ll be back talking Fed rate hikes again. This morning the results of the latest US bank stress tests will be released. Tonight will see the annual rebalancing of the small cap Russell index, which is expected to produce significant volumes and potential volatility.

Spain will hold a general election this weekend. If the UK vote is close, despite a “stay” victory, will this steel the resolve of other EU nations into pushing for an exit of their own? Euro-scepticism is growing across the continent and anti-EU parties are gaining traction.

And there’s that small matter of the presidential election in the US. And someone tells me Australia is also set to have an election in a couple of weeks.

There’s still plenty of fun to be had over the rest of 2016.

Commodities

West Texas crude is up US$1.13 or 2.13% at US$50.13/bbl.

Copper rose 1.7% in London, lead 1% and aluminium 0.5%. Nickel and zinc stood still.

Iron ore is unchanged at US$51.70/t.

Gold is down US$9.60 at US$1256.30/oz. Given the exuberance of other markets one might have expected the safe haven to have seen a lot more selling, but gold does tend to wait until the day after to make its move.

We do note the other safe haven benchmark – the US ten-year bond yield – is up 5 basis points at 1.74% (implying selling).

Today

As noted, the SPI Overnight closed up 60 points or 1.2%. I suspect this morning we will probably step-jump from the open and then hover at that new level at least until an official result is clear. As to whether we’ll then see some profit taking is not clear, but it is a Friday. Riding out the cold and wet with a steak and a good red after an anxious week does seem tempting.

Wall Street can go back to focusing on tonight’s durable goods orders number.

CSR ((CSR)) holds its AGM today.

Rudi will Skype-link with Sky Business today to discuss broker calls at around 11.05am.
 

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