The second quarter came to a close on Thursday in the midst of a furious rally in the S&P 500 off Monday’s lows, the third strongest end to the first half of the year on record and the strongest final three days since 1962. Looking back at Brexit, the two day selloff this past Friday and Monday for local European investors was extremely weak, but adjusting for foreign currency declines for U.S. investors, last Friday and Monday were nothing short of epic, ranking in the top two or three worst two day periods on record. The British pound fell from $1.48 to $1.33, plummeting to multidecade lows. The subsequent recovery rally has the S&P 500 trading right back up to its ‘kryptonite level’ of 2,100, which has been difficult for the market to break through. Oil traded down following the vote and rallied back to approximately ‐3% from last Thursday, a surprisingly limited downdraft given the surge in the dollar. Price action in global government bond markets and interest rates have been even more remarkable than equity market action. During trading last week, the 10yr U.S. Treasury touched an all-time low 1.385% while the U.S. and U.K 30 year bonds closed at all time lows of 2.226% and 0.866% respectively. Volatility across risk assets has investors clamoring for safe haven bonds to the extent that there are currently over $11 trillion worth of government bonds trading at negative yields globally. Overall market action last week suggested that last Friday’s Brexit vote was a nasty surprise but ultimately not an imminent disaster for the global economy. Pace of exit and politics are likely to dominate the narrative for the foreseeable future. Ultimately, there are three potential tracks this narrative might follow ‐ a blessing, a disaster, or somewhere in the murky middle. Risk markets last week seemingly acknowledged that whichever way things transpire, it will take some time to unfold. In the meantime, the cloud of uncertainty is likely to linger, introducing an unwelcome layer over a slow growing global economy. All eyes will now turn to policy responses to determine both monetary and fiscal reactions to the new landscape. A coordinated fiscal response across EU nations (read: Germany) would be an immensely positive influence, while inaction may invite a market view of ‘no confidence’. The extent to which further monetary policy accommodation would serve to embolden markets is unclear as the marginal benefit of already extraordinary measures is debatable. The U.S. economic calendar didn’t give the Fed any reason to look at tightening policy. Highlights include an upward revision to Q1 GDP to 1.1%, tame core PCE of 1.6% year over year, a slow May for durable goods of ‐2.2%, but stronger than expected reports on Chicago PMI and ISM Manufacturing for May.
