After market spasm, Wall
Street looks past Brexit
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[July 02, 2016]
By Noel Randewich
SAN FRANCISCO (Reuters) - A week-long
convulsion in U.S. stocks induced by Britain's vote to leave the
European Union has left some on Wall Street feeling a little bit better
thanks to stronger expectations of prolonged low interest rates.
The result of the June 23 referendum has created a bounty of
uncertainty about the future of the United Kingdom, Europe and the
global economy. But since those questions will likely take years to
answer, many U.S. investors are focusing on what they see as an
immediate, virtual certainty - that the Federal Reserve will not
raise interest rates anytime soon.
"The Fed is the 800-pound gorilla, but it's an 800-pound gorilla
that's been pushed back in its cage, and it's not going anywhere,"
said Ted Weisberg, a trader with Seaport Securities in New York. "I
would have to think that the bias will continue to be on the
positive side for the market."
Following the S&P 500's sharp 6 percent drop and near-complete
recovery since the referendum, the benchmark stock index is back in
familiar territory, just short of record levels it has repeatedly
failed to breach for over a year.
The S&P gained 0.19 percent on Friday, bringing its gain over four
days to 5 percent. [.N]
Extreme currency volatility and global financial uncertainty created
by Brexit have left most traders expecting a U.S. rate hike well
into 2017 at the earliest, compared with late 2016 prior to the
vote. Historically low interest rates have fueled U.S. stock gains
since the 2008 financial crisis and many investors fear that higher
rates would imperil future gains.
While U.S. investors monitor the slow unfolding of Brexit in Europe,
the June U.S. employment report on July 8 will be an immediate focal
point made more important by last month's surprisingly anemic jobs
Even an unexpectedly robust June jobs report hinting at inflation
would probably not be enough to lead to expectations of a rate hike
anytime soon, strategists say. But another weak report could damage
sentiment if it is interpreted as a sign that the U.S. economy is on
"If there is another shock, people will identify that as a trend and
there will be recession worries," said Aaron Jett, vice president of
Equity Research at Bel Air Investment Advisors. "Even if the jobs
number is good, we still think the Fed can use Brexit as an excuse
to not raise rates."
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A trader works on the floor at the New York Stock Exchange (NYSE) in
New York City, New York, U.S., July 1, 2016. REUTERS/Andrew Kelly
Investors will also begin to focus on U.S. corporate profits. Wells Fargo & Co,
Citigroup and JPMorgan Chase & Co will be among the earliest U.S. heavyweights
to post second-quarter results, all reporting in mid-July.
With U.S. companies stuck in an earnings recession since last year due to
slumping oil and a brawny dollar, analysts expect second-quarter results to fall
4 percent across the S&P 500, not quite as bad as the previous quarter's 5
S&P 500 aggregate earnings are expected in the third quarter to grow for the
first time since 2015, although forecasts have slipped since the Brexit vote as
investors fret about the effect of renewed dollar strength and potential
economic stumbles in Europe, according to Thomson Reuters data.
"If executives use Brexit as an excuse to take down earnings guidance by more
than a couple of percentage points, then I think markets will be in for a
pullback," said John Canally, chief economic strategist for LPL Financial.
(Reporting by Noel Randewich; Editing by Dan Grebler)
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