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The damage from last week's surprise "Brexit" vote is continuing
this week, with U.S. equities down again sharply on Monday as
currency market volatility persisted. Overnight, China kicked
things off by devaluing the yuan by 0.9% from Friday's fix - the
weakest since December 2010.
There was some relief after Spanish elections basically
maintained the status quo (weak government by the conservative
Popular party), but the United Kingdom's
index still finished with a 2.6% loss. The British government
also saw its long-term credit rating downgraded two notches from
AAA to AA by Standard & Poor's.
In the end, the
Dow Jones Industrial Average
lost 1.5%, the
S&P 500 Index
lost 1.8%, the
lost 2.4% and the
finished the day 3.4% lower. The dollar was mostly stronger,
gold gained 0.2% and crude oil lost 2.7%. The decline boosted the
ProShares UltraShort QQQ
) to a 3.9% gain for
subscribers as big tech stocks take it on the chin.
Materials and financial stocks led the decline with losses of
3.4% and 2.8%, respectively. Headphone maker
) was a rare bright spot, up 5.6%, after announcing a proposal
from Mill Road Capital to acquire the company for $6.05 a share
in cash. Semiconductor supplier
Skyworks Solutions Inc
) dropped 5.8% after being initiated at underperform by Morgan
Stanley on exposure to the volatile smartphone market and
reliance on just three customers for 62% of sales.
Key technical support levels have already been violated or are
under threat. The Dow Jones has traded below its 200-day moving
average for the first time since March. The Nasdaq has tested
back to levels not seen since February. Ten-year Treasury bond
yields, at 1.46%, have returned to lows not seen since 2012's
scare over the European debt crisis.
There has been rising concern about forced selling by
systematic strategies like risk parity, which responds to
increased market volatility by trimming exposure. This mechanical
trading system effectively draws liquidity out of the cash
market, potentially magnifying downside moves. Traders are
pointing to similarities to the August 2015 and January 2016
Overseas, the damage is even worse. U.K. sovereign default
risk has spiked to three-year highs. Italian bank stocks are down
25%, while trading in British banks was halted overnight after
losing 23% over the last two days. Banks are scrambling for U.S.
dollar liquidity, tightening interbank lending markets.
Loses look set to continue as the political fallout
The collapse in "cable" - the valuation of the British pound
vs. the U.S. dollar - was what statisticians call a 12-sigma
move. That is, it was 12 standard deviations below the average
decline. The very definition of a black swan event.
Loses look set to continue as the political fallout is
In comments to Parliament, British Prime Minister David
Cameron said that the vote of the people to leave the European
Union must be respected - diminishing the hope of many globalists
that the result would be ignored as was anti-Lisbon Treaty votes
in 2008 and the anti-bailout vote by Greece in 2015. The
President of the European Parliament raged that the British
"violated the rules" and that it is not "the EU philosophy that
the crowd can decide its fate."
Ignoring or invalidating the result of one of the world's
largest democracies would've unleashed populist outrage.
Cameron added that the timing of triggering Article 50 - the
EU's exit clause - was to still be decided. The process is likely
to take years, during which the crisis will simmer. Weaker
members of the European Union will use the chaos to negotiate
relaxed fiscal austerity and debt repayment requirements under
the threat of following Britain's example. Creditor nations like
Germany will want to hurry the process along to deny this
Bank of America Merrill Lynch analysts call Brexit the
"biggest electoral riposte to our Age of Inequality" and
recommend clients prepare for a period of populist economic
policies, higher levels of volatility, strength in precious
metals and the outperformance of Main Street assets vs. Wall
Street assets. They recommend a focus on cash, gold, and
volatility over the near term.
I continue to recommend a focus on areas of weakness, such as
big bank stocks. The July $60
JPMorgan Chase & Co.
) puts recommended to
subscribers are up nearly 76% since initiated on Friday.
Anthony Mirhaydari is founder of the
investment advisory newsletters. A two-week and four-week
free trial offer has been extended to InvestorPlace
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