Volatility at 1-Year Low after Brexit
|World ETF Performance|
|Ticker||Name||Return since Brexit||1 Week||1 Month||YTD|
|IWRD||iShares Core MSCI World UCITS ETF||0.90%||0.16%||1.66%||3.34%|
|SPY||SPDR S&P 500 ETF||3.05%||0.65%||4.39%||6.56%|
|DIA||SPDR Dow Jones Industrial Average ETF||3.17%||0.34%||4.47%||6.62%|
|EWG||iShares MSCI Germany ETF||-4.84%||0.20%||-1.74%||-5.38%|
|EWQ||iShares MSCI France ETF||-5.99%||-0.26%||-2.52%||-4.09%|
|EWU||iShares MSCI United Kingdom ETF||-6.65%||-0.13%||-4.10%||-4.28%|
|CSSX||iShares Core EURO STOXX 50 UCITS ETF||-2.14%||0.51%||-0.96%||-6.38%|
|EWJ||iShares MSCI Japan ETF||0.25%||-0.17%||2.51%||-2.15%|
|AAXJ||iShares MSCI All Country Asia ex Japan ETF||3.98%||0.92%||6.02%||7.17%|
|EEM||iShares MSCI Emerging Markets ETF||3.48%||0.78%||5.98%||11.74%|
|MCHI||iShares MSCI China ETF||3.94%||1.05%||6.29%||-0.74%|
|Ticker||Name||Return since Brexit||1 Week||1 Month||YTD|
|SPY||SPDR S&P 500 ETF Trust||3.1%||0.7%||4.4%||6.6%|
|DIA||SPDR Dow Jones Industrial Average ETF Trust||3.2%||0.3%||4.5%||6.6%|
|XLF||Financial Select Sector SPDR Fund||1.5%||0.7%||3.6%||-0.6%|
|XLU||Utilities Select Sector SPDR Fund||4.8%||1.5%||5.1%||21.9%|
|-||EURO STOXX 50 VOLATILITY||-45.6%||-34.9%||-51.3%||-11.2%|
|GLD||SPDR Gold Trust||5.2%||-0.4%||4.5%||24.5%|
|UUP||PowerShares DB US Dollar Index Bullish Fund||4.4%||1.0%||3.9%||-1.7%|
|FEZ||SPDR EURO STOXX 50 ETF||-6.1%||-0.3%||-2.8%||-7.8%|
During the last few weeks we were bombed with vast amounts of news and changes to the status quo. We observed the referendum results in UK leading to a Brexit, EU entering in uncharted waters, Italian banks prices plunging and political turmoil in Turkey and Armenia.
Despite the "negative" news and the risks arising from the events across the globe, stock markets (with one exception: EU countries) have positive returns. S&P500 and DJ are up by 2.9% and 3.1% respectively. FTSE100 is up by 6.2% since Brexit (with a starting point the day before the referendum results were announced).
Since Brexit, VIX has declined 30% and Eurostoxx 50 Volatility has slid 45.6% which under the current circumstances and the risks does not seem to be fundamentally plausible.
Central Banks' Role
Central banks seem to fail to give the right message to markets due to uncertainty. The Fed kept rates unchanged last month, with the Brexit being quoted as an excuse. We believe that they will keep rates unchanged in the next meeting despite the good economic figures, mainly due to uncertainty around Brexit and the upward trends in USD.
Bank of England on the other was expected to lower rates in the meeting which took place 2 weeks ago but surprised investors by keeping rates unstable as the effects of Brexit have not been reflected in the economy yet. This pushed FTSE lower but the market expectation dictate for a rate hike in August along with a package of monetary loosing.
ECB has also shown some caution as Fed and BOE by keeping rates and QE measures on the same level as there is no clear picture of how Brexit will affect the Eurozone.
We see more uncertainty arising from the failure of Central Banks to shape the path of future interest rates. Although most market participants believe that ECB and BoE will loosen monetary policy, their stance still remains neutral and they have not indicated any possible hikes or cuts in interest rates which could be just a strategy to give investors the impression that there is no need for extreme monetary policy decisions. Fed is also expected to keep interests in the same level in the next meeting claiming the same reasons as ECB and BoE.
Weekly FTSE and S&P Winners/Losers
|FTSE Weekly Winners/Losers|
|EZJ||easyJet plc||-9.91 %|
|AAL||Anglo American PLC||-7.22 %|
|BLT||BHP Billiton PLC||-7.20 %|
|NXT||Next PLC||-4.94 %|
|RIO||Rio Tinto PLC||-4.31 %|
|TUI||Tui AG||-4.21 %|
|BT||BT Group PLC||-4.00 %|
|IAG||International Consolidated Airlines Group SA||-3.84 %|
|TSCO||Tesco PLC||-3.68 %|
|ANTO||Antofagasta PLC||-3.23 %|
|ARM||ARM Holdings PLC||41.13 %|
|SGE||Sage Group PLC||6.21 %|
|ADM||Admiral Group PLC||4.43 %|
|LAND||Land Securities Group PLC||4.40 %|
|RSA||RSA Insurance Group PLC||3.66 %|
|BLND||British Land Company PLC||3.66 %|
|LGEN||Legal & General Group PLC||3.61 %|
|AHT||Ashtead Group PLC||3.54 %|
|IHG||InterContinental Hotels Group PLC||3.42 %|
|PRU||Prudential PLC||3.42 %|
|S&P500 Weekly Winners/Losers|
|NFLX||Netflix Inc||-12.70 %|
|LUV||Southwest Airlines Co||-12.35 %|
|DO||Diamond Offshore Drilling Inc||-8.98 %|
|MUR||Murphy Oil Corp||-8.94 %|
|CF||CF Industries Holdings Inc||-8.24 %|
|MRO||Marathon Oil Corp||-7.23 %|
|NUE||Nucor Corp||-6.97 %|
|RIG||Transocean Ltd||-6.34 %|
|HAS||Hasbro Inc||-5.96 %|
|GWW||W W Grainger Inc||-5.82 %|
|CHK||Chesapeake Energy Corp||21.95 %|
|EBAY||eBay Inc||15.76 %|
|QCOM||Qualcomm Inc||11.69 %|
|URI||United Rentals Inc||11.55 %|
|CI||Cigna Corp||10.88 %|
|HUM||Humana Inc||10.80 %|
|CTAS||Cintas Corp||10.60 %|
|BIIB||Biogen Inc||10.56 %|
|CMG||Chipotle Mexican Grill Inc||9.29 %|
|STX||Seagate Technology PLC||9.27 %|
Stock Markets Outlook
The past week has been quite good for equity markets with the main indices around the world showing positive performance. However, European indices are still yet to recover from Brexit while the FTSE has returned 6.2% in the period. We believe that the recent rally of the equity markets is not supported by fundamentals given the political instability in Europe and Middle East as well as the macroeconomic risks arising from this. The economic sentiment has already been influenced with retail sales in UK taking a serious hit last month. We believe that the start of talks about the way UK will exit EU and the slowdown in country's growth could weigh on investors sentiment. In addition a hike in discount rates used to evaluating UK stocks could mean lower valuations. A great deal of caution is needed as the rally has driven prices up without any fundamental change in earnings expectations and the volatility remains in historical lows.
Next Week's Economic Calendar
The economic calendar for next week includes the G20 meeting the consumer confidence in US (Tuesday), GDP for UK and Fed's interest rate decision (Wednesday), GDP (US and EU) and Unemployment in EU on Friday.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.