Market Volatility Spikes on British Vote, Fed Rate Reluctance

Equities, currencies and interest rates gyrated, crude oil fell, German yields moved further into the negative and the CBOE volatility Index spiked to its highest in four months as markets tried to price the potential of a U.K. departure from  the European Union. 

Over the past two weeks polls have moved substantially in favor of a British exit with the so-called 'Brexit' vote leading between one to ten percentage points for the vote on next Thursday June 23rd. 

Equites had responded with four negative session in row. A fifth, today, was negative until news that the campaigning of both sides in the referendum will be suspended for the day following the murder of a British Labor Parliamentarian Jo Cox in West Yorkshire. The opposition Labor Party supports continued EU membership. 

The Dow lost about 170 points in the first half hour of trading touching 17,471 after yesterday’s close at 17640. The index has lost 2.1 percent since closing at 18,005 on June 8th.

The report of the killing and campaign suspension brought an already recovering index back into the black. The index closed up 93.41 points, 0.53 percent at 17,733.58. The S&P 500 also saw sharp initial losses, off 21 points from yesterday’s close to 2050.37 before returning to finish ahead 6.49 points, 0.31 percent at 2077.99.

The dollar moved in opposite directions against its two main counterparties.  Initially the U.S currency gained 1.5 percent versus the euro to 1.1130, on the spillover into continental economics and finances of a British succession before being knocked back to 1.1240 by mid-afternoon by the U.K. news.  

General risk aversion from the disruptive threat of the British vote to the global economy and the FOMC and Chair Janet Yellen’s dour assessments of the prospects for the U.S economy were the main drivers of the yen which reached a 22 month high again the dollar at 103.55 before going to ground around 104.30 after the British news. 

Market expectations for an increase in the Fed Funds rate have dropped well below even for the next nine months following the downbeat FOMC statement and Yellen news conference yesterday. The odds for a December hike, according to the futures compiled by Bloomberg, are now just 34.5 percent, they had been as high as 57 percent before the Fed meeting.

These chances are a far cry from the Fed's own optimistic prediction back in December for four 0.25 percent hikes this year.  The Fed that has come around to the markets’ far less sanguine assessment of the U.S and global economic potential for this year and next. 

The yield on the 10-year Treasury continued to lose ground, trading 1 point lower at 1.5618 at 3:00 pm, having been down as much as five points earlier.   Since its high on May 31st at 1.8878 the yield has shed 32 points and it as its lowest rate in almost three years.  The 2-year yield was less than a point higher at 0.6744 at 3:00 pm. 

West Texas Intermediate, the U.S. crude oil standard had declined 3.54 percent, $1.70 to $46.31 at 3:00 pm. Its drop was unaffected by the current event effects in other markets. It is down 10 percent from its June 9th high of $51.67. 

The yield on the German 10-year Bund closed at -0.24 percent on Thursday, a record. Tuesday’s finish at -0.04 percent was the first close below zero in history. 

The Chicago Board Options Exchange Volatility index, the most widely traded measure of market volatility, the Vix for short, punched to 22.89 after closing yesterday at 20.14.

The Fed is following not leading the markets, Britain may be set to reverse a half-century of European integration and Germany has slipped down the rabbit hole of negative interest rates.

It is no wonder traders are the more nervous than they have been in months.

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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