Who’s afraid of Brexit?

Most of the world’s stock markets, it appears. Bond markets, however, not so much, as investors fled to safe-haven fixed-income assets last week and abandoned equities.

The major U.S. indexes fell more than 1% in volatile trading, caused by uncertainty about the potential outcome of the United Kingdom’s June 23 referendum on whether to leave the European Union.

Also unnerving investors were fears of slowing U.S. growth. The Federal Reserve not only didn’t raise interest rates last Wednesday, as expected, but it also lowered its projections of U.S. growth and future hikes. Not so expected. The Fed now looks for paltry annual economic expansion of 2% through 2018.

The Dow Jones Industrial Average fell 190 points, or 1.1%, to 17,675.16. The Standard & Poor’s 500 index declined 25 points to 2071.22, and the Nasdaq Composite dropped 1.9%, to 4800.34.

That markets are pretty nervous is clear from the first-ever drop below zero in yields on 10-year German bonds, says Michael Sheldon, chief investment officer at Northstar Wealth Partners. With rates negative or low in other developed-nations bond markets, “we are in uncharted territory,” he says.

He doesn’t expect a recession this year, but global bond-market behavior “has an increasing number of investors worried that there is something out there that should have us more worried.”

“The Fed’s in a pickle,” says Aaron Clark, a portfolio manager at GW&K Investment Management. “It wants to raise rates, but the data isn’t strong enough.”

The central bank continually has had to back away from its own overly aggressive projections in the past two years. “The Fed’s credibility is at risk,” says Clark.

Although Brexit seems to be holding U.S. stocks hostage, Clark says an EU exit might be priced in. European banks have been crushed, he notes, with some down 40% and others at lows not seen in years.

There might not be much more downside if Britons vote to leave, but there could be a pretty rapid and volatile unwinding of positions if the U.K. votes to remain, he adds.

And, if you haven’t had enough of the Fed, Chair Janet Yellen is testifying in Congress Tuesday and Wednesday.

(Source: Barrons Online)

It’s too bad the trading week didn’t end Wednesday.

Major stock-market indexes finished the week mixed, and sharply below midweek levels, which came within a whisker of previous all-time highs. Instead, investors took profits Thursday, and especially Friday, on the rally that started in late May. Low trading volume exacerbated the decline. The Dow Jones Industrials rose 58 points, or 0.3%, on the week, to 17,865.34. The Standard & Poor’s 500 index lost and finished at 2096.07, although it set a new 52-week closing high Wednesday of 2119.12. The Nasdaq Composite fell 1%, to 4894.55.

European markets weakened on concerns about the coming Brexit vote, which will determine whether the United Kingdom leaves the European Union. Bond markets around the world rose as buyers sought a refuge from uncertainty.

Investors are confused by a plethora of polls with conflicting results. Some surveys show a majority will vote to leave the EU, but others indicate the country will remain. Although rising crude prices helped to propel stocks early in the week, oil fell sharply in the final two sessions.

Stocks fell in London, as did the British pound, and the anxiety migrated to U.S. markets on Friday, says Michael Shaoul, chairman of Marketfield Asset Management.

“You saw a lot of yield-chasing going on,” says David Seaburg, head of sales trading at Cowen. German, U.K., and Japanese government debt yields hit all-time lows Friday, making U.S. Treasuries look relatively attractive, he adds.

Big institutional investors, like hedge funds, haven’t chased the market higher, says Seaburg. Instead, quantitatively managed funds and passive index funds have driven the latest rally.

Brexit was an excuse for profit-taking, says Steve Massocca, portfolio manager for Wedbush Equity Management. He doesn’t see a possible U.K. exit affecting the U.S. much, “but given how much and given how fast the market had risen recently, it was a good excuse to take profits.”

Marketfield’s Shaoul says U.S. stocks’ inability to break through previous highs isn’t particularly worrisome short- term. Eventually, however, if the market isn’t able to get through, it will become an issue, says Shaoul, who puts an important S&P 500 support level at around 2085.

Since February 2015, each of the past eight times that the S&P 500 approached the 2130 level, “it has rolled over,” says Massocca. He calls this range top the “valuation ceiling,” where earnings growth isn’t enough to get stocks higher “but the Fed’s low monetary policy protects on the downside.” The Fed isn’t likely to raise interest rates this week, he adds.

(Source: Barrons Online)