Australian Investment Blog

Will BREXIT be another Hong Kong?

We were talking to a number of traders yesterday about stocks and of course you guessed it BREXIT. Our current view remains that US stocks will make fresh all-time highs in 2016 remains intact - its less than 5% away. However while many still could see merit in our opinion they were wondering what the catalyst would be to propel such an advance. Our view remains the enormous weight of money sitting on the sidelines will eventually become frustrated, earning little to no return, and when they see equities hold up after BREXIT their confidence in stocks will improve. A market that does not fall on bad news is a strong market and on a monthly basis the S&P500 to date has hardly reacted to the BREXIT. Last night US growth was revised up to 1.1% beating estimates, the US economy may actually be stronger than many think....that would be bullish.

We feel that while the EU will continue to experience uncertainty over coming months it may actually see some positives, including strength and unity from the remaining members. Markets become fixated on short-term events but they also posses short memories. In 1997, Hong Kong went back to China and in the build up to the handover concerns were so high that international merchant banks like Goldman Sachs moved much of their operations to Tokyo, however looking back on this event now, the transformation has become unnoticeable. Also stocks recently had a decent correction into early 2016 around China fears but these worries have faded into the background while nothing has materially changed.

US S&P500 Monthly Chart

Since the strong 17% rally from early February the S&P500 has corrected well under 50% of the advance which is a normal / common bullish formation - ignoring any fundamentals around BREXIT. We have seen nothing to negate our positive outlook but a close over 2050 is required to make us short term positive.

US S&P500 Daily Chart

Many investors may be amazed to know that the FTSE is trading at its highest ever valuation against the EuroStoxx but the weak pound is good for many British companies.....let's hope the RBA cuts rates again and gets the $A back under 70c! Amazingly the FTSE remains bullish technically which is encouraging for the ASX200 due to its high correlation with the UK indices - both have significant resource components.

UK FTSE Weekly Chart

We also believe that the panic around BREXIT may have created panic extremes in global bond markets. If this view is correct short-term bonds should fall = rates higher and stocks will rise.

US 10-year Bond Yields Monthly Chart

• The Dow closed up 269 points (+1.6%) to 17,410. The S&P500 had a stronger finish, up 36 points (+1.8%) to 2,036.
• Oil helped to raise US$1.52 (+3.3%) to close at US$48.11/bbl. Investors were counting on a sizeable cut of 2.4m barrels in US stockpiles in the latest Reuters poll.
• As tensions over the Brexit vote eased, Gold dropped US$6.80 (-0.5%) to US$1,314.50/oz.
• Iron Ore was quiet, but weaker, dropping 21c (-4%) to US$53.65/t. BHP however, is expected to outperform today, as it closed an equivalent of 2.6% higher to $18.51 in the US from Australia’s previous close.
• The ASX 200 is expected to open 70 points higher, near the 5,175 level as indicated by the September SPI Futures this morning.

Regards,
The Market Matters Team
28-34 O'Connell St
Sydney, NSW 2000


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