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The Markets This Week

June 22, 2016 | Weekly Commentary

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)

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