Fed Meeting Begins, But Investor Eyes On Britain as Brexit Vote Looms

The Fed meets today and tomorrow, but investors’ attention appears to be nearly 4,000 miles to the east.

All around the world, markets seem spooked about the June 23 British “Brexit” referendum on whether to leave the European Union. Investors are snapping up bonds, the U.S. dollar, and gold while selling stocks and oil. It’s hard to see this fear trade changing much ahead of the vote, especially with some recent polls showing voters in Britain leaning toward packing their bags and leaving the E.U. Most of the closely followed odds makers still predict a vote to stay, but the numbers are getting closer. A British exit from the E.U. could slam the country’s economy, with some economists forecasting a 2% drop in British Gross Domestic Product (GDP) as a result of Brexit.

But there was some news in the U.S. early Tuesday as well, with the government reporting a 0.5% rise in May retail sales, above the consensus estimate of 0.3%. Retail sales provide an important look at the state of consumers, and this report would appear to indicate U.S. consumers are still healthy, despite the disappointing jobs number released earlier this month. Inflation data due later this week could provide further insight.

The Fed isn’t considered likely to make any rate changes this week, but it’s usually instructive to look closely at the press release following the meeting, as well as any comments Fed Chair Janet Yellen makes when the meeting ends early Wednesday afternoon. Will Yellen hint at future policy moves and provide any insight into the Fed’s calendar? Many analysts believe the Fed is likely to make at least one rate hike in 2016, but the likelihood of such a move keeps slipping farther into the year, according to the futures market.

Along with Brexit, the Fed and retail sales, a big story this week is volatility, with VIX futures at the Chicago Board Options Exchange’s (CBOE) soaring Tuesday to levels last seen in late February. VIX, a closely watched indicator of market fear, has executed a complete turn-around from early this month, when it touched multi-month lows. Looking at the big picture, it seems pretty clear what’s happening. The markets are focused on Brexit, and the Fed meeting today and tomorrow and Wednesday’s Bank of Japan meeting also play into market fears. Markets don’t like uncertainty, and that typically leads to the kind of flight to safety that’s happened this week. The monster move in the VIX is a big red flag, saying, “There’s danger out there!”

The flight to safety that began last week continued early Tuesday, with the dollar showing strength and bonds rising across several markets. Yields on U.S. 10-year Treasury notes slipped under 1.6%, the lowest levels of the year and the lowest since 2012. The pressure on U.S. yields came as the German 10-year bund yield fell below zero for the first time ever.

Retail sales may grab some headlines today, but many investors are still buzzing over Monday’s news that Microsoft Corporation MSFT will acquire LinkedIn Corp LNKD for $26 billion. The move raised some eyebrows among those who remember Microsoft’s mixed track record on acquisitions over the years, and MSFT shares traded down 2% at times Monday even as LNKD soared more than 40%. The news also triggered speculation about whether this might be the beginning of a “Cloud consolidation” in which other web-based firms start looking ripe for plucking. Some of that enthusiasm was evident Monday in the performance of Twitter inc TWTR, which was up 6% or more at times during Monday’s trading.

Speaking of technology stocks, it’s worth watching Apple Inc. AAPL shares this week with the Apple Worldwide Developers Conference (WWDC) going on from today through Friday in San Francisco. Will Apple make any news that could boost its sagging shares?

On the commodities front, OPEC said Monday it expects global oil demand to remain unchanged this year from its prior forecast, which is for a 1.2 million barrel a day rise to 94.18 million barrels a day. OPEC members pumped 32.4 million barrels a day in May. Oil prices have been climbing since February in part due to falling production in places like Canada, Nigeria, and the United States. The question is whether benchmark producer Saudi Arabia will keep raising production to make up for losses elsewhere. The OPEC report showed a slight bump in Saudi Arabian output in May.

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Oil Corellation Less Evident: For a few days there last week, the S&P 500 Index (SPX) seemed to be up to its old habit of following the oil market up or down on any given day. And there’s still a good deal of corellation between the two markets, just not the type of embrace the two had in January and February. Late last week, the corellation between crude and the SPX was 69%, compared to highs above 90% a few months back. Oil remains near 2016 highs and gas prices are up around the country, but to put things in perspective, nearby U.S. crude futures remain about $10 below mid-2015 peak, which was above $60.

Producer Price Index Looms Wednesday: Today’s retail sales report and the Fed meeting take the spotlight this week, but closely-watched inflation data could also be a factor in the market, with the Producer Price Index (PPI) for May due early Wednesday. Consensus, according to Briefing.com, is for a 0.3% rise in PPI from the prior month, but just a 0.1% rise in core PPI, which strips out the volatile food and energy components. The previous month, PPI rose 0.2% and core PPI rose 0.1%. If core PPI comes in near the consensus figure, it would be a sign that inflation remains muted. Weak inflation world-wide, including in the U.S., is considered a major factor behind the recent steep decline in interest rates. The Fed is believed to keep a close eye on PPI as it calculates rate policy, and also on the Consumer Price Index (CPI), which is scheduled for early Thursday. All in all, it’s quite a busy week in terms of data. In one sense, the data this week holds even more importance than usual, coming on the heels of the disappointing jobs data earlier this month. This week’s retail sales, PPI, CPI, and the Empire State Manufacturing Survey, which is due Wednesday, could help give investors a better sense of whether the jobs report was an outlier or if it really was a sign of slower economic growth.

Trying to Time the Market? Maybe Not a Good Idea: Investors who try to time the stock market could be missing out on big gains, according to a recent study. During the last 20 years, an investment in the stock market would have provided an 8.19% average gain per year, Boston financial research firm Dalbar determined. But the average person with stock mutual funds only ended up making 4.67% annually, Dalbar found. Why? Because average investors tend to pull their money out of the market during periods of weakness, like 2008. Though stocks lost 38% that year, there have been more up years than down years in the last 20, and Dalbar concluded that the best strategy would have been to simply keep money in the market through its ups and downs. Dalbar said panic selling during downturns accounted for 44% of the difference between what stock mutual fund investors made and the market’s actual performance. And an additional 15% of the difference came because people held onto cash for too long after the market fell, missing the chance to invest at lower prices.

 

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