The Scots voted firmly in favor of REMAIN but this fell far short of the English majority for LEAVE.
Pound falls as UK votes to LEAVE
The Pound fell this evening to its lowest level since the 1980s.
Gold surges as BREXIT looms
It looks like the LEAVE vote has it, with a lead of more than 900,000 so far.
Gold bugs seem to think so, with the spot price blasting through resistance at $1300/ounce. Retracement that respects the new support level would confirm a target of $1550*.
* Target calculation: 1300 + ( 1300 – 1050 ) = 1550
Gold: Should I BREXIT?
Odds of a BREXIT are drifting at the bookmakers, with REMAIN a firm 1 to 4 favorite. Fears of a BREXIT have been driving demand for gold and a REMAIN vote is likely to spur a sell-off.
* Target calculation: 1300 + ( 1300 – 1050 ) = 1550
Breakout above resistance at $1300/ounce turned into a bull trap with a sharp retreat to support at $1250/$1260. A REMAIN vote on June 23rd would test support at $1250 and possibly $1200. But the up-trend remains intact if support at $1200 holds.
Political uncertainty is unlikely to fade before the November US election. And economic uncertainty, fueled by Chinese instability, is likely to last a lot longer.
Capital outflows from China continue, with USDCNY running into resistance at 6.60. This is a sign that PBOC sale of foreign reserves has resumed, weakening the Dollar and boosting demand for Gold.
Gold’s up-trend is likely to continue. And breakout above $1300 would offer a long-term target of $1550/ounce*.
Disclosure: Our Australian managed portfolios are invested in gold stocks.
Odds Are U.K. Will Stay In E.U. | NPR
Peter Kenyon at NPR:
Britain’s bookies say the smart money is on Remain.
“At the moment, Remain is the odds-on favorite at 1 to 4, so that equates to about a 76 percent chance of the U.K. voting to remain in the EU,” says Jessica Bridge, spokeswoman for Ladbrokes, one of the U.K.’s larger betting firms.
The Leave side, meanwhile, “is drifting like a barge,” she says, with the odds 3 to 1 against.
Source: Britain’s Bookies: Odds Are U.K. Will Stay In E.U. : Parallels : NPR
Rebalancing, wealth transfers, and the growth of Chinese debt | Michael Pettis
Michael Pettis summarizes China’s debt dilemna:
This, I think, is really the key point. There is no way Beijing can address the debt without a sharp drop in GDP growth, but as unwilling as Beijing may be to see much lower growth, it doesn’t have any other option. It must choose either much lower but manageable growth today or a chaotic decline in growth tomorrow.
…..History suggests that developing countries that have experienced growth “miracles” tend to develop risky financial systems and unstable national balance sheets. The longer the miracle, the greater the tendency. That’s because in periods of rapid growth, riskier institutions do well. Soon balance sheets across the economy incorporate similar types of risk.
….Over time, this means the entire financial system is built around the same set of optimistic expectations. But when growth slows, balance sheets that did well during expansionary phases will now systematically fall short of expectations, and their disappointing performance will further reinforce the economic deceleration. This is when it suddenly becomes costlier to refinance the gap, and the practice of mismatching assets and liabilities causes debt, not profits, to rise.
Xi Jinping doesn’t have the short-term focus of most developed economies, where leaders are primarily concerned with the next election, but even he has failed to grasp the nettle. Cutting GDP growth may fuel greater political instability but this is a price China has to pay.
IEX Group Gains Approval for Stock Exchange | The New York Times
By NATHANIEL POPPER:
America is getting a new stock exchange from the most prominent critics of high-frequency trading.
After months of delays and a brutal lobbying battle that divided Wall Street, the IEX Group won approval on Friday from the Securities and Exchange Commission to become the nation’s 13th official stock exchange.IEX is run by the people at the center of the Michael Lewis book, “Flash Boys: A Wall Street Revolt,” which profiles the early efforts of the IEX team to create a trading exchange that would be somewhat shielded from high-frequency traders.
Other exchanges and trading firms had urged the S.E.C. to reject the IEX application to become an exchange.
Opponents of IEX, including the other stock exchanges, have argued that the structure of the new exchange will add unnecessary new complexities into an already complex stock market, and potentially end up hurting small investors.
…..The most novel and controversial feature of the IEX exchange is a so-called speed bump that would slow down trading slightly to throw off traders that rely only on speed.
The speed bump slows trades down by only 350 microseconds — or millionths of a second — but that is an eternity in a stock exchange universe in which computers can buy and sell stocks in nanoseconds — or billionths of a second.
The Nasdaq, and other existing exchanges, have said that the IEX’s speed bump will violate rules mandating that exchanges make their prices available to all parties at the same time.
Judging from the barrage of objections from other exchanges, they see IEX as a threat. Not as a threat to small investors as they so eloquently argued in their submissions — and whose interests they have ignored for years — but a threat to the billions of dollars in fees they receive from high-frequency traders for privileged co-location and access to stock exchange data feeds. Why would any investor want to trade on an exchange that encourages HFT when there is another exchange that offers a level playing field?
Source: IEX Group Gains Approval for Stock Exchange – The New York Times
Who is/isn’t buying Australian stocks?
Two interesting charts from Tim Baker at Deutsche Bank. Foreign investment in ASX equities, avoiding banks and resources, has slowed to a 5-year low.
Super fund investors have lost their enthusiasm for bank deposits, as interest rates tumble, and are allocating more to equities.
Hope isn’t a strategy
Cautious optimism has evaporated after poor recent polls favoring a BREXIT. I hope that sanity prevails but, as the saying goes: “Hope isn’t a strategy”.
Better to have a Plan A and a Plan B to cope with the two alternatives. But if enough investors decide their money is safer in the bank, then expectations of a fall are likely to become a self-fulfilling prophecy.
The S&P 500 does not appear unduly alarmed but a sharp fall on 13-week Money Flow warns of selling pressure. Reversal below 2000 would warn of another test of primary support (1820 to 1870).
Dow Jones Industrial Average shows a similar picture. Breach of medium-term support at 17400 to 17500 would warn of another test of primary support at 15500 to 16000.
A CBOE Volatility Index (VIX) spiked to 20, indicating increased market risk. Long-term measures remain unaffected.
Europe
Germany’s DAX retreated below medium-term support, warning of another test of primary support. 13-Week Money Flow below zero suggests a primary down-trend.
The Footsie broke support at 6000 warning of a test of 5500. Reversal of Money Flow below zero would suggest a primary down-trend.
* Target calculation: 6400 + ( 6400 – 6000 ) = 6800
Asia
The Shanghai Composite Index continues to range between 2700 and 3100.
Japan’s Nikkei 225 Index broke support at 16000 and its lower trend channel, warning of another decline.
* Target calculation: 15000 – ( 18000 – 15000 ) = 12000
India’s Sensex remains bullish, with a short retracement below 27000. Bearish divergence on 13-week Money Flow would end if the descending trendline is penetrated.
Australia
The ASX 200 broke medium-term support at 5200, warning of another test of primary support at 4750. Expect support at the former level of 4900 to 5000 but it is questionable whether this will hold. Combination of a seasonal sell-off and BREXIT fears are going to test buyers’ commitment.
The Banks Index fell sharply and breach of support at 7200 would offer a target of 6400*.
* Target calculation: 7200 – ( 8000 – 7200 ) = 6400
Health Care is experiencing a strong sell-off, led by CSL. This is a good long-term stock but exposure to the UK/Europe has spooked the market.
Gold surges on BREXIT fears
Long-term interest rates continue their decline, with 10-year Treasury yields breaking support at 1.65 percent. Breach signals a test of the all-time (July 2012) low of 1.40 percent.
Gold broke resistance at $1300/ounce on fears of a BREXIT vote on June 23rd and expectations that the Fed will need to soft-pedal on interest rates. Breakout offers a long-term target of $1550*.
* Target calculation: 1300 + ( 1300 – 1050 ) = 1550
Chinese buying of gold has been relegated to secondary status, at least for the next week. Sale of foreign reserves appear to have resumed, with the USDCNY running into resistance at 6.60. PBOC sale of foreign reserves weakens the Dollar, boosting demand for Gold.
Disclosure: Our Australian managed portfolios are invested in gold stocks.