Market Lab Report - Premarket Pulse 7/5/16
Major averages rose Friday on lower, below average volume ahead of the 3-day weekend. All major averages are now above their respective 50-day lines as the markets have shot straight up from their bottoms. The UK market did one better and closed above the prior recent high it achieved before the Brexit vote was tallied.
Markets are voting that the selling was overdone as it will be at least a 2-year process for the UK to exit the EU. The concerted effort on behalf of central banks to insure ample liquidity also gave a confidence boost as well as a QE-related capital boost to markets.
Nevertheless, serious issues remain with respect to the flagging global economy, the fate of the EU, and a loss of confidence in our governments and central banks.
Indeed, the Bank of England (BOE) on Tuesday released its Financial Stability Report, noting “there is evidence that some risks have begun to crystallize,” in the aftermath of the June 23 referendum.
“The current outlook for UK financial stability is challenging,” the bank said in the report.
The BOE will hold a press conference at 11 a.m. London time, or 6 a.m. ET.
As expected, the BOE will opt for additional measures of quantitative easing, this time by lowering capital requirements for UK banks in a move that should allow them to lend an extra £150 billion ($199 billion) to UK companies and individuals, a move they had rejected earlier this year. Of course, this move may simply help UK banks hoard more capital as banks around the world have been reluctant to lend in these uncertain, risk-off times.
We remain focused on potential short or long plays as it is key to remain fluid and not get wedded to any bullish or bearish stance. Surprise news could send the markets sharply lower over a period of days as has happened numerous times over the past year. Alternatively, QE could push reluctant US markets to new highs as the QE-capital tends to finds its way into US markets as they are perceived as the tallest standing midget. Indeed, the US stock market is the only country where markets have traded near all-time highs while all other global markets have been in bear market territory for at least a year if not longer.
Still, the US stock market has been hit with a growing number of corrections that are economically or interest rate hike induced. Markets have become addicted to the QE-morphine drip so if a central bank stands pat on interest rates, it is often met with heavy selling if markets expected a further reduction in rates or additional measures of QE.
Consequently, interest rates are more likely to continue their moves lower in the coming months, fueling the NIRP environment, which should propel hard assets such as US stocks higher, but this will only serve to make the global economic situation more dire.
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