I'm actually in Continental Europe this week visiting clients, and I can confirm that in fact there is still economic activity. No, Brexit has not killed Europa.
Those hoping for a quick bounce back are disappointed, though, as afternoon trading shows the FTSE-100 down 1.9% and, even more disconcertingly, the pound now trading way below $1.33.
While the pound is trading though 1985 lows, the FTSE-100 itself is currently down only about 2.5% for the year 2016. As of Friday's close, the S&P 500 was trading down a massive 0.6% year-to-date.
So, as bad as Friday's stock action felt, it barely brought us below the flat line for the year. People forget how much the global markets (equities following commodities) rallied from the "Dimon Bottom" in mid-February through Thursday June 23, heretofore to be known as Brexit Eve.
So, I don't think we've seen the depths of depression for global equity markets. I'm guessing the FTSE-100 will follow sterling this week and then we'll see if there's a decoupling heading into the third quarter.
I'm not buying British stocks at these levels, though I noted BAE Systems (BAESY), Rolls-Royce (RYCEY) and Diageo (DEO) as three to watch in my Real Money column Friday. I'd also love to get a bite of the tasty yields offered by Royal Dutch Shell (RDS.A, RDS.B) and BP (BP).
But I'm on hold. Why am I not yet pulling the trigger? Because of the following factors, which make up what we have to look forward to in the third quarter:
- Brexit earnings warnings. You know they're coming, you know it's just a matter of time, and with third quarter earnings season kicking off with Alcoa's report on July 11th, the only suspense is which U.S. company will utter the "Brexit warning" first. My money's on Action Alerts PLUS portfolio name General Electric (GE), but Immelt is just one of many candidates. We're about to enter quarter six of the S&P 500's earnings recession, and, at this point, any excuse for soft guidance will do.
- Brexit-inspired central bank watches. Fed funds futures whipsawed Friday to a point at which a September cut became more likely than a September raise. That's crazy, and I do not believe the Fed will cut rates back to 0-0.25% that close to a general election. The FOMC's not the only game in town, though, and I would look for action from Mark Carney at the Bank of England and Mario Draghi at the European Central Bank. The ECB really can't cut rates from their already-negative levels, but can offer new and different methods of quantitative easing, while the BOE is most likely to do a bog-standard rate cut. The question is: will the market take these central bank actions as a move toward accommodation or an outright pushing of the panic button? If it's the former then stocks go up, if it's the latter, they will fall sharply. I'm worried that the market will view central bank intervention as panic now, which only reinforces my bearishness.
So, keep your eyes on the European bourses as you wake up each morning this week ... and learn to love Brexit as much as I have.