Things financial look like they have already seen the results of the UK referendum to depart or remain in the European Union. If you have been following the media, the polls and the odds-makers, the choice was basically down to a sovereignty (leave) issue and an economic (stay) one.
In the polls it was too close to call. The gambling odds favoured the stay camp.
The British Pound is, this morning, at it's best levels since December, up more than 6% from its lows last week (indicating that financial markets are going with the "bookies"):
Global stock markets are higher as well. Relief is in the air, this morning, but the polls don't close until 10pm UK time (5pm EDT) later today.
It will be behind us soon and will be one of the many uncertainties that financial markets have been facing.
If, as the sentiment appears to be indicating, the status-quo is maintained, the focus shifts back to the global economy which in a number of major advanced economies remains mired in deflation or low inflation and economies are not yet showing the expected results of the massive amounts of monetary stimulus in Europe, Japan and China.
Further, the path of the US economy remains a major question mark. The US Federal reserve wants to "normalize" interest rates, but cannot, at the moment, because the economic data does not yet warrant it.
And, even if the data permits it (as we have suggested numerous times on our weekly webinar over the last number of weeks http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html ), a flatter yield curve (higher short-term rates or lower long-term rates or a combination of both) pushes the US economy closer to recession (as was the case in 2007):
And of course, there is the US presidential election campaign and who knows what twists and turns that situation holds for us. A"Reality TV" show like no other!
And of course, if equity markets rally, as they have already this morning (S&P 500 is closing in on 2100, only 35 points or 1.6% away from its all time highs) with earnings and expected earnings levels entering their 5th consecutive quarter of negative growth, then the fundamentals will continue to be out of line with market prices and equities remain very expensive on those metrics.
If the bookies are wrong? I do not even want to think about the consequences of the UK leaving the European Union and the domino effect on all of Europe and the global economy, but the volatility meter would spike because the added uncertainty would send investors into a flight out of risk assets.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist