U.S. equities were hit on Monday after overnight weakness in Europe and Asia spilled into the New York session. There was no single catalyst for the drop, just a building sense of unease ahead of the Federal Reserve policy decision and press conference on Wednesday, the over-the-weekend terror attack in Orlando, growing poll support for “Brexit” and volatility in currency markets.
In the end, the Dow Jones Industrial Average lost 0.7%, the S&P 500 lost 0.8%, the Nasdaq Composite dropped 0.9% and the Russell 2000 lost 1.1%. The dollar was weaker, gold gained 0.9%, crude lost 0.4% and Treasury bonds were stronger.
Defensive utility stocks led the way limiting their decline to a 0.1% gain. Materials were the laggards, down 1.3%.
Professional networking icon LinkedIn Corp (NYSE:LNKD) gained 46.6% after agreeing to be acquired by Microsoft Corporation (NASDAQ:MSFT) for $196 a share in cash in a deal valued at more than $26 billion. The purchase is expected to be accretive to earnings by 2019. MSFT shares lost 2.6% as the market pooh-poohed the deal.
Gun stocks Sturm, Ruger & Company (NYSE:RGR) and Smith & Wesson Holding Corp (NASDAQ:SWHC) gained 8.5% and 6.9%, respectively, on the Orlando nightclub shooting headlines, in which the gunman pledged allegiance to the so-called Islamic State. Facebook Inc (NASDAQ:FB) lost 2.3% on reports Citron’s Andrew Left, a well-known short-side independent research firm, is shorting the stock.
Overnight, markets were hit even harder. Germany’s DAX lost 1.5%. Japan’s Nikkei lost 3.5%. Hong Kong’s Hang Seng lost 2.5%. And China’s Shanghai Composite lost 3.2%. The yen rally made everything worse by pressuring carry trade positions.
Investors were disappointed by weak economic data out of China, with industrial production and retail sales in-line but fixed asset investment much weaker than expected — posting the slowest growth since 2000 at a 9.6% annual rate. They were also bothered by a new ICM Brexit polling showing “Leave” support in the United Kingdom at 53% support vs. 47% for “Remain.”
But above and beyond all of this, the big news as the huge 23.1% rise in the CBOE Volatility Index (INDEXCBOE:VIX) for its best gain in 10 months and its sixth consecutive risk. Trading in VIX futures was the third most active of all time.
Known as Wall Street’s “fear gauge,” the measure had been in a sustained downtrend and consolidation pattern since February as hopes of a delay to the Fed’s rate hike scheduled squeezed volatility out of stocks and allowed the slow-burn melt up of the past few months.
Yet, just days after the Dow retook the 18,000 level, investors have succumbed to a wave of panic and uncertainty. While Fed rate hike odds remain low for Wednesday’s meeting, the fear is that action in July could be combined with the fallout from a possible Brexit event mixed with ongoing evidence of economic unevenness both at home and overseas.
This puts the Fed in an uncomfortable position. Further backing away from a July or September rate hike — given Brexit concerns and market instability — would only erode their credibility at a time when labor market tightness is starting to deliver evidence of wage inflation.
And besides, if voters in the United Kingdom decide to unshackle themselves from the European Union, it may not matter where the Fed moves its “dot plot” on Wednesday anyway since the Eurozone will suddenly look vulnerable.
Given all this, I continue to recommend defensive positions such as the VelocityShares 2x VIX (NYSEARCA:TVIX) that gained nearly 30% for Edge subscribers today.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
