Stock Market Today: Stocks Slump as ‘Brexit’ Fears Build

The damage from last week’s surprise “Brexit” vote is continuing this week, with U.S. equities down again sharply on Monday as currency market volatility persisted. Overnight, China kicked things off by devaluing the yuan by 0.9% from Friday’s fix — the weakest since December 2010.

There was some relief after Spanish elections basically maintained the status quo (weak government by the conservative Popular party), but the United Kingdom’s FTSE 100 index still finished with a 2.6% loss. The British government also saw its long-term credit rating downgraded two notches from AAA to AA by Standard & Poor’s.

In the end, the Dow Jones Industrial Average lost 1.5%, the S&P 500 Index lost 1.8%, the Nasdaq Composite lost 2.4% and the Russell 2000 finished the day 3.4% lower. The dollar was mostly stronger, gold gained 0.2% and crude oil lost 2.7%. The decline boosted the ProShares UltraShort QQQ (NYSEARCA:QID) to a 3.9% gain for Edge subscribers as big tech stocks take it on the chin.


Materials and financial stocks led the decline with losses of 3.4% and 2.8%, respectively. Headphone maker Skullcandy Inc (NASDAQ:SKUL) was a rare bright spot, up 5.6%, after announcing a proposal from Mill Road Capital to acquire the company for $6.05 a share in cash. Semiconductor supplier Skyworks Solutions Inc (NASDAQ:SWKS) dropped 5.8% after being initiated at underperform by Morgan Stanley on exposure to the volatile smartphone market and reliance on just three customers for 62% of sales.

Key technical support levels have already been violated or are under threat. The Dow Jones has traded below its 200-day moving average for the first time since March. The Nasdaq has tested back to levels not seen since February. Ten-year Treasury bond yields, at 1.46%, have returned to lows not seen since 2012’s scare over the European debt crisis.

There has been rising concern about forced selling by systematic strategies like risk parity, which responds to increased market volatility by trimming exposure. This mechanical trading system effectively draws liquidity out of the cash market, potentially magnifying downside moves. Traders are pointing to similarities to the August 2015 and January 2016 selloffs.

Overseas, the damage is even worse. U.K. sovereign default risk has spiked to three-year highs. Italian bank stocks are down 25%, while trading in British banks was halted overnight after losing 23% over the last two days. Banks are scrambling for U.S. dollar liquidity, tightening interbank lending markets.

Loses look set to continue as the political fallout deepens.

The collapse in “cable” — the valuation of the British pound vs. the U.S. dollar — was what statisticians call a 12-sigma move. That is, it was 12 standard deviations below the average decline. The very definition of a black swan event.

Loses look set to continue as the political fallout is deepening.

In comments to Parliament, British Prime Minister David Cameron said that the vote of the people to leave the European Union must be respected — diminishing the hope of many globalists that the result would be ignored as was anti-Lisbon Treaty votes in 2008 and the anti-bailout vote by Greece in 2015. The President of the European Parliament raged that the British “violated the rules” and that it is not “the EU philosophy that the crowd can decide its fate.”

Ignoring or invalidating the result of one of the world’s largest democracies would’ve unleashed populist outrage. Rightfully so.

Cameron added that the timing of triggering Article 50 — the EU’s exit clause — was to still be decided. The process is likely to take years, during which the crisis will simmer. Weaker members of the European Union will use the chaos to negotiate relaxed fiscal austerity and debt repayment requirements under the threat of following Britain’s example. Creditor nations like Germany will want to hurry the process along to deny this opportunity.


Bank of America Merrill Lynch analysts call Brexit the “biggest electoral riposte to our Age of Inequality” and recommend clients prepare for a period of populist economic policies, higher levels of volatility, strength in precious metals and the outperformance of Main Street assets vs. Wall Street assets. They recommend a focus on cash, gold, and volatility over the near term.

I continue to recommend a focus on areas of weakness, such as big bank stocks. The July $60 JPMorgan Chase & Co. (NYSE:JPM) puts recommended to Edge Pro subscribers are up nearly 76% since initiated on Friday.

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.

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