06.26.2016
By John D'Antona

TRADING THE WEEK: Brexit Roils Markets, But It’s No Aug. 24

Traders last week finally got a definitive piece of news to trade on — even though it was unexpected and seen as negative — with the Brexit vote, which sharply increased volatility and executions.

The CBOE Volatility Index spiked nearly 50% to nearly 26 on Friday, the highest level since February for the closely watched ‘fear gauge’. Total U.S. equity trading volume according to Bats Global Markets was 15.3 billion shares, more than double the average daily volume of 6.8 billion shares so far in June.

Friday was a tumultuous day in U.S. markets, but moves weren’t as violent as they were last Aug. 24, after a crash in Chinese markets led to a big downdraft at the opening of trading. On that day, U.S. stocks and equity-related futures experienced extraordinary volume and significant volatility, and there were some trading glitches and problems that raised questions about the operation of exchange-traded funds and equities more generally.

At Friday’s open the DJIA dropped 500 points as the Brexit news was digested. But within an hour or so the market rebounded somewhat amid heavy trading. One floor trader told Markets Media that while the market dropped, liquidity was available and markets functioned well, save for some sporadic issues with dark pools.

“It was busy at the open but what I’m really happy about was that there was plenty of liquidity in the market,” he said. “Buyers found sellers. Sellers found buyers. The market didn’t lock up and trading was orderly.”

European and Asian markets tumbled on news that the U.K. voted to leave the European Union. The U.S. markets fared a bit better, though there was a decided spillover effect in equities and a rush to bonds.

Bats reported that by 2:45 pm BST, €90.5bn of stock traded across Europe in comparison to the average daily notional value traded this month of €45.1bn. Globally, bank stocks led the way lower at the open as their future profitability was deemed more uncertain.

Morgan Stanley said the firm would relocate as many as 1,000 workers if the U.K. was to leave the EU. J.P. Morgan Chase, prior to the vote, said it was likely to move 4,000 employees out of Europe. Looking to calm the markets, J.P. Morgan Chief Executive Officer Jamie Dimon said the firm was still committed to a U.K. presence but stopped short of saying there’d be a reduction in the jobs leaving the country.

White-glove broker Goldman Sachs, made no mention of potential job losses in the U.K. However, the firm’s analysts were quick to get out in front of investors and in a research note said it expected a higher risk premium on European equities and a drop of around 15% after the Brexit dust settles.

Following the Brexit result, the Bank of England went public and said it will provide £250B additional capital to help the financial markets, helping to stabilize the floundering GBP and the FTSE. It also intimated that it could cut interest rates from 0.5% to 0% to give the country’s economy a boost.

In the U.S., some traders took comfort from remarks made by Federal Reserve Chair Janet Yellen who in prepared remarks before the Senate Banking Committee last week said she is not making any judgments ahead of the Brexit vote and that the Fed is monitoring the situation carefully. She did note that the effects of Brexit would bring “economic consequences that would be relevant to the U.S. economic outlook.”

Furthermore, Yellen said the Fed wasn’t in any particular hurry to raise U.S. interest rates with regards to U.K withdrawal from the EU or given the tepid U.S. economic outlook.

“Proceeding cautiously in raising the federal funds rate will allow us to keep the monetary support to economic growth in place while we assess whether growth is returning to a moderate pace, whether the labor market will strengthen further, and whether inflation will continue to make progress,” Yellen said in her testimony.”

Despite falling share prices at Citi, Prudential, J.P. Morgan and others, traders said business was generally orderly, and the U.S. Securities and Exchange Commission issued a statement to that affect.

“The U.S. equity markets opened normally for trading this morning,” the statement read. “We are continuing to closely monitor the markets and have been in regular communication with financial institutions, exchanges, and market utilities, as well as our financial regulatory counterparts.”

And as one trader in New York reminded, Friday’s trading volume was also affected by annual rebalancing of FTSE Russell’s stock indexes. For example, the Russell 3000 Index has 184 additions and 133 deletions to its measure. In 2015’s rebalancing exercise, U.S. equity trading jumped by more than 10 billion shares.

With the outcome of Brexit and Russell rebalancing now a matter of record, U.S. traders said the upcoming Independence Day holiday was perfectly timed to allow the markets to catch their breath.

“With these two events out of the way, we can now take a minute and just get our bearings before looking again at the U.S. economy’s signs,” said a prop trader. “The market went into Brexit on a high note, saw some profit-taking after the results, and now I think we’ll continue to see some gains. The Fed could be on hold for all of 2016 now and that would be great for us.”

This Week’s Major U.S. Economic Indicators of Interest:

Monday International Trade

Dallas Fed Manufacturing Survey

Tuesday US GDP
Redbook Retail SalesConsumer ConfidenceRichmond Fed Manufacturing Index
Wednesday Mortgage Bankers Applications Index

Janet Yellen Speaks

Personal Income and Outlays
New Home Sales

Thursday Weekly Jobless Claims
Chicago PMI
Friday Motor Vehicle Sales

PMI Manufacturing Index

Construction Spending

More on Brexit:

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