The Dow was guided entirely by the chances of a Brexit this week. Markets swung between gains and losses as the odds of a Brexit waxed and waned over the week. Investors closely watched the results of opinion polls conducted ahead of the crucial referendum. Toward the end of the week, the “Remain” camp had ended up slightly ahead which helped the blue-chip index notch up significant gains on Thursday. The Dow has lost 0.3% over the first four trading days of the week.
Last Week’s Performance
The index declined 0.3% on Friday on looming Brexit fears and the Fed’s reluctance to raise rates this month. Investors were increasingly edgy over the referendum on whether U.K. should stay in the European Union (EU). Possibility of a Brexit intensified after fresh polls, which raised concerns about bouts of volatility and U.K. sinking into recession.
Meanwhile, the Fed’s reluctance to hike rates also continues to dent investors’ sentiment. This has raised concerns about the strength of the economy, while the Fed also downgraded the economic outlook for the rest of the year. Shares of Apple AAPL dropped almost 2.3% after patent dispute threatened to halt its iPhone 6 and 6 plus sales in China. Meanwhile, housing starts fell 0.3% to 1,164,000 in May from April’s revised tally of 1,167,000.
The Dow lost 1.1% over the week, as investors turned cautious over a possible exit of the U.K. from the EU. The absence of a rate hike also raised doubts about the strength of the domestic economy. May’s discouraging jobs report, a low level of business investment and inflation falling short of expectations did little to help the Fed take a rate hike call.
The Dow This Week
The index gained 0.7% on Monday after polls suggested that the U.K. will remain in the EU. As prospects of a U.K. exit from the EU diminished, investors piled into riskier assets and abandoned safe havens such as government bonds and gold. Weekend polls showed a swing toward “remain” in the run-up to the Brexit vote, which eventually helped stocks rally on Monday.
Thanks to the “remain” votes, concerns about U.K.’s exit from the EU and the potential damage it will have on Britain’s economic growth, jobs, investment and trade, reduced. Speculations that the death of British politician Jo Cox, an active pro-EU campaigner, was responsible for swinging the vote in favor of ‘Bremain’ were doing the rounds.
The index inched up by a meager 0.1% on Tuesday as the latest Brexit polls tilted slightly in favor of the ‘remain’ camp. Investors mostly refrained from making big bets yesterday ahead of the U.K. vote on whether to leave the EU. An ORB poll for the Telegraph showed that the “remain” camp maintained a lead over the “leave”. But, a Survation poll showed that the referendum remained highly contested with both camps polling within one percentage point of one another.
Fed Chair Janet Yellen warned that a decision by U.K. to leave the EU would pose a ‘significant risk’ to the U.S. economy. In her testimony to the Senate Banking Committee on Tuesday Yellen said “a U.K. vote to exit the EU could have significant economic repercussions.” Additionally, she cautioned that domestic demand might falter, thanks to weak labor market report and economic growth this year.
The index declined 0.3% on Wednesday as polls showed a neck-and-neck contest between the “remain” and “leave” camps in the run-up to the Brexit vote. As the Brexit debate reaches a climax, opinion polls clearly failed to give a direction, eventually keeping traders on the edge. Possibility of a Brexit raised concerns about the U.K. sinking into a recession and the markets falling prey to fresh bouts of volatility.
As investors braced for the U.K. vote on whether to leave the EU, Yellen in her second day of testimony to the Congress warned that a Brexit and a slowdown in U.S. hiring will have economic repercussions. However, she did play down the risk of a recession.
Sales of existing homes rose in May to a more than 9-year high. On a seasonally adjusted annual rate, sales climbed 1.8% to 5.53 million last month. April’s sales pace, however, was revised down to 5.43 million from an earlier reported 5.45 million units.
The index ended higher on Thursday, moving up 1.3%. The Dow posted its biggest gain since March after the latest poll showed support for the U.K. staying in the EU. The “Remain” camp accounted for 52% compared with 48% backing the “Leave” side, according to an Ipsos Mori poll for the Evening Standard newspaper.
Investors’ appetite for riskier assets increased as investors wagered that a Brexit won’t happen. This helped oil prices move north. Oil prices were also benefitted by a report of a drawdown of nearly 1 million barrels at the Cushing, Oklahoma storage base during the week to June 21.
Components Moving the Index
The Boeing Co. BA seems to be nearing a $4 billion deal with Russia’s air-freight company AirBridgeCargo Airlines. According to a Bloomberg report, Boeing is in talks with AirBridgeCargo Airlines and its Moscow-based parent, Volga-Dnepr Group, to transform a year-old commitment into 10 firm orders or more for 747-8 freighters.
Last July, Boeing signed a memorandum of understanding (MoU) with Volga-Dnepr Group that operates the cargo carrier, AirBridgeCargo Airlines, at the Paris Air Show for 20 freighter version of the 747 aircraft. The deal would come to nearly $3.8 billion on list prices of $379.1 million (read: Boeing (BA) Set to Win $4 Billion Order for 747 Freighters).
In a separate development, Iran has reached a deal with Boeing under which the country will buy 100 commercial planes to renew its aged fleet, as per media reports. However, this agreement still requires approval from the U.S. Treasury authorities, according to the head of Iran's Civil Aviation Organization, Ali Abedzadeh (read: Boeing to Sell 100 Planes to Iran; Awaits U.S. Treasury Nod).
The Coca-Cola Company KO recently updated its guidance for second quarter 2016. Following the completion of the Coca-Cola European Partners Plc (CCE) merger on May 28, Coca Cola anticipates a larger negative impact of acquisitions/divestures on sales and profits.
Acquisitions/divestitures and structural items are expected to hurt revenues by 5–6% compared with 2–3% expected previously and income before taxes by 4–5% compared with 3% previously (read: The Coca-Cola Company (KO) Updates its Guidance for Q2).
Caterpillar, Inc.’s CAT global retail sales for the three-month period ending May 2016 plunged 12%. Nevertheless, the share price gained a nominal 0.6% as sales growth, despite remaining in the negative territory, was flat with April. This raised hopes that the rate of decline was decelerating.
So far in 2016, the company’s sales have dropped an average14.6%. After plunging 21% in February, its lowest in 2016, the company witnessed a slight improvement with the 13% decline in March. The decline remained steady in April and May.
As per the company’s May 2016 sales report, overall performance was dragged down by a 31% slump in Latin America. Sales fell 13% in the Asia Pacific region, 12% in North America, and 4% in the Europe, Africa and Middle East (EAME) (read: Caterpillar's Monthly Sales Slip, May Records 12% Fall).
Visa Inc. V has completed the acquisition of Visa Europe Ltd within the scheduled time. For Visa, reuniting with Visa Europe has been a crucial long-term growth strategy. The company stands to gain a competitive edge from Visa Europe’s strong business model.
The addition of Visa Europe will further boost Visa’s position in the industry with digital payment products, services and processing amounting to about 17,100 financial institution clients and partners, 40 million merchant outlets, and 3.0 billion Visa cards worldwide.
Visa-branded cards and payment products account for approximately $6.8 trillion in global payments’ volume annually. The combined company will pose stiff competition to its competitors (read: Visa to Spread Further in Europe with Visa Europe Buyout).
The Goldman Sachs Group, Inc. GS has commenced the third round of layoffs with the elimination of 98 staff in New York. In March, Goldman updated the job cut list filed with the New York State Department of Labor. According to the amended “warn notice,” the company disclosed the potential termination of 109 employees, up from 43 reported in February.
Also, the amended filing extended the time period of the concerned layoffs which were scheduled to take place between May 9 and Dec 31. While the filing does not reveal which operations or positions will be affected, it gives the reason for elimination as “economic” (read: Goldman (GS) Third Round Layoffs: 98 in New York).
Apple Inc. could soon open its own retail stores in India. The new foreign direct investment (FDI) rules for retailers that were outlined this week will remove the last roadblock for Apple, at least for a while.
The iPhone maker has been striving to enter this market since the beginning of this year. The Indian government has now relaxed its 30% locally sourced products norm for up to three years for foreign retailers. Thereafter, the company will have to comply with the rule (read: Apple's India Plans Set to Materialize with New FDI Norms).
Performance of the Top 10 Dow Companies
The table given below shows the price movements of the 10 largest components of the Dow, which is a price weighted index, over the last five days and during the last six months. Over the last five trading days, the Dow has gained 1.8%.
|
Ticker |
Last 5 Day’s Performance |
6-Month Performance |
|
MMM |
-0.7% |
+15.2% |
|
GS |
-3.3% |
-19.7% |
|
IBM |
-2.9% |
-16.3% |
|
HD |
-3.3% |
-3.5% |
|
BA |
-2.3% |
-7% |
|
UNH |
+0.6% |
+17.6% |
|
MCD |
-4.4% |
+2.2% |
|
TRV |
+1.3% |
+0.5% |
|
JNJ |
-1.5% |
+13.25% |
|
AAPL |
-3.2% |
-11% |
Next Week’s Outlook
Dow futures declined after a shock verdict in favor of a Brexit. With the worst fears of investors coming true, it is likely that stocks will move into the red in the absence of tailwinds. At the same time, several important economic reports are lined up for release over the next few days. This includes data on durable orders, personal expenditure and the GDP’s final estimate. If most of these are on the positive side, markets could still find reason for cheer next week.
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