Markets fell on Brexit fears and concerns about the Fed’s dovish statements, giving the Dow its worst week in a month.1 For the week, the S&P 500 slipped 1.19%, the Dow fell 1.06%, the NASDAQ dropped 1.92%, and the MSCI EAFE lost 2.78%.2
The big news last week was the Federal Reserve’s decision not to raise interest rates. The decision wasn’t a surprise; just before the announcement, traders had assigned just a 1.9% chance of a June rate increase.3
Over the weekend polls showed that voters are now leaning towards staying in the EU.
Asian, European, and US markets were all solidly higher on Monday.
Looking at the official statement, we can see that the Fed is concerned enough about a slowdown in the labor market and persistently low economic growth to hold off on raising rates.4 However, the Fed hasn’t lowered its forecasts for economic growth or unemployment, indicating that its concerns may be short-term.5 Is that decision a reflection of the data or a political move designed to support its vision of a healthy economy? It’s hard to say.
A July rate increase is still possible though traders don’t seem to buy it. Current probabilities of a July rate hike sit at just 7.0%.6 What would need to happen for the Fed to move in July? Well, we’re not Fed economists, but experts think the Fed would want to see a strong June jobs report, a British vote to remain in the EU, solid data out of China, and stable financial markets.7
It seems more likely that the Fed will push rate increases out to September or December despite Fed Chair Janet Yellen’s hawkish statements. With a contentious presidential election in November, it doesn’t seem likely that the Fed will rock the boat until the votes are tallied.
In a Q&A session, Yellen cited Britain’s upcoming referendum vote on EU membership as a factor in the decision to hold pat on interest rates. She believes that a Brexit is a decision that would have consequences for the U.S. financial and economic outlook.8
After the shocking murder of a British member of Parliament, Brexit polls have swung closer to a “Remain” vote.9 However, the vote is still too close to call and politicking will continue until the votes are counted. Uncertainty around Britain’s possible exit will likely keep markets on edge, and investors should expect continued volatility as we approach the end of the quarter. We’ll keep you informed.
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