Market View; World Stock Indexes; Trading Journal

During the press conference, Mario Draghi should reiterate that monetary policy remains accommodative. It will be interesting to see if Mario Draghi will mention some risks approaching on the horizon, as the referendum in England (June 23) and the legislative elections in Spain (26 June).

On one hand, rising wages increases consumption and reflexively boosts GDP. On the other hand, the increase in wages generates inflation (increasing production costs and intensifying the demand for goods and services), helping the Fed to achieve the desired 2%. Thus, the two main employment report variables will be job creation and change in wages. Most likely, it is sufficient that only one of the two variables increase to reinforce the likelihood of an increase in US interest rates. Even if there a significant reduction in employment but accompanied by a rise in wages, the Fed may consider that the conditions for a rate hike are met. This position is explained by the fact that the lack of job creation is due not to a decline in economic activity but the lack of people available for hire without a prior increase in wages. In other words, such a scenario could mean that companies would be forced to pay higher wages to hire new employees, thus triggering the positive effect desired by the Central Bank. The employment report also deserves a note of warning. The reaction to its publication may be volatile to the extent that their numbers may be adulterated due to the strike by 36,000 employees of Verizon. Many of these workers (who are paid weekly) may not have received their salary and as such may be statistically treated as unemployed.

Although the unemployment rate is very sensitive to statistical adjustments, a decline as steep unemployment in weak job creation scenario is a rather contradictory combination. The only certainty that stemmed from this report is that wages continue to grow (0.20% monthly; 2.50% in annual terms), confirming the trend of recent months. The main reading from this report is that increases uncertainty about the future of monetary policy in the US. This indicator raises the question whether after this data (which should probably be revised upwards next month) is sufficiently striking for the Fed to postpone a possible rise in interest rates at the July meeting. Although these figures decrease the likelihood of an increase in interest rates, increase the uncertainty in the current environment and the uncertainty is the worst threat to the financial markets. Investors fear over an uncertain and unknown factor than a negative factor already know. In this context the intervention of Janet Yellen in Philadelphia (17h30) will be closely followed.

Beyond the issue associated with the future of interest rates in the US (and its impact on the Euro), European investors will begin to give increasing weight to the referendum on the United Kingdom staying in the European Union, to be held on 23 this month. After a great advantage in favor of permanence, recent surveys point to a minimum differential between the two camps. In addition to surveys, investors have monitored the odds that the bookmakers have assigned to each scenario. Another barometer is the evolution of the British Pound. An appreciation of the British currency may indicate a greater likelihood of victory to the "Remain in EU". The reverse case provide an opposite conclusion.

Chinese economic indicators support the decision of the IMF, the OECD and more recently the World Bank to reduce estimates for global growth. Yesterday, the World Bank said it expects the world economy to grow only 2.40% in 2016 compared to the previous 2.90%.

In the pre-opening, European indexes traded with slight losses. Despite the rise of Wall Street, European equities should be conditioned by the weakness of the Asian session and the fact that the Euro is being traded near 14.01 against the dollar. The recent weakness of the dollar, the result of uncertainty about the future of interest rates in the US, had a positive impact on oil, gold and other commodities, which could ensure an early stage over-performance in oil and mining sectors. The referendum in the UK will have an increasing role in investors’ decisions especially if the result is still uncertain. Today at 8:00 am Mario Draghi will inaugurate the Brussels Economic Forum, an event where diverse personalities of the political, economic and financial world will be present. These events are always an opportunity to sound out the feelings and perspectives of some of the key players in the current environment.

The US stock market yesterday made a pause after the recent valuations. The selling pressure was mainly driven by the drop in oil prices. An indicator of the labor market was published, but it did not have a very significant effect on the stock markets. The number of weekly claims for unemployment benefits fell by 4,000 to 264,000 in the week ended June 4, compared to 270 000 estimated. The data from the previous week were revised up registered another 1,000 weekly claims for unemployment benefits than previously indicated. The dollar depreciated, reaching the minimum in over a month against the Yen. The main exporting companies were favored by this movement of the US currency. Prices of Treasury bonds to 10 years were up, putting their yields to the minimum levels since 11 February (1.673%).

Since Thursday there has been a devaluation of the Euro, which possibly indicates that non-European investors (mostly American) are selling European assets. For its part, the European managers take refuge in assets with a lower risk associated as German bonds. In commodity markets, gold and silver in smaller scale have attracted the purchases of several global managers.

The uncertainty that characterizes the outlook of the stock markets will continue to generate a risk aversion among global investors. While there is almost a consensus view that the Fed will not change interest rates in its decision tomorrow, the unknown in relation to the statement of the meeting, is from the perspective of investors, an additional risk factor in the current environment. But the factor that seems to be most conditioning the investor sentiment is the UK’s EU referendum. Yesterday, two new polls were released. The first commissioned by Telegraph states that 48% of Britons are in favor of permanence and 49% support the output of the EU. In turn, the Times of London published a poll in which 46% of respondents said they would vote to leave and 36% would vote to remain. But perhaps the most striking news is the position of the newspaper The Sun, the most widely read in England, defending the “Leave”. The Sun is a tabloid that according to many sociologists has a high ability to influence the vote of a portion of readers. Given the recent risk aversion, the technical situation of European markets deteriorated significantly. DAX broke several support lines, being the area of 9480/9500 an important support. From a purely technical point of view and given the speed of recent declines can not be excluded that the German index can at an early stage, halting the falls if that zone is tested.

Today the "Brexit" (the possibility of the UK leave the EU) may be overshadowed by the meeting of the Fed. In this context, it is expected that many investors to position their portfolios for this event. Some of these investors are hedge funds which in recent days constituted selling positions on equity markets and also in the British Pound. Thus, it is possible that these investors close some of these positions which will represent a buying impulse in such assets.

After the reaction of financial markets to the meetings of central banks, European investors will focus again on the referendum on the permanence of the UK in the EU. Regarding this subject there is a slight discrepancy between the polls and the odds offered by the bookmakers. The latest polls point to a growing advantage of the favorable field outside the EU. However, the bookmakers continue to assign a higher probability to the “Remain”. The reason for this difference is that the bookmakers, based on similar events that occurred in the past, presuppose that the undecided will vote for continuity. Thus, according to this assumption of bookmakers, the undecided tend to vote for the stay. Today will meet the Bank of England and the referendum is undoubtedly the main theme of the press conference.

Investors will continue to react to economic data, trying to anticipate what may be the decisions of the Fed. But this pattern has become more complex from the time the Fed began to give greater importance to the behavior of financial markets.

The rise in crude on Friday is associated with a recovery of some risky assets (due to a decrease in fears for the Brexit) and a technical reaction to the losses suffered in the previous days. From a fundamental point of view, there is still an imbalance between supply and demand, which although not as pronounced as at the beginning of the year continues to persist.

The devaluation of the price of the dollar boosted commodities, with the exception of gold that had previously attracted purchases from investors because of their defensive nature. Although in Wall Street, investors continue to monitor developments in Europe, the main event of the day will be the testimony of Janet Yellen on the financial committee of the Senate at 15:00.

The Asian session was relatively quiet, reflecting the expectations of investors concerning tomorrow’s referendum in the UK. The only exception was the Japanese market, which once again was affected by the appreciation of the yen. The Japanese currency has shown great resilience in relation to other haven assets and has not suffered losses the latter recorded in recent days. The rise of the yen pressured shares of exporters, which in turn, penalized the Nikkei.

yesterday US markets closed with modest losses. While waited for today's referendum, US investors focused on factors specific sectors and companies. Oil traded volatile fashion, following during the morning the rise of other risk assets but later reversing this trend when the Department of Energy published a report that showed an unexpected increase in gasoline reserves. In the technology sector, investors reacted negatively to the offer launched by Tesla (producer of electric cars) on the SolarCity by 2800 M.USD. In the Dow Jones, the highlight was the weakness of the shares of McDonald's (-1.50%) after Nomura analysts have reduced the recommendation of Buy to Neutral. Last year, McDonald's has shown a over-performance against the S & P, the result of a major restructuring of the company. Today, it is expected that investors maintain an expectant attitude.

Four months of nervousness that dominated all the attention. Against expectations, the Brexit won and now will begin negotiations for farewell to the European Union. But the impact on markets was felt soon and experts are on the alert. Investment banks and asset managers are informing customers of the referendum effects on the economy and markets.

After the result of the referendum in the United Kingdom, which finally ruled the exit of this country from the EU, investors, economic operators, policymakers are facing a scenario that until Thursday was purely hypothetical and that will have ramifications (many unpredictable) that will last for years. The closest scenario that was envisioned was an exit of Greece from the Euro zone, something that has been widely discussed but never realized. The biggest threat to the financial markets is uncertainty. Markets prefer a negative event to an event whose ramifications are uncertain. When a given scenario materializes, investors look for similar events in the past in order to obtain patterns or trends that help them to understand the new scenario. But sometimes there are no precedents. September 11 is a good example. Not only was an unprecedented event as was a comparison for future attacks in Madrid and London. But as September 11, the Brexit does not have an antecedent that offers a relatively useful comparison. Investors and economists can try to anticipate some of its consequences but they are unaware of its contours, its magnitude and its extension, financially, economically and politically. Focusing in particular to the financial impact, the first shock-fitted into, in general, in the idealized scenario, although the magnitude was difficult to anticipate. In currency markets, the Pound and the Euro were the main “victims”, while the Swiss Franc and the Yen, which in the perception of investors are “safe”, recorded strong valuations. In debt markets, US government bonds and German bonds registered gains, while corporate debt and peripheral countries debt devalued. These two movements together have led to an increase in the spread between German yields and their European counterparts. Interestingly, the English debt showed a recovery, despite warnings from rating agencies. In stock markets, the declines were sharp, with the DAX recording the largest daily decline since the financial crisis of 2008. Another curious note was that the FTSE100 had an over-performance. This pattern was observed due to the strong exposure that the companies that are part of this index have in external economies. The vast majority of investors deceived by polls and indications of bookmakers, abandoned a defensive stance adopted earlier, to take a few days before the referendum, a positioning that would benefit from the “remain” (Expecting UK to remain in the EU). Now they will be forced to a new repositioning, which may take several days and may generate high volatility. So it is not excluded that the movements recorded on Friday to extend during the session today, although on a smaller scale. The fund managers should adopt a more defensive stance, reducing their exposure to equity markets and concentrating in securities less related to economic cycles, with businesses benefiting from the decline in yields and offering a more appealing dividend yield . On the other hand, fund managers want to increase the liquidity of their portfolios in order to correspond to a hypothetical increase in redemptions of its funds by investors. In this complex picture is added the results of the Spanish elections, which have not yet set a stable majority. In the pre-opening, the European indices traded with a drop of about 1%. The assets considered “refuge”, traded mostly higher.

Asian markets closed with opposing tendencies. On one hand, the Japanese and Chinese stock exchanges ended with modest gains, but on the other, the indices of Hong Kong and Sidney finished lower again. Stocks in these two markets have a strong connection to British banks. In fact, institutions such as HSBC and Standard Chartered have high exposure to several Southeast Asian countries and Australia.

The recovery triggered by the purchase of selling positions by hedge funds and other short-term investors, was also observed in the forex market and the pound reached gains of more than 1% against the dollar. However, this increase is still modest considering that the English currency had lost 13% since Thursday, a very sharp move to one of the major world currencies. The potential for recovery of the British Pound and therefore the equity markets is uncertain, given the uniqueness of the times we are experiencing. From a technical point of view and using the DAX as a sample for the European market as a whole, the main resistance zone is between 9720 and 9780. Many fund managers intend to take a more defensive position and can take advantage of market recoveries to decrease their exposure to shares.