Sellers were in control early last week pushing the index futures down to 2040.75, which was down 2% on the week, before rallying late Thursday. However, sellers also controlled the tape on Friday, thus maintaining control of the week’s close as well, as the Brexit concerns led to selling for seven sessions in a row and totally dismissed the strong stats for June quad witch. All in all, as weak as the equities were, the S&P 500 maintained civility as no serious technical damage was done and is still in range of 2100. Heading into this week, traders are likely to see a continuation of last week, meaning that headline risk will prevail. It’s possible that violent price eruptions will occur across equities, gold, bonds, crude oil and currencies as various news, statements and polls hit the newswires. It appears, according to sources, that British Parliament has the power to veto next week’s vote. So even if the popular nationalist movement to withdraw from the European Union wins, as the polls suggest, it will still lead to uncertainty over whether or not Parliament will allow such a move. Everyone wants their independence, and many of us are not surprised that a day would come when some European powers would have second thoughts, but it appears from all the economic forecasts and studies that a move to withdraw from the EU will have negative consequences on both sides. At the end of the day no one wants a more economic/politically unstable Europe.
At this point most polls show a fair amount of undecided voters who tend to vote with the status quo. Will this be enough to turn the tide of momentum and push voters to retain their EU membership? I don’t know, but just minutes ago the first poll was released since the murder of Jo Cox, and it now shows that voters favor to remain by 45%. Since then, the futures have gapped higher, and the ESU16 is trading at 2079.00, up 20 handles, or 1.00%. By morning when you read this, the gap could be filled. These are the type of headline risks we face this week. At the end of the day these votes can never be a certainty. I recall from our desk at the CME in September 2008 when Congress was voting on the bank bailout bill the first time. Everyone knew it was going to be close, but it seemed that the inevitable would occur and the vote would pass. However, moments before the vote, House Speaker Pelosi made some comments that offended Republicans and many of them withdrew their support at that time. The bill was defeated and the stock markets crashed 777.68 on the DJIA; and just a week or so later, Congress was approving the bill. I remember in 2008 when traders were in shock over the circumstance, leading us to realize that anything can happen when voters go to the poll, and to never take election outcomes, or trading conditions, for granted. In the U.S. this week, the economic calendar is fairly light, and all eyes will be on Great Britain for Thursday’s vote. At stake for the S&P could be whether new all-time highs are made or whether it is the beginning of another downtrend. If traders choose to hold overnight positions, then tight stops should be used, as this market may trade higher and lower in wide ranges during the overnight hours.
Overnight, global equity markets traded risk off as Asian & European indices saw extended rallies. In the U.S., the benchmark index futures continued to push higher all night, and currently sits two ticks from the 2087.00 globex high, up 27.50 points, or 1.34%. Treasury bond futures are down -0.50%, crude oil is up +1.67%, and gold futures are down -1.00%. Heading into this morning’s open it will be meaningful to see if equity buy programs begin to participate in this rally.
In Asia, 11 out of 11 markets closed higher (Nikkei +2.34%), and In Europe 12 out of 12 markets are trading higher this morning (DAX +3.45%). This week includes 17 economic reports, 4 Fed speakers, 12 US Treasury event, and will feature the UK Brexit vote on Thursday. Today’s economic calendar includes a 4-Week Bill Announcement, a 3-Month Bill Auction, a 6-Month Bill Auction, Neel Kashkari Speaks, and a 2-Yr Note Auction.
Our View: This price action may be fun to observe, but at the end of the day, it is very difficult to trade. As tempting as it will be to fade this gap up, it will be too easy to be caught on the wrong side of this market, as violent short covering possibly turns into extended buying. At the same time, with these kind of events there is usually a two-sided trade, and the market will give back a bit. At some point, the gap overnight will be filled, but not necessarily today. If you are a scalper, today’s price action will be well suited, but for guys who like to find tops to sell or bottoms to buy, there is likely to be too much trickery involved. Our view is to trade less, and smaller, wait for the best opportunities to sell the early rally, and then buy the late day weakness.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 11 out of 11 markets closed higher: Shanghai Comp +0.13%, Hang Seng +1.69%, Nikkei +2.34%
- In Europe 12 out of 12 markets are trading higher: CAC +3.49%, DAX +3.45%, FTSE +3.21% at 6:30am ET
- Fair Value: S&P -8.77, NASDAQ -8.72, Dow -100.44
- Total Volume: 1.8m ESU 400k ESM and 2.4k SPU traded
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