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Volatile Week Ends Down More Than 1 Percent


The news conference of Federal Reserve Chair Janet Yellen is reflected in a specialist's screen on the floor of the New York Stock Exchange, June 15, 2016.

The news conference of Federal Reserve Chair Janet Yellen is reflected in a specialist's screen on the floor of the New York Stock Exchange, June 15, 2016.

The major U.S. averages slipped more than 1 percent to close out a volatile week of trade.

Risk appetite has declined in front of the so-called Brexit vote, which sent stocks and bond yields lower, while safe haven assets like gold and the yen spiked. Year-to-date, the S&P 500 is up just over 1 percent, while the SPDR Gold Shares, an electronic-traded fund (ETF) that seeks to reflect the performance of the price of gold, is up nearly 22 percent.

Markets also seemed to be confused by the dovish sentiment out of the Federal Reserve, considering it sounded more hawkish toward an interest rate hike weeks earlier. If there is one thing markets do not react well to, it is uncertainty.

Apple fell as much as 2 percent following a report from The Wall Street Journal that regulators in Beijing banned sales of the iPhone 6 and 6 Plus in the city because the phones violated a Chinese rival's patent. Sales in China make up 25 percent of Apple's revenue, but the impact to the company will be relatively small because the phones are banned only in Beijing, not the whole of China. Apple told CNBC in a statement that the phones are available for sale, and it will be appealing the ruling.

Brexit

On June 23, Britons will go to the polls to vote on whether the U.K. should remain in the European Union. This referendum has been termed "Brexit."

According to Number Crunch Politics, the likelihood of an exit is 42 percent. Matt Hedrick, macro strategist at Hedgeye, outlines three important points as to why the U.K. is leaning toward a "stay" vote:

Political — There's intensely strong political support from U.K. leadership (including Prime Minister David Cameron and Bank of England head Mark Carney), met by equally fervent support from EU partners like German Chancellor Angela Merkel and French President Francois Hollande, which many believe will influence the vote to stay in the EU, Hedrick says.

Financial/Economic — Existing weakness in the U.K. economy is met with grave fears and concerns that a Brexit will negatively impact trade, tax revenue and jobs, and cause the exit of London as a financial capital, according to Hedrick. Conversely, there's very little public conversation or reporting on the benefits of a Brexit. The collective economic uncertainty is expected to tip the balance to “stay,” says Hedrick.

Behavioral — Hedrick stresses that behavioral psychology indicates people generally don't like change and indecision. Leaving the EU clearly spells huge change for Britain, he says, which many may try to avoid with a “stay” vote.

The biggest issue in the campaign is immigration, as refugees from the Middle East and Northern Africa flee conflicts in search of safety and greater opportunity on the continent. Also, those supporting an exit believe the EU has taken too much power away from the British government.

If U.K. voters choose to leave, Cameron would have to notify the European Council. Next would be a two-year negotiating process to work out the details of the exit. In other words, the June 23 vote is not an isolated event where all issues are magically resolved the following day.

Campaigning in the referendum currently is suspended because of the slaying of Jo Cox, a British Member of Parliament, who was killed Thursday after a town hall meeting in West Yorkshire, England. An investigation is ongoing into whether the suspected assassin had ties to right-wing extremists. Cox was known for her social-justice advocacy and calls for Britain to remain in the EU.

Week ahead

Only a handful of economic data are on tap, including Existing and New Home Sales and Durable Goods Orders. But not all will be quiet in the macro world as Federal Reserve Chair Janet Yellen is scheduled to testify Tuesday and Wednesday on Monetary Policy to the Senate Banking Committee. She most likely will refer to the Federal Open Market Committee's decision to keep interest rates unchanged in June, Brexit concerns, the disappointing jobs report and lower growth forecasts.

The earnings calendar is still very quiet and will remain light until the season picks up in the second week of July. However, there are some reports to be aware of including, Lennar, FedEx, K.B. Homes, Bed Bath & Beyond and ConAgra.

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