The Tell
Brexit fears are another brick in the 'wall of worry'
Published: June 22, 2016 at 3:48 a.m. ET
Mark DeCambre
European banks are off 80% since 2007
Wall of worry in markets is growing.
MGM/Courtesy Everett Collection
TMBMKDE-10Y
CLQ26
Hand-wringing over the possibility that the U.K. could exit the European Union may be in the spotlight, but investors have plenty of other bricks in the so-called wall of worry to fret over.
The Thursday referendum, dubbed the Brexit vote, on Britain exiting the EU is certainly chief among the shortlist of problems for market participants, but a number of other concerns have managed to hem in stock-market gains over the past several weeks, according to a recent research report by Burt White, LPL Financial chief investment officer and Ryan Detrick, senior chief market strategist.
Here are some others in the piece, entitled "Overcoming a Wall of Worries":
1). European banks are off nearly 80% from their 2007 highs. Generally speaking, money-center banks have been assailed by persistently low and negative interest rates in many markets around the globe. Part of that can be pinned to central-bank policies. Banks, considered key cogs in most developed economies, will need to figure out a way to make money in a world in which the margins between short-term borrowing costs and long-term lending rates are constantly being squeezed.
Source: LPL Financial Research
Falling interest rates are best illustrated by ever-shrinking yields on certain sovereign government bonds, which tend to draw safe-harbor bids in times of crisis. Or in some cases, for lack of better options. Last week, benchmark 10-year German bond yields TMBMKDE-10Y, 2.243% slipped into negative territory for the first time ever. Bond prices and yields move in opposite directions. LPL explains the implications of declining rates this way:
German bank made new all-time lows last week. With German 10-year bund yields in negative territory, Japanese government bond yields negative through 15 years, and Swiss government bond yields negative through 30 years, European banks are bearing the brunt of lower rates.
White and Detrick attribute weak performance in Europe's banking sector to their sluggish reaction to the 2008 financial crisis that brought the global financial market to its knees.
2). Another cause for worry is the surging Japanese yen USDJPY, -0.17% against the U.S. dollar. The yen sends an important signal to markets because it is primarily viewed as a haven currency in times of distress, along with gold and sovereign bonds. The LPL tandem say that investors' inability to identify more attractive risk assets has lured them into buying yen. The equivalent of one buck was buying ¥104.7590 in recent trade Tuesday. As the LPL chart illustrates, one dollar has been buying fewer yen:
Strength in the yen comes even as the S&P 500 index SPX, +0.25% has flirted with an all-time high. The S&P 500 is less than 2% away from its record of 2,130.82 set on May 21, 2015, though it has retreated recently amid growing Brexit trepidation. LPL's point is that assets perceived as relatively risky, like stocks, shouldn't be climbing at the same time as the yen is strengthening.
3). As much as equities have attempted to push higher, investors have shifted out of risk and into the safety of bonds, as the following LPL chart shows:
Goldman Sachs took a hatchet to its 2016 estimate for U.S. demand for equities. A separate note from Deutsche Bank chief international economist, Torsten Slock more than a week ago indicated that foreigners were selling U.S. stocks at the fastest pace ever.
So, while Brexit has the chance of fading into the background like Y2K fears did back at the turn of the century, there are other market bugaboos to consider, says LPL.
To be fair, there are causes for optimism. Crude-oil prices CLQ26, -2.73%, although well off their 2014 peak, have stabilized, at least momentarily, just around $50 a barrel. Weakness in the dollar DXY, -0.03% also might provide a tailwind for multinational corporations who have been plagued by a strong dollar earlier in the year, said LPL's White and Detrick.
Now, will that be enough to get markets over the wall? That is the billion-dollar question.
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Mark DeCambre is MarketWatch's Editor in Chief. He is based in New York. Follow him on Twitter @mdecambre.