The UK’s FTSE-100 dropped to once again test the level of last year’s breakout to all-time high.

There was no shortage of breakouts among global equity markets in 2016. Perhaps the most monumental, however, was that of the UK’s FTSE-100. Following a 15-year triple top between 1999 and 2014, and a false breakout in 2015, the UK’s benchmark index finally managed a seemingly successful breakout to new all-time highs, as we noted in a post at the end of 2016. After about a 3.5% pop to start the year, the FTSE returned to test the level of its breakout, around 7100, near the end of January, as we indicated to investors at the time. Or, as we put it, the FTSE appeared to be giving investors another chance to “”board the FTSE bus” prior to an ultimate run higher. Indeed, the test proved successful and the FTSE subsequently took investors along for a ride, to the tune of 5% into mid-March. 

It appeared as though the bus had left the station and those investors who had failed to jump aboard at the end of January had likely missed the bus completely. However, last week, following the snap election news out of the UK, the FTSE bus once again returned to the spot of its breakout, giving investors one more chance to hop aboard. However, they needed to hop on quickly as the FTSE has already sped out of the station as if driven by one of those belligerently impatient bus drivers. Specifically, the FTSE popped higher yesterday, gaining more than 2%.

So what next? Well, if it is another successful breakout test, there should be a lot more legs to this rally, i.e., investors who failed to “board the bus” previously can still get on at the next stop without missing too much. However, it is always nice to pick one’s optimal bus stop -- you just have to be ready for the bus.

Were you ready for the FTSE bus when it stopped last week? At The Lyons Share, we’ve been highlighting this potential setup for members for the past week. Check out this Premium TLS Post at our new “all-access” site for ideas on how to take advantage of this development in UK stocks. And don’t miss the bus -- sign up for The Lyons Share!

_____________

The UK’s FTSE-100 Index is testing the level from which it broke out to all-time highs a month ago.

Our final Chart Of The Day, and accompanying post, for 2016 focused on the UK’s main stock index, the FTSE-100. Specifically, it noted that the index was breaking out to all-time highs. More specifically, the tone of the post was the new high’s juxtaposition against the consensus calls for financial calamity in the UK following the Brexit vote. The epic pundit forecasting whiff aside, the main point for investors was quite simply the significance of the FTSE’s new high, above the peaks of April 2015 and October 2016.

Furthermore, as a reminder, the new high near the 7100 level also marked a decisive break above the peaks from 1999-2000 and 2007.

Thus, the significance of this breakout cannot be overstated. There is no guarantee that the breakout will be successful, of course. But after waiting 17 years, 2 cyclical tops and a serious intermediate-term top, the breakout of a month ago is a chart watcher’s dream. And the good news is, if you missed the breakout the first time, you’re getting another shot at it now. That’s because after about a 3.5% pop following the breakout, the FTSE-100 has now pulled back and is approaching a test of that breakout level.

Again, there is no guarantee in this business. All one can do is try to garner the best odds of success in a trade. In this case, testing 17 years of former resistance turned possible support represents about as high odds as one can hope to find. So needless to say there is compelling evidence to hop aboard the FTSE bus here.

________

More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

U.K.’s FTSE-100 Index is in the midst of a historic run following the Brexit vote -- but it is running into multi-decade resistance.

The only thing predictable about financial markets is their unpredictability. Take the Brexit episode, for example. Not only was the U.K.’s vote to leave the European Union a surprise to just about everyone, but the resultant market reaction was as well. Yes, the immediate gut-wrenching selloff was probably expected, after knowing the results of the referendum. However, what has taken place since is very interesting. For far from a sustained meltdown in European and British equities. a terrific rally has ensued.

In the U.K., in particular, the popular FTSE-100 Stock Index (FTSE) is in the midst of a historic move. Depending upon where the index closes tomorrow, the FTSE has a chance at registering a 20% rally off of its post-Brexit lows just 7 weeks ago. It would mark just its 6th such rally over a 7-week span in the past 27 years. That’s the good news. The challenging part is that the FTSE is presently bumping up against a potential resistance level whose significance stretches back either 5 years or 16 years, depending on the view. First, the 5-year look.

As this first chart shows, the FTSE is currently testing the Up trendline stemming from the August 2011 lows and connecting the October 2011, October 2014 and December 2014 lows. After breaking below the trendline in August 2015, the FTSE attempted to reclaim the top side of the line on 2 occasions in October 2015 but was soundly rejected. It is now testing the trendline (presently in the mid-6800 range) once again, attempting to climb back above it. If it can do so successfully, the trendline should re-engage as another piece of support for the FTSE.

Now, scrolling back another decade, we see that this area between 6800-6900 has an even longer history of significance.

On the day before Y2K, the FTSE closed at 6930, a record that would stand for the next 15 years. The index would test the 6800 level several times during 2000 before getting cut in half in the subsequent bear market. At the 2007 top, the FTSE stopped just shy of that level, testing the mid-6700′s on 4 occasions before, again, getting chopped in half. By May 2013, the index had once again recovered to the 6800-6900 area. Over the next 16 months, it would test the level, unsuccessfully, at least a half a dozen times.

Finally, in February 2015, the FTSE was able to break through the level and score a new all-time high. It rallied as high as 7100 over the next 2 months before the breakout failed. In the ensuing global equity selloff, the index would drop some 23% into the lows of February 2016. Following a bounce from there, and the moonshot off of the Brexit news, the FTSE finds itself back at the same 6800-6900 level.

So what do we expect to happen? Well, considering the history, one would expect this level to at least pose a stiff challenge for the FTSE temporarily, especially with the index up on a rope since June. Then again, if the markets have taught us anything, as with the Brexit incident, it is that they will consistently deliver the unexpected.

_____________

More from Dana Lyons, JLFMI and My401kPro.

Following the Brexit vote, seven asset managers, so far, have suspended redemptions on their UK real estate funds. Accounting for around £18 billion—more than half of the open-ended British property funds market—these funds apparently have limited cash/liquid options to meet the flood of withdrawal requests from investors.

Heightened uncertainty around U.K.’s business prospects, following the referendum, has jittery fund-holders rushing to offload exposures to U.K.’s commercial property. But, given the relatively illiquid nature of the funds’ underlying assets, such as office buildings/parks, warehouses and other commercial properties, asset managers are suspending redemptions to avoid a real estate fire sale.

Standard Life was the first to halt redemptions. Its 13% cash reserves proved insufficient to cushion the overwhelming withdrawal requests, compelling the fund to suspend trading on its £2.9 billion U.K. Real Estate fund on July 4—barely 11 days since the poll results came out. The next day, Aviva Investors froze its £1.8 billion Property Trust.

Citing mounting liquidity pressures, Henderson halted trading on its £3.9 billion U.K. Property PAIF fund along with feeder funds. Columbia Threadneedle and Canada Life temporarily suspended redemptions on £1.39 billion PAIF/feeder funds and four funds totaling £450 million respectively.

Additionally, many money managers ‘devalued’ their funds to discourage investors from selling at prices deemed too low. Aberdeen Fund Managers Ltd. slashed a property fund value by -17% and stopped redemptions. Henderson cut its fund price by -4%.

Many asset managers want to avert a 2007-like real estate bust, when funds contributed to a more than -40% decline in UK property prices from their peak. Temporarily freezing trade on real estate funds is probably viewed by their managers as the only way to stem a potential self-reinforcing cycle of redemptions and free-fall in British property prices. It doesn’t help that foreign investment in UK commercial real estate was already down -50% in the first quarter this year. Plus, demand for the nation’s residential properties plunged to a three-year low in May, mainly due to the anticipation over the forthcoming Brexit referendum at the time.  

Also, talks of possible U.K. regulatory measures, such as requiring investors to provide a notice period of at least 30 days to six months to liquidate fund positions, and/or allowing sell-offs only at ultra-low prices, are doing the rounds.

Bottom Line for Investors

The Brexit referendum has sparked a drastic change in sentiment, from the post-financial crisis period of skyrocketing London property prices. The fund redemption requests are a sign of increasing apprehensions about the U.K.’s consistency as a business center after its vote to leave the EU—meaning, British commercial properties could experience some price decline in the future, even if temporary withholding of funds’ redemptions prevents it from ballooning into a catastrophic downward spiral. Nevertheless, if prices do manage to fall enough, long-term investors could spot some bargain hunting opportunities for high-end properties in London, especially with an already cheap pound.

On the other hand, the rush to unload British real estate exposure could also shift investor capital towards real estate in the U.S. in the coming months, especially as the latter’s economy is showing signs of resilience.

FREE Download – Zacks Stock Market Outlook Report: July/August, 2016

The aftermath of the “Brexit” vote is sure to create plenty of winners and losers, but perhaps most-watched will be those affected in the realm of trade. At this stage, there’s no sense in speculating how the trade relationship between Britain and the EU will ultimately look— there are far too many unknowns. But, what is worth a closer look is how the Brexit vote has seemingly stirred a movement—one that is bringing into question the benefits of globalization and trade.

 Is Free Trade on the Chopping Block?

Something we learned from those leading the “Leave” campaign in Britain was how effective it was to appeal to isolationism. Boris Johnson and Nigel Farage focused their messages on how Britain could do it all on their own—no need for Brussels bureaucracy, no need for a trade deal they felt benefited the EU more than Britain, no need for labor coming from other countries.

Readers may have a strong opinion on the topic of ‘trade’ one way or the other, some even more so who have been directly affected by it with a job loss. The economic benefits of trade are very difficult to measure directly, but the costs are quite tangible (job losses, immigration) and it is easier to see trade hurting more than it helps. In this sense, the emotional argument often trumps the analytical one.

 As a career asset manager, I’m hard-wired to put my weight behind the analytical when it comes to cost/benefit analysis, and for trade I’m convinced that freer is almost always better. There is a relatively new data set available that supports this case. The Organization for Economic Development (OECD) and the World Trade Organization (WTO) have created a joint initiative to better measure how countries, in their trade relationships, benefit from and contribute to total output.

The metric is known as the Trade in Value-Added (TiVA) and, in the WTO and OECD’s words, it’s “the value added by each country in the production of goods and services that are consumed worldwide.” A look at some of the findings reveal quite a few highlights:

The United States adds more value to China’s exports than China does to ours

Foreign countries add about 15% of value to our total exports, with the rest coming from domestic production

While most people see China as “making everything,” they actually source over 30% of the value of their production from other countries

Even Mexico relies on foreign value adds more than the U.S. does

The OECD-WTO joint initiative examines 61 countries and 34 unique industrial sectors, so one could study the findings all day and night. But, the consistent discovery you’ll make is that very few mass produced goods are made in just one country—the global supply chain is vast and interconnected. To make an iPhone, about a dozen countries are involved, and if that supply chain breaks down or a link goes missing (or is legislated away via tariffs) then the cost effectiveness of the iPhone goes out the window. Just ask any Brazilian (with whom the U.S. does not have a free trade agreement) how difficult it is to acquire an Apple computer at a reasonable price. Citizens in Brazil pay at least double what we do.

Raising tariffs or nixing free trade agreements can easily result in a backlash to protectionism, which could mean the ultimate costs of goods sold rises significantly. Roughly two-thirds of GDP in this country is comprised of consumer spending, and the last thing anyone really wants is the costs of goods skyrocketing. Trade is by no means perfect all of the time, but it’s also one of those things that ‘you don’t really know how much it hurts until it’s gone.’ 

Bottom Line for Investors

Again, I’m not arguing that freer trade is a perfect economic solution and that globalization is the end-all solution for creating the most wealth possible. But, I’d argue that they help more than they hurt. The reason sentiment against trade and globalization is easy to ignite is because the effects are felt by some acutely (those who lose jobs), and that is certainly a problem governments need to work to figure out. Ultimately, the benefits of globalization and trade are distributed throughout society via the lower cost of goods—an iPhone costs $600 instead of the $1,200 it costs in Brazil. If folks were able to see a menu of goods before tariffs and after tariffs, my guess is that free trade wouldn’t get such a bad rap.

FREE Download – Zacks Economic Outlook: July/August, 2016

Theresa May Assumes Key Role as Britain PM – Theresa May became the second woman to lead Britain since Margaret Thatcher (1979-1990), and the world is watching as she assumes the extraordinarily tricky task of guiding Britain through their separation from the European Union (EU). May is a career politician and actually campaigned against the Brexit, but she appears committed to seeing it through based on the referendum result. Germany’s leader, Angela Merkel, has already stated that Britain should not expect an easy path forward in their relationship with the EU, and May finds herself in a difficult position.

June Jobs Report Surprises to the Upside – after a dismal May jobs report that arguably sent the Fed back into the bomb shelter, U.S. job growth surged in June as manufacturing employment increased. June saw nonfarm payrolls increase by +287,000 m/m, the largest gain since last October, which followed the bleak +11,000 m/m added in May. Meanwhile, the unemployment rate held at 4.9%. One would normally assume that a stronger jobs report might encourage the Fed to revisit their projected course for raising rates, but at this stage Fed forecasting feels like a feckless exercise. Even though the Fed’s dual mandate is employment and inflation, they also seem greatly influenced by global events, like the Brexit.

Maintaining Close Ties with Wall Street – Chancellor of the Exchequer, George Osborne, met with some of Wall Street's biggest investors in New York this week to try and encourage them to keep close ties with the U.K. despite the Brexit. It seems extremely unlikely that Wall Street will want to alter its relationship with London following the Brexit, as neither party has any incentive to close-off ties in any way. In fact, once the Brexit has fully taken its course, there could be even more advantageous aspects to the relationship between New York and London, since London will no longer have to abide by regulations set forth in Brussels. Osborne will also visit Singapore and China later this month for the same end.

Bank of England Holds Key Rate at 0.5% - the market has seemingly been wrong in forecasting Britain policy moves lately—first the Brexit, and then this week in setting the expectation that the Bank of England would cut the benchmark rate by 25 basis points and perhaps also boost other stimulus measures, like bond buying programs. Neither outcome happened, perhaps as the central bank elected to hold off on using its stimulus measures until it is deemed essential. With the FTSE trading higher since the Brexit vote, the read is that the markets are perfectly content with the referendum outcome—so why should the central bank act? A 25 basis point cut would be the Bank of England’s first cut in seven years, and would represent an unprecedented low in the central bank's 322-year history.

FREE Download – Zacks Economic Outlook: July, 2016

The UK’s decision to leave the European Union (EU) created a myriad of uncertainties about the economic futures of Europe and Britain. I’ve seen many pundits remark that ‘the market at least has clarity given the vote is over,’ but even that is uncertain at this stage. The referendum itself is powerless until Britain invokes Article 50 of the Lisbon Treaty, whereby they formally request to leave the EU. The EU is pressing for this to happen quickly so markets aren’t left waiting in the wings, but it does not appear that Prime Minister David Cameron will be the one to lead the effort; his successor will when that person (still unknown) takes over. It could be weeks, even months before Britain actually starts this process.

You’ve seen me write this before, but markets loathe uncertainty, and there is a heap of it in Europe right now. The biggest uncertainties I see are:

To what extent will businesses defer fixed investment and hiring in the region due to uncertainty about exchange rates, regulatory issues, further political fallout and the possibility of new trade barriers?

Will UK GDP take a hit and where will it fall as a result? Shallow recession?

Will Scotland declare a 2nd referendum to stay in Britain? (A majority of Scottish voters preferred to remain in the EU.)

I am not convinced anti-globalization and anti-trade were the driving issues that led voters over the edge in Britain, especially as immigration and over-regulation from Brussels seemed to be the bigger catalysts. With that, I’m less concerned about other countries leaving the EU, and do not think we’re heading towards a revolutionary wave of anti-globalization and anti-trade.

There is no such thing as certainty in the market, only probabilities: what you believe is either more likely or less likely to occur. And, in my view, the events (as they unfold) in Britain and Europe have actually added some clarity on what I think could occur in the market this year. Here is what I believe we’ll see happen:

Low Interest Rates Are Here to Stay – the Fed’s streak of backing away from commitments to rate increases is nothing short of remarkable. In December 2015, Fed policymakers expected the benchmark fed funds rate to be around 1.375% at the end of 2016 with a median forecast of 2.375% by end of 2017. This rate was actually down significantly from just six months prior, with previous “dot plot” forecasts in June 2015 predicting a 1.625% rate by the end of 2016 and 2.875% by 2017’s close. It is clear to me now that we will get nowhere near those levels in the next two years, and there is scarce chance the Fed will elect to raise rates anytime soon, as the Europe situation plays out.

Money and Capital Should Flow into the US – I believe money will continue to flow into the U.S. and U.S. dollar denominated assets, which should keep downward pressure on long-term interest rates and provide further support to risk assets, like stocks. Yield-bearing stocks, like the dividend-payers, could perhaps surface as the most attractive in this environment—historically, when dividend stock yields are materially higher than the risk-free rate, stocks do well. That’s what we have today and will likely have for some time.

Major Indices in Europe Could Continue Wobbling – I actually do not see a huge change to the growth story in Europe and Britain in the medium term. The path forward still looks very uninspiring with flattish growth. I think GDP estimates will have to be revised downward for both areas, however, as the investment component weakens (I do not see a major recession in the wings). As mentioned, the unwinding process could take years, and capital can flow freely in that time just as it does now. The uncertainty behind regulatory considerations, future trade barriers, and the potential for brinkmanship in negotiations could unnerve markets for a period going forward. I would not expect upside surprises from the FTSE (Britain), DAX (Germany), or the Euro STOXX 50 (Europe).

Financials May Have a Difficult Road Ahead – downward pressure on long-term interest rates also implies a flatter yield curve, which does not play well for banks’ operating margins. In a world of sustained low rates, it could be some time before we see a steep yield curve again.

Bottom Line for Investors

Expect constant media coverage that will most likely focus on the uncertainty of the situation, with a bias to the negative. A barrage of doomsday forecasts could tempt many investors to want to “do something about it,”—sometimes in ways that could run counter to long-term investment objectives. As the market consistently teaches us, sometimes the best response is no response at all.

The overarching message is that investors should resist the temptation to make knee-jerk portfolio adjustments in response to this decision. There are several uncertainties and risks that have surfaced in its wake, but the biggest risk we see in the current market environment is an unforced error by investors—reflexive selling, in our view, would not be the most prudent choice.

FREE Download – Zacks Economic Outlook: July, 2016

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

On June 23rd, Brits will vote in a referendum on whether to remain in the European Union (EU), or leave. Depending on which news story you read, leaving the EU could devastate the UK’s economy or free it from the shackles of EU regulation.

So which is it? The only answer is: it’s neither. That’s because any argument you hear is either purely academic—meaning, it’s making assumptions to draw theoretical conclusions—or it’s political. Or, it’s some fuzzy combination of the two, like the Bank of England Governor Mark Carney’s assessment that a Brexit would assuredly mean a UK recession (he was hired by Prime Minister David Cameron, who is in the “Remain” camp).

My conclusion? The decision to “Remain” or “Leave” will not impact my forecast for modestly positive returns from equity markets in 2016, and I do not think it will dramatically affect the growth trajectory for the U.S. and the world.

In the near term (next 6 – 12 months), my view hinges on the fact that a “Leave” vote does not mean that Britain leaves overnight. A “Leave” vote actually just triggers a 2-year exit process, where the UK would almost surely retain market access while renegotiating the terms of trade, tariffs and labor movement. That is not to say the EU will be keen to make a new deal with Britain, or that they’ll be friendly about the terms, but at least there will be time.

Possible Impact of a “Leave” Vote

I’ll focus analysis on the impact of a “Leave” vote, since a “Remain” vote means that essentially nothing changes.  

1.     On Trade and Tariffs:

“Leave” proponents argue that a Brexit would allow the UK to unilaterally pursue better trade deals, which could theoretically mean more favorable trade terms with countries outside the EU, like China and India. This could open up huge new markets for exports. Trade deals are not simple transactions, however, and worker’s unions could emerge as fierce domestic opponents to deals. The EU has negotiated trade deals for the UK for the better part of 20 years now, so Britain would have a long way to go to re-establish relationships. 

Nearly half of the UK’s exports went to the EU. Additionally, Germany, Ireland, Spain, and Poland each count the UK as one of their top three trading partners. These relationships could be compromised with the “Leave” vote.

2.     On Labor Markets:

Leaving the EU might benefit local labor markets by stemming immigration, which has been a hot button political issue given the current refugee crisis in Europe. According to the Office for National Statistics, there are 942,000 eastern Europeans, Romanians and Bulgarians working in the UK, along with 791,000 western Europeans. That’s significant. A “Leave” vote may turn this on its head.

3.     On Corporations:

Many global businesses have, until now, chosen the UK as their hub for connecting them to the greater EU. But, in the event of Brexit, new restrictions and duties may be thrust upon their cross-border operations with the rest of the EU, leaving multinationals with an undesirable quandary. The worst case scenario would be multinationals rethinking operations in the UK, which could stifle foreign direct investment flows—a key source of growth (not to mention losing key sources of tax revenue).

On the other hand, a vote to “Leave” could empower local corporations to regain a stronghold, which in theory would benefit local citizens more than multinationals.

Bottom Line for Investors

History suggests that when voters are faced with a huge decision questioning sovereignty, they tend to want to maintain the status quo. Looking back at the Quebec referendum in 1995 or the Scottish one in 2014, in both instances voters decided to “Remain,” and the issue passed. If I were a betting man, I’d guess the same happens here.

At the end of the day, it’s not really investors like you who should fear the Brexit; it’s the businesses in the UK and EU that are heavily reliant on the single market. The restructuring and reshuffling based on policy and trade changes could be costly and arduous, and would take time. But remember, even “Leaving” means there’ll be time.

Download Zacks Latest Stock Market Outlook Report

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.