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World Week Ahead: Will UK stay or go?

Monday 20th June 2016

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British voters will determine this week whether the country will remain in the European Union, a decision that will be closely eyed by investors around the world. 

The June 23rd referendum will dominate markets for another week, with the latest polls showing British voters are leaning towards the exit, referred to as Brexit. 

Last Thursday’s shocking murder of Jo Cox, a member of Parliament, who was in favour of the UK staying in the EU, has damped the level of hostility in the debate the past few weeks.

First though, all eyes will be on US Federal Reserve Chair Janet Yellen as she delivers her semi-annual testimony before Senate Banking Committee, in Washington, on Tuesday, and again before the House Financial Services Committee on Wednesday.

Other Fed officials speaking this week include Minneapolis Fed President Neel Kashkari, today, and Dallas Fed's Robert Kaplan on Thursday.

Last week, the Dow Jones Industrial Average shed 1.1 percent, the Standard & Poor’s 500 Index slid 1.2 percent, while the Nasdaq Composite Index sank 1.9 percent. The Brexit vote is expected to remain a cloud hanging over the markets. 

"I don’t think we’re going to escape this until Thursday,"Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, told Reuters. "We’re just going to be tied to those anxieties going up or down between now and the Thursday vote.”

Europe’s Stoxx 600 Index rose 1.4 percent on Friday, limiting its drop for the week to 2.1 percent.

The US dollar slid for a third day on Friday as the Fed signalled a more gradual pace of interest rate increases.

“This is a Fed accepting the new normal - we’re in a world where 2 percent growth is as good as it can get,” Kit Juckes, a London-based strategist at Societe Generale, told Bloomberg. “There’s a lot of Brexit ‘remains’ in the market. But I have to say the bigger story is the Fed running out of tools and influence.”

Indeed, yields on 10-year Treasury notes fell a third straight week.

"US yields have moved down very sharply, and the question is whether that's just in sympathy with Europe and Japan or something more troublesome - like a sign the US economy is starting to weaken more broadly," Charlie Bilello, director of research at New York-based Pension Partners, told Bloomberg.

The latest US data will arrive in the form of reports on the FHFA house price index, and existing home sales, due Wednesday; weekly jobless claims, Chicago Fed national activity index, new home sales, and leading indicators, due Thursday; and durable goods orders, and consumer sentiment, due Friday.

On Friday, shares of Apple dropped 2.3 percent after a Beijing regulator ruled some of its iPhone models violated a patent by a local start-up company amid increasing headwinds for overseas companies in the world’s second-largest economy. Apple said its phones would remain for sale in Beijing as it appealed the ruling.

China is Apple’s second-largest market.

“There’s a variety of risks of having dependence on sales in China to Apple, and government intervention in whatever form is one of them,” BGC Partners analyst Colin Gillis told Reuters.

Some, including BMO Capital Markets analyst Tim Long, aren’t worried.

“We believe there have been several prior cases against US companies ruled in favour of local companies by lower courts that were later overturned by higher courts,” Long wrote in a note to clients, according to Bloomberg. “We have seen dozens of court decisions banning different smartphone products over the years in many different countries. We are not aware of one ever that has resulted in an actual injunction.”

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