If you thought yesterday’s uncertainty was bad…

  • Unpleasant stimulus
  • Bonds coming out on top
  • Time to revisit this ‘hated’ sector

Uncertainty. It’s the catch word of the week. And it’s why I opted for today’s headline. Made you look, didn’t it?

With the ramifications of Britain’s decision to leave the EU still ping-ponging around the globe, people are desperate for some solid answers. Investors more than anyone.

If you Google ‘uncertainty’, and filter results for news sources only, the following headlines top the search results:

  • ‘Market uncertainty rules after Brexit vote, analysts say’ — CNBC
  • ‘MEPs call for swift Brexit to end uncertainty and for deep EU reform’ — European Parliament (press release)
  • ‘Carpetright shares tumble on Brexit uncertainty’ — Telegraph.co.uk
  • ‘How To Work Through Extreme Uncertainty’ — Forbes

The list goes on….and on. But you get the idea.

Now, if you want my opinion — and even if you don’t — this whole Brexit thing has been blown completely out of proportion. It’s not like the UK has signed an exclusive alliance with North Korea and is closing its markets and borders to the outside world.

This is the UK we’re talking about, the world’s fifth largest economy. A nation that knows a thing or two about trading…and alliances…and finance. Sure, Brussels, and the leaders of the remaining EU members, won’t make it easy for the Brits. They don’t want to encourage their own citizens to go the same route — as campaigners in the Netherlands, France, and Italy are already urging.

But when push comes to shove, the EU will bend. And the UK’s relationship with the rest of the world ‘simply’ needs a spot of renegotiation. That’s good news for the bureaucrats.

So why all the fuss?

Because change is scary. And let’s face it. Uncertainty sells. And not just newspapers.

Brokers have done quite well with the uncertainty driven market panic as well. Following the Brexit announcement, the amount of shares traded on the US S&P 500 last Friday more than doubled the previous day’s trade. In fact the S&P 500 saw more activity than it has all year. That won’t hurt the old commission fees.

You might think all the activity was predominantly driven by sellers. But remember, for every seller there’s a buyer.

Speaking of selling and buying…to the markets.

Markets

Following a string of losses, bargain hunters have returned to the scene.

In yesterday’s trading in the US, the Dow Jones Industrial average gained 1.57%, the NASDAQ closed up 2.13%, and the S&P 500 gained 1.78%.

Markets also rebounded in Europe. The German DAX finished up 1.93%, while the battered French CAC 40 rose 2.61%. That’s a move in the right direction for the French market. But don’t forget it’s following on a 2.97% loss for the CAC yesterday, and an 8.04% loss on Friday. Ouch.

And over in the UK — the root cause of all this uncertainty — the FTSE 100 closed at 6140 points, up 2.64%. That’s only 3.1% lower than before the Brits voted to exit the EU. Of course, this doesn’t reflect the losses foreign investors will incur if they sell shares priced in pounds.

Last Friday the pound plummeted from US$1.50 to US$1.32, its biggest intra-day trading loss in history. As of writing it’s inched back up to US$1.33 (AU$1.80). That’s still a 12% fall against the greenback — slightly less against the Aussie dollar, which is also down a bit against the US dollar. That puts the FTSE 100’s 3.1% loss in a bleaker, though more realistic, perspective.

Asian markets are also enjoying a healthy rebound today. As of writing (2:30pm AEST) the Nikkei 225 is up 1.73%, while the Shanghai composite has gained 0.48%.

Aussie markets are also in the black. As of writing the ASX 200 is up 0.99%. That’s only 2.6% lower than before the Brexit. And without any major depreciation in the Aussie dollar.

In commodities West Texas Crude nudged up to US$48.16 per barrel and gold is trading at US$1318.91 per ounce.

Perhaps investors have caught on to the fact that the recent selloff has been an overreaction. Perhaps we’re in for a period of steady gains. Or not…

Unpleasant stimulus

There’s that uncertainty again.

And, as far the fallout from the Brexit goes, don’t expect any concrete outcome anytime soon. Here’s what our international strategist, Jim Rickards, has to say on the matter,

Divorce proceedings can take years with fights over property and valuations. Worst of all the proceedings create a great deal of uncertainty and stand in the way of making new decisions on investment, spending and savings. That’s what’s happening in the early stages of the “divorce” proceedings between the UK and Europe. The Europeans are even squabbling among themselves right now.

The truth is we can research every facet of a company before investing our hard earned money into the stock, but we’ll never know what tomorrow brings. There could be a second referendum in the UK, as British Health Secretary Jeremy Hunt suggested in The Daily Telegraph.

Or it could be the next Greek debt default. Or the Scots voting to split with the UK and stick with the EU. Or the Chinese debt load finally reaching critical mass. Or Donald Trump wielding supreme executive power in the world’s largest economy.

And let’s not forget our own election this Saturday.

Apparently we humans really hate uncertainty. More, even, than I suspected.

According to The Atlantic:

Studies [released by the American Psychological Association] have shown that people would rather definitely get an electric shock now than maybe be shocked later, and show greater nervous-system activation when waiting for an unpredictable shock (or other unpleasant stimulus) than an expected one. Where people differ is in the degree to which uncertainty bothers them.

Um. I’ll deal with my jittery stomach and take the chance of shock later please.

Bonds coming out on top

All this uncertainty may have put the ASX on a rollercoaster ride, one that’s left it 3.17% in the red for the first half of 2016. But that same uncertainty — and the increasing odds of another rate cut from the RBA — has been good for bonds. In fact Aussie bonds have enjoyed their best first half year returns since 1995.

Have a look at the chart below. It shows you the year to date (1 January through 28 June) returns of Aussie bonds for the last 22 years.



chart image

Source: Bloomberg
Click to enlarge


According to Bloomberg:

Holders of federal debt have earned 5.8 percent since Dec. 31, the best beginning to a year since 1995, a Bloomberg AusBond index showed as of Tuesday. The instability stemming from the U.K.’s European Union referendum has seen investors flock to sovereign debt and helped push Australia’s benchmark 10-year yield to an unprecedented 1.95 percent. Risks are also mounting in China, Australia’s biggest trading partner.

Remember, when you’re dealing with bonds, yields are inversely related to the price. As bond prices rise, yields go down. And with global uncertainty running high, the demand for secure Australian government bonds has seen prices rise 5.8% this year.

Now, a 5.8% gain (atop the roughly 1% yield you would have achieved in six months) isn’t bad. Not with an investment as relatively safe as Australian government bonds. But it doesn’t exactly blow your socks off either, does it?

Time to revisit this ‘hated’ sector

If you’re looking for something a little more exciting — and risky — with the potential to more than triple your investment in short order, you’ll want to find out what our resource analyst, Jason Stevenson, has been up to over at Resource Speculator.

Earlier this year he sold one oil stock for a 242% gain, and another for a 64% gain. To top that off he unloaded a zinc stock for a tidy 100% gain. Now, of course, not all of his recommendations deliver returns like that. Some, invariably, are sold for losses. But over the past year, since he’s turned his attention towards finding speculative miners with promising stories, Jason has had some fantastic successes.

And with the Metals & Mining Index down around 54% over the past five years, Jason believes now is the perfect time to buy the right resource stocks at multi-year lows.

In this just-published investor report he reveals three ASX ‘bounce-back’ miners that look set to soar in the second half of 2016 and beyond. You can find all the details here.

That’s all from me today. Keep an eye on your inbox tomorrow for a guest article from our Currency Wars strategist, Jim Rickards.

Cheers,

Bernd