The stock market gallivanted higher though the first four days of the week, but the upbeat attitude dissipated on Thursday evening after it became clear that the British referendum on membership in the European Union ended with a 51.9% victory for the 'Leave' camp. The resulting Friday selloff sent the S&P 500 lower by 3.6%. The index slid below its 50-day moving average (2080), surrendering 1.6% for the week.
Although the weekly decline in the S&P 500 did not look particularly concerning, the moves that unfolded in the foreign exchange market caught the attention of many.
The final set of polls released ahead of the referendum pointed to a growing edge for the 'Remain' camp, which lulled some market participants into a false sense of security. The pound notched a fresh six-month high against the dollar at 1.5018, but reversed in a flash after actual results began pouring in.
The first signs of an impending reversal in the foreign exchange market began appearing around 18:00 ET on Thursday when the pound started backing away from its high. This took place after it was reported that the 'Remain' camp secured just a slight victory in Newcastle, where status quo was expected to prevail by a large margin. Subsequent vote counts hinted at a much closer result than it was first expected, which invited risk-off positioning into capital markets.
At its lowest point, the pound was down nearly 11.0% against the dollar, but that decline was narrowed to 8.0% by the end of Friday. The volatility left the pound down more than 1,000 pips versus the dollar for the day, which is a move that would be expected to unfold over a few weeks under typical conditions.
U.S. Treasuries surged in reaction to the developments, pressuring the 10-yr yield to 1.40%--its lowest level since mid-2012.
The defensive finish to the week weighed on rate hike expectations, and the fed funds futures market now sees a higher chance of a rate cut in July (7.2%), September (7.2%), or November (7.0%) than that of a hike in November (1.9%). Looking farther out, the likelihood of a hike in February 2017 sits at a lowly 22.3%.
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