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Brexit vote countdown could outweigh Yellen

The question of whether the United Kingdom stays in or leaves the European Union will likely remain the focus for markets Tuesday, even as Federal Reserve Chair Janet Yellen speaks before the U.S. Senate.

"Brexit is going to dominate the market if it looks as if they are going to leave," said Quincy Krosby, market strategist at Prudential Financial. "If it looks like they're going to stay, Yellen will dominate the market."

As the trading week kicked off, campaigning for both leave and remain began again after a pause late last week following the murder of a member of Parliament in Northern England.

Hundreds of Londoners gathered in Parliament Square
Jay Shaw Baker | NurPhoto | Getty Images
Hundreds of Londoners gathered in Parliament Square

The latest polls indicated the remain camp recovered some of the ground it appeared to lose in polling the week prior, and that rebound helped spur a global stock rally.

Stocks closed higher Monday, with the Dow Jones industrial average and S&P 500 both above their 50-day moving averages. The S&P gained 12 points to 2,083, helped by gains in energy stocks as oil prices climbed toward $50 a barrel.

Art Hogan, chief market strategist at Wunderlich Securities, said Monday's gains were an "unwinding of last week's trade, but not a pricing in of this week's decision."

"It's not the Brexit decision in and of itself. ... It's who's next," he said.

The U.K. is set to vote Thursday on whether to leave the European Union, the latest manifestation of growing nationalism — and by far the most serious to date — among certain members of the European economic bloc.

Fed policymakers have cited uncertainty around the Brexit vote as a rationale behind delaying a June rate hike. Minneapolis Fed President Neel Kashkari said Monday in a Reuters report that a Brexit would have "moderate direct effects" on the U.S. economy, but probably does not pose big financial risks.

For investors, the bigger concern around the Fed is its drastic change in tone, from playing up the possibility of a June or July hike just a couple weeks ago to leaving out specific time references and lowering growth expectations.

Clues on why the Fed backed off from its hawkish chorus could come in the next few days.

Yellen kicks off her two-day congressional testimony with a scheduled session before the Senate Banking Committee on Tuesday morning. Traders will be listening carefully to the question and answer session.

"I think what the market wants to know is, 'What happened?' What happened in the course of a few weeks?" Krosby said.

"Does 38,000 jobs [in May] bother her when she said one month doesn't make a trend? Don't think for a minute the market doesn't make its own assessment. In many ways, Janet Yellen basically acquiesced to the market, because the market said, 'You're not moving anything,'" Krosby said.

U.S. Treasury yields continued to edge higher Monday in a recovery from last week's lows. The 10-year yield held near 1.67 percent, still close to lows seen during the stock market correction earlier this year when recession concerns worried markets.

"I don't think the Fed's inconsistent. I don't think they've lost credibility," Allianz Chief Economic Advisor Mohamed El-Erian said at a press briefing Monday. "But if you're data-dependent, you're going to look inconsistent."

Federal Reserve Governor Jerome Powell is scheduled Tuesday afternoon to give opening remarks at a New York roundtable on the interim report of the Alternative Reference Rates Committee.

No major economic data is expected, but some key earnings reports will be in focus for their perspective on economic growth. Earnings due before the bell include CarMax and Lennar. FedEx, KB Home and Adobe Systems are scheduled to report after the close Tuesday.