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Rolling risk clouds for stocks ahead

The greatest risk event of the last few months became a reality that surprised markets, raising a flurry of questions that will likely overshadow domestic news in the week ahead.

"This is not a shock that can be solved by central banks. This is more of a political [issue] and one that is more to be solved by politicians," said Jeff Kleintop, chief global investment strategist at Charles Schwab.

Investors are all ears to any statements from world leaders on how to negotiate Britain's formal departure from the European Union, a succession plan as David Cameron steps down as prime minister of the U.K., the potential for other EU members to leave and clues on economic growth.

The Federal Reserve
Jay Mallin | Bloomberg | Getty Images
The Federal Reserve

Rest doesn't come this weekend. Spain on Sunday is set to hold elections, and results could add to concerns about the stability of the European Union. The heads of the U.S. Federal Reserve, European Central Bank and the Bank of England are also set to participate in a panel Wednesday at the ECB's Forum on Central Banking in Portugal.

"Major central banks will remain accommodative and will ease policies more, which at least should support risk assets for now," said Athanasios Vamvakidis, head of G10 FX strategy in Europe at Bank of America Merrill Lynch.

But with Britain's vote to leave the EU, "we have very long negotiations," he said. "This will magnify the implications for the U.K. economy, and if anything, this will affect broader global risk appetite."

BofAML and several other major investment banks trimmed their U.S. GDP forecasts Friday and lowered the number of rate hike expectations from two this year to one or none. U.S. Federal Reserve policymakers have cited a potential Brexit as a reason to delay a rate hike.

"We like the financials, but we recognize, eyes wide open, that there are some headwinds here on the interest rate side," said Katie Nixon, chief investment officer at Northern Trust Wealth Management.

"It doesn't help sentiment," Nixon said. "It's really hard here to have a really robust rally that doesn't include financials."

Financials led Friday's stock decline with the sector dropping 5.4 percent in its worst day since August 2011. Major banks passed the initial part of the Fed's stress tests this week, but still face the hurdle of next week's qualitative exam results.

The Dow Jones industrial average and S&P 500 plunged more than 3 percent Friday, erasing year-to-date gains. The 10-year Treasury yield hit a low of 1.406 percent, its lowest in nearly four years.

Amid Friday's knee-jerk reaction to Brexit, U.S. durable goods orders showed a worse-than-expected 2.2 percent decline in May. Next week, the advance read on May's trade deficit, the third read on first-quarter GDP and the Fed's preferred gauge on inflation, the PCE deflator, are all due for release. Several PMI reports and ISM manufacturing are also on the calendar.

"I'd say the main focus is how strong the U.S. economy is, especially with [Friday's] drop in durable goods," said Kate Warne, investment strategist at Edward Jones.

"Investors are looking for clues about the significance of the vote and what it means for economic growth and earnings growth. Whatever helps them figure out the implications will be the focus next week," she said, adding Thursday night's surprise Brexit would continue to have "a lingering effect."

The final results showed a 52 percent lead for leave versus 48 percent remain. Traders had overwhelmingly positioned for a remain vote late Thursday, which saw the British pound sterling hit $1.500 before falling more than 10 percent against the U.S. dollar to $1.3224, its lowest since 1985.

"The reaction was exacerbated, because I think it was done overnight, especially in the FX markets," said Jeremy Klein, chief market strategist at FBN Securities. "It's pretty much, people are going to wait a bit, take the weekend and see how the futures open up."

The Japanese yen briefly crossed below 100 against the U.S. dollar overnight for the first time since late 2013 and was last slightly weaker, near 102 yen versus the greenback. The euro hit a nearly three-month low of $1.1015 versus the dollar.

The U.S. dollar index traded more than 2 percent higher for its best day in more than seven years.

After the historic vote, U.K. Prime Minister David Cameron announced his resignation and plan to leave by October. His successor remains uncertain, while the country's negotiations to depart from the EU is a process that could take two years or more.

Moody's Investors Service downgraded Friday its outlook on the U.K. sovereign to "negative" from "stable," citing the vote to leave the EU "will herald a prolonged period of uncertainty for the U.K." Moody's affirmed its AA1 rating.

"I'm not sure everyone's clear about what this actually means," said Alan Rechtschaffen, UBS Wealth Management Americas financial advisor and senior vice president. "We have a global sentiment towards trying things that are not the status quo. … There is a new world happening."

What to watch

Monday

8:30 a.m. Trade deficit

9:45 a.m. Markit services PMI

10:30 a.m. Dallas Fed survey

Tuesday

8:30 a.m. Q1 GDP, 3rd read

9:00 a.m. S&P Case-Shiller home prices

10:00 a.m. Consumer confidence

10:00 a.m. Richmond Fed survey

7:00 p.m. Federal Reserve Governor Jerome Powell speaks on recent economic developments, monetary policy considerations and longer-term prospects

Wednesday

8:30 a.m. Personal income, consumer spending

9:30 a.m. Fed's Yellen, ECB's Draghi and BOE's Carney participate in panel discussion at ECB Forum on Central Banking in Portugal

10:00 a.m. Pending home sales

Thursday

8:30 a.m. Jobless claims

9:45 a.m. Chicago PMI

3:20 p.m. St. Louis Fed President James Bullard speaks on U.S. economy and monetary policy

Friday

Vehicle sales

9:45 a.m. Markit manufacturing PMI

10:00 a.m. ISM manufacturing

10:00 a.m. Construction spending

11 a.m. Cleveland Fed President Loretta Mester on economic outlook and monetary policy

*Planner subject to change