Yellen and Brexit

The two key events this week -- Yellen's "Humphrey-Hawkins Testimony" and the Brexit vote -- should not be a problem for the stock market.   But, Treasuries -- particularly longer-term maturities -- risk being sold.

Yellen's Testimony
1. Yellen's H-H Testimony typically follows the message from the prior FOMC Statement, in this case June's.   The June Statement and projections effectively implied a slight easing, as the forward guidance moved toward only one rate hike this year.   So, her testimony should be benign with regard to monetary policy.  This would be a positive for stocks, but should steepen the Treasury yield curve.

2.  To be sure, the Fed also lowered its forecast of GDP Growth over the next couple of years.  This, in principle, is not a positive for stocks but is a positive for Treasuries.  However, the Fed's economic forecasts have not been reliable and thus its latest view is of little significance except to the extent that it convinces the Fed not to tighten in the next few months.  In particular, Yellen still should signal a very gradual approach to tightening even if her current "downside risk" -- Brexit -- is eliminated in the vote.

Brexit Vote
1.  If Brexit is voted down, then there is no question of it being a positive for stocks -- unless stocks have fully reversed their earlier Brexit-fear sell-off by then: a buy the rumor/sell the fact phenomenon.  But, the window for new highs into July remains intact (as predicted in my May 8 blog).

2.  If Brexit is approved, there are two reasons why any knee-jerk sell-off in stocks should be bought:  /1/ Central Banks will likely ease to counter market reactions, as indicated by Bank of Italy President Viscio in the press.  /2/ Negative fall-out on the UK economy or contagion effects on other European countries will likely take a few years to show up.  So,  they can be ignored short term.