Day Traders Diary

6/30/16

The stock market capped off the second quarter with the S&P 500 (+1.4%) clawing its way back to a 2.7% gain on the year. The three-day rebound resulted in the benchmark index trimming its post-Brexit loss to a paltry 0.7%. Today's leg of the rebound can be attributed to rising expectations regarding further easing measures from the Bank of England and European Central Bank, the reclaiming of the 200-day simple moving average in the S&P 500, month-end/quarter-end re-positioning, and the outperformance of the heavily-weighted industrial (+2.0%) and financial (+1.6%) sectors. The S&P 500 (+1.4%) finished ahead of the Dow Jones Industrial Average (+1.3%) and the Nasdaq Composite (+1.3%).

Global equity markets sputtered at the start of the U.S. session as European bourses spun their wheels near their flat lines. The restrained action overseas followed two days of recouping steep Brexit-related losses. On that note, the Euro Stoxx 50 Index (+1.1%) recovered 5.0% of its 11.2% decline by the end of yesterday's session. A downturn in crude oil also added to the restrained tenor.

U.S. equity indices ticked higher after the first hour of trade as the consumer staples sector (+2.2%) climbed the leaderboard. The move in the space was prompted by Mondelez International (MDLZ 45.48, +2.51) offering to buy Hershey Foods (HSY 113.49, +16.35) for $107 per share in cash and stock. Hersey has since rejected the offer, but remains in talks with Mondelez. The ensuing rally in the broader market enabled the benchmark index to reclaim its 50-day simple moving average (2076.42).

The benchmark index extended its rally through the afternoon, spurred on by promises of continued easing from central banks. Bank of England Governor Mark Carney pledged that the bank was ready to provide further stimulus in the wake of Thursday's surprise Brexit vote. Additionally, reports indicated that the ECB may loosen its regulations regarding quantitative easing purchases. The commentary was enough to fuel risk appetite through the end of the session. All ten sectors finished in the green with consumer staples (+2.2%), utilities (+2.2%), and industrials (+2.0%) leading the pack.

In the industrial sector (+2.0%), Dow component General Electric (GE 31.48, +0.93) finished at the top of the price-weighted index as participants ruminated over yesterday's decision to remove the company's nonbank Systemically Important Financial Institution designation. On the flipside, Deere (DE 81.04, -0.47) was pressured after the USDA released its quarterly grain stock report and acreage report.

The financial space (+1.6%) paced the advance as investors digested results from the Federal Reserve's supervisory stress test. The response was mixed as each institution's capital return program was weighed against recent expectations. Morgan Stanley (MS 25.98, +0.75) gained 3.0% after announcing an additional $3.5 billion in share repurchases and a dividend increase to $0.20 per share.

The U.S. Dollar Index (95.90, +0.13) ended modestly higher as the buck gained against the yen, euro, and pound. The dollar/yen pair finished higher by 0.4% (103.25) while the single currency lost 0.2% against the buck (1.1100). Separately, the pound fell 0.7% against the dollar (1.3337) as participants eyed potential stimulus from the Bank of England.

The Treasury complex finished modestly higher despite the rally in equities. The yield on the 10-yr note slipped three basis points to 1.49%.

Today's participation was above the recent average as more than 1.3 billion shares changed hands on the NYSE floor.

Today's economic data included weekly initial claims and Chicago PMI for June:  

• The encouraging trend for initial jobless claims persists with claims for the week ending June 25 increasing by 10,000 to 268,000 (Briefing.com consensus 265,000).
  • Weekly initial claims have been running below 300,000 for 69 consecutive weeks.
  • This is the longest streak below 300,000 for initial claims since 1973!
  • The latest initial claims reading left the four-week moving average for initial claims unchanged at 266,750.
• Continuing claims for the week ending June 18, meanwhile, decreased by 20,000 to 2.120 million.
  • The four-week moving average for this series fell by 13,000 to 2.134 million, which is the lowest since November 11, 2000.
• The Chicago Purchasing Managers Index (PMI) sprung out of its contraction, surging to 56.8 in June from 49.3 in May.
  • The June reading is the highest reading since January 2015 and was well above the Briefing.com consensus estimate of 50.8.
  • The headline strength in June was nice to see, yet it most likely reflects inventory rebuilding after an extended period of destocking in an environment of sluggish demand.
  • One month here does not a trend make and the providers of the report implied as much, pointing out that the business barometer needs to be viewed in the context of the weakness seen in April and May.
  • On that note, it is worth pointing out that the three-month average of 52.2 for the second quarter is roughly flat with the three-month average for the first quarter. The line between contraction and expansion is 50.0.
  • There was a huge surge in new orders, which drove the strength in June. The New Orders Index spiked from 48.8 to 63.2.
  • Similarly, there was a big jump in the Production Index from 47.4 to 56.3, which also proved to be a driving factor behind the headline surprise.
  • Order backlogs reportedly rose to their highest level since March 2011, breaking a 16-month streak of below 50 readings.
  • The Inventory Index ended a seven month run in contraction and saw a double-digit increase from the 6 1/2 year low recorded in May
  • Strikingly, despite the big jump in new orders and order backlogs, there wasn't a pickup in employment.
  • That could be seen in the Employment Index, which fell from 48.3 to 45.0. The Prices Paid Index was little changed at 55.7 versus 56.5 in May.

Tomorrow's economic data will include the ISM Index for June (Briefing.com consensus 51.4) and Construction Spending for May (Briefing.com consensus +0.5%), which will cross the wires at 10:00 ET. Separately, Auto and Truck Sales figures for June will be released throughout the session. 

• Nasdaq Composite -3.3% YTD
• Russell 2000 +1.1% YTD
• S&P 500 +2.7% YTD
• Dow Jones +2.9% YTD