The Week In Review

5/10/16

The stock market ended a mixed week on a lower note as investors eyed a rally in global sovereign bonds and a downturn in equity markets. Other focal points for today's action included a leg lower in oil, strengthening in the dollar, and relative weakness in the heavyweight financial (-1.2%), health care (-0.9%), technology (-1.1%), and the industrial (-1.0%) sectors. The Nasdaq Composite finished lower by 1.3%, extending its weekly loss to 1.0%. Separately, the S&P 500 (-0.9%) ended the week lower by 0.3%.

Equity indices opened under selling pressure as investors eyed sizable losses in European bourses and sinking yields from overseas. Germany's DAX (-2.5%) helped lead the losses as participants reacted to weakness in equities and a continued bid in the Bund. On that note, the yield on 10-yr Bund carved out a new all-time low overnight (0.01%). The weakness in Europe led to yield chasing in U.S. Treasuries and safe-haven inflows to the dollar.

The broader market ebbed lower through the morning as heavily-weighted components helped pace the retreat. Economically-sensitive financials (-1.5%) underperformed noticeably while growth-sensitive groups such as the Dow Jones Transportation Average (-1.5%) and the PHLX Semiconductor Index (-1.7%) also saw their fair share of selling interest.

The S&P 500 (-0.9%) fell to a session low as strengthening in the U.S. Dollar Index (94.54, +0.60) pressured dollar-denominated oil. The energy component carved out a new low ($48.87/bbl) through the afternoon before ending its pit session lower by 2.9% ($49.06/bbl; -$1.47). Nine sectors ended beneath their flat lines with energy (-2.0%), financials (-1.2%), technology (-1.1%), health care (-0.9%) ending behind the broader market. The countercyclical telecom services (+0.8%) and consumer staples (+0.1%) sectors ended with the only gains.

In the financial sector (-1.2%), money center banks, asset management companies, and investment brokerages underperformed as the groups weighed global growth concerns. Citigroup (C 43.90, -1.11) and Bank of America (BAC 13.83, -0.36) both lost 2.5%. Meanwhile, Dow component Goldman Sachs (GS 149.89, -3.28) finished at the bottom of the price-weighted index.

The PHLX Semiconductor Index (-1.7%) ended behind the broader market as the group erased a weekly gain, finishing down 0.9% over that time. In the group, Marvell (MRVL 9.82, -0.38) fell 3.7% after warning investors that its first quarter revenue may miss estimates. On the flipside, Intel (INTC 32.04, +0.10) outperformed after headlines stated that the company won an order to supply Apple (AAPL 98.83, -0.82) with chips for its new iPhone.

The Dow Jones Transportation Average (-1.5%) underperformed as FedEx (FDX 160.87, -3.24) declined by 2.0%. Rail names also weighed with Norfolk Southern (NSC 84.09, -1.51) and Kansas City Southern (KSU 88.50, -1.68) losing 1.8% and 1.9%, respectively. For the week, the index gained 0.5%, compared to a gain of 0.8% in the broader industrial sector (-1.0%).

The SPDR S&P Retail ETF (XRT 41.71, -0.61) declined by 1.4% as investors examined sales metrics and guidance. Urban Outfitters (URBN 26.32, -1.61) fell 5.8% after disappointing with its quarter-to-date comparable store sales data. Influential Netflix (NFLX 93.75, -3.34) ended lower by 3.4%.

The U.S. Dollar Index (94.58, +0.63) finished off its high, gaining against the euro, commodity currencies, and the pound. The euro/dollar pair ended at 1.1255 (-0.5%) while the dollar gained 0.3% against the Canadian dollar (1.2757). The pound fell 1.4% against the dollar (1.4260) as investors ruminated over the potential implications of the looming Brexit vote.

The Treasury complex settled higher as the yield on the 10-yr note slid five basis points to 1.64%.

Today's participation was relatively light as 853 million shares changed hands on the NYSE floor.

Today's economic data included the preliminary reading of the Michigan Sentiment Index for June and the Treasury Budget for May:

The preliminary University of Michigan Consumer Sentiment report for June checked in at 94.3 (Briefing.com consensus 94.0), down slightly from the final reading of 94.7 for May and down from the 96.1 reading seen in June 2015.

This dip was entirely related to a downturn in the Index of Consumer Expectations, which slipped from 84.9 to 83.2. The Current Economic Conditions Index jumped from 109.9 to 111.7.

The takeaway from those respective readings is that consumers are feeling a little better about their current situation, yet have grown more concerned about the outlook.

The report itself said wage gains aided in consumers' assessment of their current financial situation, which is at the best level since the 2007 cyclical peak.

Consumers, though, don't think the economy is as strong as it was last year and they don't expect it to enjoy the same financial health in the year ahead as they thought it might a year ago.

Reservations about the outlook could ultimately curtail their spending behavior; however, it is important to note that income gains are a much more influential driver of spending than sentiment.

The Treasury Budget for May showed a deficit of $52.5 billion versus a deficit of $84.1 billion in May 2015.

The Treasury Budget data is not seasonally adjusted, so the May deficit cannot be compared to the $106.5 billion surplus registered in April (coincided with filing of individual tax returns).

Total receipts in May were $224.6 billion while total outlays were $277.1 billion.

Receipts were $12.2 billion more than receipts from May 2015. Total outlays, meanwhile, were $19.3 billion less than the same period a year ago.

The 12-month deficit narrowed to $479.3 billion from $510.9 billion in April.

Monday's economic data will include Import (Briefing.com consensus) and Export Prices (Briefing.com consensus) for May and May Retail Sales (Briefing.com consensus 0.3%), which will each cross the wires at 8:30 ET. Separately, Business Inventories for April (Briefing.com consensus 0.2%) will be released at 10:00 ET.

Week in Review: S&P 500 Backs Away From 11-Month High

The stock market endured its second consecutive range-bound week, but this time around, the S&P 500 could not avoid a lower close. The benchmark index shed 0.2% for the week while the Nasdaq Composite (-1.0%) underperformed amid weakness in biotechnology.

Equity indices climbed through the first half of the week, but stumbled into the weekend as investors focused on global growth concerns. On Wednesday, the World Bank lowered its 2016 global growth forecast to 2.4% from 2.9%, but stocks climbed despite the warning.

The renewed grumblings about the state of the global economy got louder on Thursday after the Bank of Korea unexpectedly cut its key interest rate to a record low of 1.25% from 1.50%. Separately, China reported a 0.5% month-over-month decline in May CPI (expected -0.2%). Commodity markets flashed some red flags as copper futures abruptly reversed from a one-month high to a four-month low, ending the week at $2.028/lb. For its part, crude oil marked an 11-month high $51.67/bbl on Thursday, but reversed from that level and continued its retreat through Friday to end the week at $49.06/bbl. Gold (+2.9% to $1275.70/ozt) and silver (+5.7% to $17.31/ozt) advanced even though the Dollar Index ticked up 0.6%.

Another sign of defensive posturing could be found in global bond markets as European yields plummeted after the European Central Bank launched its bond purchase program. Germany's 10-yr Bund yield ended the week at 0.02% after marking a record low at 0.01%.

The global risk-off cocktail pushed out rate hike expectations with the probability of a June hike dropping to just 1.9% from 6.0% at the end of last week, according to the fed funds futures market. The likelihood of a hike in July dropped to 23.0% from 35.0%, leaving December (59.1%) as the month that shows the first 50.0%+ probability of a rate hike.