The Week In Review

6/17/16

The stock market ended a volatile week on a modestly lower note as investors eyed a downturn in the heavily-weighted health care (-1.1%) and technology (-0.9%) sectors. As a result, the tech-heavy Nasdaq (-0.9%) finished behind the S&P 500 (-0.3%). For the week, the two indices lost a respective 1.9% and 1.2%.

Equity indices began on a choppy note as investors weighed a rebound in global bourses against recent remarks from St. Louis Fed President and FOMC voter James Bullard. The Fed President announced earlier this morning that he has re-thought his global economic outlook, projecting that one rate hike may be appropriate through 2018. This accentuates diminished rate-hike expectations from the FOMC's June Policy Statement, which showed a lowered projection for the fed funds rate in 2017 (to 1.6% from 1.9%) and 2018 (to 2.4% from 3.0%).

On the other hand, global bourses saw a reprieve from their recent sell-off as participants weighed developments in the ongoing Brexit campaign. Both camps agreed to suspend their respective campaigns for another day following yesterday's fatal attack on MP Jo Cox. As a result, safe havens swooned while risk assets rebounded.

The benchmark index fell through the morning, eventually finding support near the 2062 area. Equities advanced steadily through the afternoon, but the S&P 500 (-0.3%) sputtered out short of its flat line and its 50-day simple moving average (2078.02). Five sectors ended in the red with health care (-1.1%), technology (-0.9%), and consumer staples (-0.5%) rounding out the board. Commodity-sensitive energy (+0.8%) led countercyclical telecom services (+0.6%) in front of the pack.

The health care space (-1.1%) extended its weekly decline to 2.1% as Dow component Merck (MRK 55.89, -1.61) and the biotechnology group weighed. Merck lost 2.8% today after rallying 2.5% on Thursday. In the biotechnology sub-group, Regeneron Pharmaceuticals (REGN 354.21, -12.31) and Vertex Pharmaceuticals (VRTX 86.73, -3.68) lost 3.4% and 4.1%, respectively. Regeneron was pressured after Canaccord Genuity made bullish comments regarding a competitor's medication. Meanwhile, Vertex fell after the U.K.'s National Institute for Health and Care Excellence failed to recommend the company's cystic fibrosis drug.

In the technology sector (-0.9%), Apple (AAPL 95.33, -2.22) underperformed after reports indicated that regulators in China ordered the company to halt sales of its iPhone 6 due to a patent dispute. The company said its products remain available for sale and that an appeal will be filed. Elsewhere, Alphabet (GOOG 691.72, -18.64) fell to a multi-month low (688.45) after Citigroup issued cautious commentary regarding the company's second-quarter results.

The Dow Jones Transportation Average (+0.6%) trimmed its weekly loss to 2.3% as rail names outperformed. Additionally, the U.S. Global Jets ETF (JETS 21.54, +0.07) rebounded 0.3%, trimming its weekly loss to 9.0%.

The commodity-sensitive energy sector (+0.8%) trimmed its loss to 0.1% as WTI crude rebounded. The energy component finished its day higher by 4.0% ($48.02/bb; +$1.84). For the week, the commodity lost 2.1%.

The U.S. Dollar Index (94.17, -0.40) ended near its low as the euro and the pound gained against the dollar. The euro finished higher by 0.5% against the buck (1.1277) while sterling climbed 1.1% against the dollar (1.4354).

The Treasury complex ended near its low as the yield on the 10-yr note rose three basis points to 1.61%.

Today's volume was above the recent average with more than two billion shares changing hands on the NYSE floor. The increased total was due to quadruple witching, which marks the expiration of index options, index futures, stock options, and single-stock futures.

Economic data was limited to the Housing Starts and Building Permits Report for May:

Housing starts decreased 0.3% to a seasonally adjusted annual rate of 1.164 million (Briefing.com consensus 1.150 mln) in May.

This follows a revised April estimate of 1.167 million (from 1.172 mln)

Building permits increased 0.7% to 1.138 million (Briefing.com consensus 1.150 mln) from the revised April rate of 1.130 million (from 1.116 mln).

Altogether there wasn't anything overwhelming about the monthly report.

Arguably, it was a bit disappointing considering that there was minimal growth (+0.3%) in single-family starts to 764,000 and that permits for single-family units -- a leading indicator -- were down 2.0%, led by declines in the Northeast (-8.9%), the West (-5.1%), and the Midwest (-3.5%).

The South was the only region to see an increase in permits for single-family units (+0.8%).

A 33.3% decline in starts in the Northeast, all of which was owed to a decline in multi-unit starts, was the big drag on total housing starts. A 14.7% decline in single-family starts in the Midwest also weighed.

Notwithstanding the relatively soft monthly figures, total housing starts were up 9.5% year-over-year. Building permits, however, were down 10.1% on the same basis given large drops in permits for multi-unit dwellings.

On a good note for second quarter GDP forecasts, the number of units under construction at the end of the period jumped to 1.019 million from 1.001 million in April.

The second quarter average for this metric is 2.5% above the first quarter average.

There is no economic data of note scheduled for release on Monday.

Nasdaq Composite -4.1% YTD

Russell 2000 +0.8% YTD

S&P 500 +1.3% YTD

Dow Jones +1.4% YTD

Week in Review: Sovereign Debt Rallies; Stocks Slide

After spending two weeks inside narrow ranges, the stock market faced selling that resulted in the S&P 500 surrendering 1.2% for the week. The tech-heavy Nasdaq underperformed, falling 1.9%.

Investors focused on commentary from central banks, which wasn't surprising, considering the Federal Reserve, Bank of Japan, Bank of England, and Swiss National Bank all held their policy meetings. All four stood pat, keeping their key interest rates unchanged. However, all four cited a litany of growth concerns that fueled strong demand for sovereign debt and a somewhat surprising aversion to stocks. Surprising, because dovish commentary from several major central banks has been known to elicit a strong bullish response in recent years.

To little surprise, a potential "Brexit" was cited frequently ahead of the June 23 referendum. The long-running storyline took a tragic turn after Labour MP Helen "Jo" Cox was murdered on Thursday. This prompted a two-day suspension of campaigning by both sides and the pound rallied back to last week's levels after hitting a five-week low early on Thursday.

Sovereign debt was in strong demand into Thursday morning, but some selling developed into the weekend. Germany's 10-yr yield dropped to a record low of -0.038%, ending the week at 0.018%, while the Swiss 30-yr yield marked a record low at -0.004%, settling at 0.034% for the week. The global risk aversion was also visible in the foreign exchange market where the dollar/yen pair slid to 104.20, registering its lowest weekly close since August 2014.

On Friday, St. Louis Fed President and voting FOMC member James Bullard said that he believes only one rate hike will be warranted through 2018. The born-again dove had voiced support for four rate hikes as recently as mid-January.

In sum, the fed funds futures market started to get comfortable with the theory that there will be no hikes in 2016, pricing in just a 45.0% chance of a rate hike in December. The probability of a rate hike in July receded to 10.0% from 23.0% at the end of last week.