Wall Street on Pace for Losing Week, Taking Cue From Soft Markets Overseas

European data released overnight showed persistent softness in the manufacturing industry as interest rates keep rising, and all the major European stock markets are down substantially this week. The losses there likely played a role in Wall Street’s struggles over recent days. Asian markets also had a rough time the last few sessions and are down sharply from a week ago.

Morning rush

• The Treasury note yield (TNX) fell 5 basis points to 3.74%.
• The ($DXY) jumped to 102.96, a one-week high.
• The Cboe Volatility Index® () futures edged higher to 13.32 but remain near three-year lows.
• WTI Crude Oil (/CL) fell to $68.66 per barrel, down around $15 over the last two months.

is on pace for a negative week after falling 4% yesterday to below $70 per barrel. The drop partly reflected worries about U.S. demand should the economy weaken. However, crude hasn’t shown much propensity to stay below $70 for long, possibly due to hedging by transport companies and efforts by the U.S. government to refill the Strategic Petroleum Reserve (SPR) at relatively low costs.

Eye on the Fed

Futures trading points to a 74% probability that the Federal Open Market Committee (FOMC) will raise rates 25 basis points at its July meeting, according to the CME FedWatch Tool. In remarks made to the Senate banking panel yesterday, Federal Reserve Chairman Jerome Powell reiterated that two more interest rate hikes may be necessary this year to lower inflation.

Last year, most of the world’s central banks marched in lockstep to tighten lending conditions, but things have changed drastically. The Fed recently paused rate hikes while central banks in Europe, the U.K., and Canada all raised rates. Japan has been holding steady, and China is lowering borrowing costs. All of which speaks to economic conditions varying across the globe, perhaps creating a more complex trading environment for fixed income investors.

China’s recent decision to drop rates for mortgages and corporate loans is probably the surprise of the bunch, as many economists had expected China to recover more quickly from last year’s shutdown. Anyone expecting the slight decline in Chinese rates to jumpstart the economy may be too optimistic, one analyst told The New York Times this week, adding that the central bank’s reduction will only “gradually” seep through the system.

What to Watch

Ho Hum Homes: May Existing Home Sales came in yesterday at a seasonally adjusted 4.3 million, roughly in line with analysts’ expectations. That sets the stage for another burst of housing data next week, starting with May New Home Sales on Tuesday. The tally could be solid considering the strength seen in last week’s Housing Starts and Building Permits report. New home sales have been trending upward this year after last year’s steep drop, albeit at generally lower prices.

Un-Freaky Friday? Fridays tend to be busy data days, but not this week. Today’s calendar is surprisingly light. The IHS Markit Manufacturing Purchasing Managers’ Index (PMI) report due out shortly after the open might get more attention than usual simply because there’s not much else to look at from a numbers standpoint.

Washing windows: Next week is the final one of the second quarter and may include some “window dressing.” That’s when major fund managers tend to exit losing positions and buy stocks with better track records to “window dress” the quarter for clients. It could mean more volatility in coming days, but there’s no guarantee.

Week ahead: The coming days are a bit busier than usual from a data standpoint. Next week includes May Durable Goods, the government’s final estimate for Q1 Gross Domestic Product (GDP) growth, and June Consumer Confidence. The most crucial report before the end of the quarter is next Friday’s May reading on Personal Consumption Expenditure (PCE) prices, the inflation metric most closely followed by the Fed.

Stocks in the Spotlight

Paring down: Ford (F) plans a new round of layoffs for U.S. salaried workers, the Wall Street Journal reported late yesterday. It’s unclear how many jobs will be affected. Last August, Ford laid off 3,000 U.S. employees and contract workers, and it has been reducing its European workforce since. The company says it’s working to get costs in line as it transitions to electric vehicles.

Bank check: Next Wednesday is when the Fed is expected to release results of its latest “stress tests” on the nation’s largest banks (see more below).

Talking technicals: This week’s pullback in the S&P 500® Index (SPX) hasn’t brought it within range of any key moving averages. The SPX has been trading well above those for weeks, and remains above the summer 2022 peak and Fibonacci retracement level of 4,325 that had formed resistance for some time. The 50-day moving average (MA) is way below current levels at just under 4,200, which happens to be another important resistance level that marked the top of a long-term trading range between 3,800 and 4,200. Support could now potentially be near those old resistance levels of 4,325 and 4,200.

CHART OF THE DAY: BREAKING DOWN? (/GC—candlesticks) appear to be on the verge of breaking below a key support level on the charts. Hawkish congressional testimony from Fed Chairman Jerome Powell this week might be a factor, as investors appear braced for higher interest rates and possible dollar strength, both of which tend to move opposite of gold. Data source: CME Group (NASDAQ:). Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Final exam: Consider watching financial stocks next week as the Fed shares results of its latest round of “stress tests” on the nation’s largest banks Wednesday. These annual tests help determine whether big Wall Street banks can do investor-friendly things like raise dividends and buy back shares. This year’s test got tougher as the Fed said in February it was raising the hypothetical strains the eight largest banks would have to withstand. That turned out to be timely considering the ensuing banking turmoil that led to several regional bank failures. The idea is to see how resilient the big banks would be in these situations and whether they have enough capital cushion. Last year, several large banks raised their dividends after passing the tests.

Meh Week for Megas: The so-called “mega-cap” tech stocks that fueled much of this year’s rally hit a snag this week. Morgan Stanley (NYSE:) downgraded Tesla (NASDAQ:) to Equal Weight from Overweight, saying the stock is at “a fair valuation.” Amazon (NASDAQ:) got hit with a lawsuit from the Federal Trade Commission (FTC), which said Amazon “tricked and trapped” people into Prime subscriptions without consent. Amazon denied the claims. Insiders at Nvidia (NASDAQ:) sold shares after the stock’s meteoric rally, and Microsoft (NASDAQ:) still faces regulatory challenges to its proposed takeover of Activision (ATVI). Apple’s (AAPL) rally appeared to temporarily lose steam. All of which shows that even $1 trillion stocks aren’t immune to having a bad week, and also that when mega-caps sneeze, Wall Street can catch a cold. It’s no coincidence that the broader market struggled in recent days. Back in the 2017–2019 era, there were several days when big-tech had a major market hiccup out of nowhere. While that’s not guaranteed to happen again, investors might want to stay on their toes, especially with mega-caps trading at historically elevated valuations.

Mid-year check-up: Here’s a reminder to examine your market positions, especially considering the steep rally in tech stocks year to date and the approaching end of Q2 next week. If you haven’t checked your portfolio in a while, you may be surprised to find out how the 2023 the rally shifted your balances toward tech and large-cap growth in general. That’s a flashing light telling you it might be time to adjust positions to ensure they still reflect your long-term goals. It may feel good right now to have a heavy tech exposure considering the market’s recent performance, but things can change quickly. Tech was a big loser last year, and it’s come a long way very fast. For example, if you once had, say, a 20% exposure to tech, it might be 30% now because tech rallied so hard without much company from other sectors. Also look over your ratio of stocks to bonds. If you started 2023 with the popular “60–40” portfolio, it may be 70–30 by now with stocks up so sharply. Again, consider adjusting as necessary to stay on track, and don’t let emotions guide your investing.

Calendar

June 26: Expected earnings from Carnival (NYSE:)

June 27: June Consumer Confidence, May New Home Sales, May Durable Orders, and expected earnings from Walgreen’s Boots Alliance (WBA)

June 28: Expected earnings from General Mills (NYSE:)

June 29: Q1 Gross Domestic Product (third estimate), May Pending Home Sales, and expected earnings from Nike (NYSE:), McCormick (NYSE:), and Rite Aid (NYSE:)

June 30: May Personal Consumption Expenditures (PCE) prices, May Personal Income and Personal Spending, and Final June University of Michigan Consumer Sentiment

July 3: June Chicago PMI, June ISM Manufacturing Index, and May Construction Spending

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Source link