The WMA Weekly Market Wrap v.180605

June 5, 2018

There and Back in the Same Week

Domestic stocks finished last week modestly higher after quickly recovering from a post-Memorial Day sell-off amid worries about Italian politics and the stability of the eurozone. The small-cap Russell 2000 outperformed the broader market, reaching record highs, as did the tech-heavy Nasdaq. On the negative side, the blue chip Dow declined. Tech shares performed well, while financial stocks struggled as a sharp decrease in longer-term Treasury yields led to worries about bank profitability.

Traders attributed last week’s market action to a wide range of factors, from European politics to trade worries as the U.S. imposed tariffs on steel and aluminum from the European Union, Canada, and Mexico and thus faces retaliation for doing so. Continued volatility in oil prices and month-end positioning activity also played roles. Despite these factors, the S&P 500 remains largely range-bound and has remained in a narrow range since May 9. The “on again” nature of the summit with North Korea happened late on Friday and didn’t make an impact.

The price of West Texas Intermediate oil, the U.S. crude benchmark, continued to decline following OPEC’s pre-Memorial Day decision to increase its output and finished the week below $66 per barrel. News reports about strife among OPEC members contributed to further price declines. Oil prices did not fall steadily, however, as a sharp midweek rally pared earlier losses.

The monthly jobs report was issued on Friday and it was a very good one. The unemployment rate fell to an 18-year low, employers added jobs at a faster pace, and wages modestly improved. The unemployment rate ticked down to a seasonally adjusted 3.8 percent in May, matching April 2000 as the lowest reading since 1969. Non-farm payrolls rose a seasonally adjusted 223,000 in May, a jump in gains from March and April. Average hourly earnings ticked up to a 2.7 percent from a year earlier – and raises were even stronger for nonmanagers.

U.S. employers have now added to payrolls for 92 straight months (almost eight years), extending the longest continuous jobs expansion on record. Those gains are extending to all corners of the labor market. The unemployment rate for women, 3.6 percent in May, was the lowest since 1953, when a far smaller share of women sought jobs. The jobless rates for blacks, Latinos and those without high-school diplomas are all trending near record lows.

Last week, bonds traded much like stocks, but in the opposite direction. On Tuesday, demand for safe-haven securities amid political turmoil in Italy triggered a rally in U.S. Treasury paper, driving the benchmark 10-year U.S. Treasury note’s yield to its largest one-day decrease since the Brexit vote in June 2016. However, yields increased later in the week to close only modestly below where they started.

In Europe, the news focus was that Italy’s populist Five Star Movement and far-right League party formed a coalition government, naming an academic and political novice, Giuseppe Conte, as prime minister. It was a week characterized by uncertainty amid political deal-making and calls for impeaching Italian President Sergio Mattarella by coalition members angry that their plans for a nascent government were being blocked. Investors fled Italian stocks, and bond spreads widened as a result, with much of the concern centered on whether Italy, one of the eurozone’s largest economies, would abandon the euro and how the country would handle its vast public debt (third highest in the world, behind the U.S. and Japan). Traders also seemed to be concerned that populist sentiment elsewhere in the eurozone, strengthened by the events in Italy, could threaten the long-term survival of the currency bloc. European stocks generally traded off, as well.

In Asia, stocks generally weakened on account of global risk aversion. In China, the “risk off” tendency overcame the perceived benefits of the long-awaited inclusion of Chinese A shares into MSCI’s global equity benchmarks. For the week, the benchmark Shanghai Composite Index and the large-cap CSI300 Index dropped 2.1 and 1.2 percent, respectively. The declines in Chinese stock markets continued into Friday, when 234 Chinese companies officially joined MSCI’s global equity benchmarks, including its flagship Emerging Markets Index.