European Politics Take Center Stage in Risk-Off Stock Market Mood

Stock market investors were focusing on politics in Spain and Italy to start off a week filled with economic data.

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(Tuesday Market Open) Stock market participants appeared to have geopolitics in focus Tuesday morning to start a holiday shortened week with plenty of economic data on tap.

While tensions in the Korean Peninsula have dominated the geopolitical headlines in recent days, this week the center appears to be western Europe. Investors appeared to be fretting that Italy will hold fresh elections in coming months and could end up rejecting the euro. The Italian political crisis may mean that the European Central Bank will need to keep rates lower and hold off drawing down its balance sheet. Meanwhile, over in Spain, politics also appear to be contributing to the risk-averse mood this morning, as Prime Minister Mariano Rajoy is set to face a "no confidence" vote on Friday.

It hasn’t been totally quiet on the eastern front though, as it appears that the U.S.-North Korea summit may go forward after all. It’s been a bit of a roller coaster on that front as President Trump previously said the meeting was canceled. But the potentially good news seems to be overshadowed this morning by the European political turmoil.

Risk Paring; Sliding Crude

Investors appear to be seeking haven in U.S Treasuries. The yield on the 10-year note fell 6 basis points to 2.875. Recall in recent days the 10-yr traded above 3.1%. The dollar is continuing its move higher, touching 95 for the first time in over 6 months.

Oil continued its slide over the weekend on worries about increased production from OPEC and Russia. Lower oil prices bode well for consumers like manufacturers and transportation companies but can take a bite out of producers.

Holiday Roundup

The U.S. stock market was closed Monday for the Memorial Day holiday. While traders are returning today, some may be taking additional vacation days after the long weekend. This could make for thin trading, which has the potential to exacerbate market moves up or down.

If you're among the many who tiptoed out ahead of the holiday, here's a quick summary of the Friday action. U.S. equities ended mixed, with the Dow Jones Industrial Average ($DJI) and the S&P 500 Index (SPX) down a bit while the Nasdaq (COMP) edged higher.

The energy sector led the S&P 500 lower, with energy stocks dipping more than 2.6% as crude oil sank on concerns about increased production.

Meanwhile, news from the retail sector was mixed. Foot Locker (FL) easily beat Wall Street analysts’ expectations, posting EPS of $1.45 vs. expectations of $1.24 per share. Revenue of $2.03 billion also beat estimates. Its shares rose more than 20%. It looks like FL is one of the bright spots in the brick-and-mortar retail business.

It was a different story for Gap (GPS). The company’s stock fell more than 14.5% after it reported same-store sales climbed a little less than analysts had expected and earnings per share came in below expectations. Old Navy has been a driver for GPS, but same-store sales there rose 3%, down from 8% a year earlier.

Figure 1: Crude Slide Continues. After touching a high near $73 a barrel last week, crude oil futures (/CL) fell in 6 consecutive sessions, hitting a low of $65.80 early Monday morning, on word that OPEC may be increasing production targets. Prices have regained somewhat in early Tuesday trading. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Lots of Data to Chew On: This week, as we close out May and enter June, there’s a bevy of data that may shed light on economic growth and inflation. On Wednesday, investors are expecting to see the second GDP estimate for Q1, with economists polled by Briefing.com expecting growth of 2.3%. That would be in line with the moderate growth we’ve been seeing and may not raise too many fears about inflation. Also Wednesday, investors could get a bit more insight into the Fed’s thinking, with the release of its Beige Book for April. Personal consumption expenditures (PCE) data are due out on Thursday, and the week rounds out with non-farm payrolls, a key indicator of economic health.

PCE Data: Inflation in Focus: Personal income and spending are each expected to show a rise of 0.3% for April while core PCE prices are forecast to show a gain of 0.1%, according to economists polled by Briefing.com. Such a reading on prices might indicate that inflation is on the rise, but not at a particularly alarming pace. Consider watching the Fed funds futures before and after the release of PCE data to see whether the numbers change the chances investors are expecting for a fourth rate hike this year.

Looking for Jobs: Investors are likely to be paying close attention to the jobs report at the end of the week. The non-farm payrolls report is a closely watched indicator of economic health and can move markets if the numbers come in much different than expectations. Economists polled by Briefing.com are anticipating May non-farm payrolls to increase by 190,000 and the unemployment rate to come in at 3.9%. Tucked into the report is information on average hourly earnings, which are expected to rise by 0.3%, according to a Briefing.com consensus. Consider watching this closely as it is seen as a key indicator of inflation.

Good Trading, 

 JJ

@TDAJJKinahan 

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This Week’s Economic Calendar. Source: Briefing.com
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