Northern Lights: Eyes Turn Toward G7 Meeting in Canada Amid Global Rally

Global markets followed the U.S. with a rally of their own early Thursday. Not much data or earnings news to monitor, so attention could turn toward G7 meeting.

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(Thursday Market Open) The question going into Thursday might be what Wall Street can do for an encore in what so far has been a heady week for stocks. Global stocks followed Wall Street’s lead and moved mostly higher overnight as attention starts turning toward the G7 economic conference that begins in Canada tomorrow.

The S&P 500 Index (SPX) posted its highest close in nearly three months on Wednesday, while the Nasdaq (COMP) and Russell 2000 (RUT) finished at new all-time highs. Meanwhile, volatility took a dive, sending the Cboe VIX down to its first close below 12 since January, back before the big February shakeup that briefly sent VIX to 50.

General enthusiasm about the U.S. economy, signs of strength in Europe, and less fear of potential trade wars all helped combine  to light a fuse under Wall Street Monday through Wednesday. There’s not a lot on the table Thursday in the sense of new data or earnings. That could put the spotlight on the “Oracle of Omaha,” Warren Buffett, who told CNBC this morning that the health of U.S. business is good and so is the economy in general. "Right now, there's no question: It's feeling strong,” Buffett said. “I mean, if we're in the sixth inning, we have our sluggers coming to bat right now," Sometimes Buffett’s words can influence the market.

Still, the G7 conference could put trade concerns back on the table in a big way as the U.S. faces allies who haven’t expressed much happiness with recent U.S. tariffs imposed on their products.

Financials Finally Get Into the Action

Looking at the sector round-up Wednesday, financial stocks finally got a boost as rising rates carried big banks up the ladder. Shares of JP Morgan (JPM), Citibank (C), Morgan Stanley (MS), Bank of America (BAC) all rose more than 2%, and the S&P 500 Financial Sector jumped nearly 2% after many weeks of treading water. Yields on 10-year Treasuries, which had fallen back below 2.8% last week after a rise to above 3.1% in May, once again challenged 3% by early Thursday as concerns about trade barriers and politics seemed to recede a bit.

One thing that might have helped U.S. rates was a sense that Europe’s economy might be warming up (see below). If that’s the case, it potentially could give the Fed more comfort about its own rate hike regime, because one concern regulators might have is raising rates too high vs. other major economies and possibly upsetting the balance of trade.

Speaking of regulators, it’s almost time for the pre-game ahead of next week’s Fed meeting, so the focus on rates could get even heavier over the next few days. That’s especially true when you consider the European Central Bank (ECB) also gathers next week.  With expectations growing that the ECB might sound more hawkish, the dollar has started to give back some of its recent gains against the euro. That could come as a bit of a relief to some U.S. multinationals that might have been worried about how the recent dollar strength might affect their overseas sales this quarter.

Smoking! Economic Data Stays Hot

Unlike the last two weeks when politics and innuendo played big roles in shaping the market, economic data seems to be driving things during recent sessions. Recent U.S. numbers continue to impress, and The Wall Street Journal reported Tuesday there are now more job openings than there are people looking for jobs for the first time since that kind of record keeping began in 2000. Mortgage applications rose 4.1% last week and there were a lot of first-time buyers, which is a really great sign for the health of the economy.

That said, productivity growth of 0.4% in Q1 came in slightly below economists’ estimates, the U.S. Labor Department said Wednesday, and labor costs grew slightly more than expected. Also, if there’s one economic sector to consider worrying about, housing might be it. The real estate market looks red hot now, but home prices are pretty high and interest rates seem to be back on the rise.

As rates in the interest rate complex rose Wednesday, the high-yielding utilities sector took a hit. Another sector where a lot of high-yielding companies can be found is energy, which rose at a slower pace than the broader market Wednesday. Generally, stocks with higher yields can sometimes be vulnerable to rising rates because of potential competition from bonds. An important lesson for long-term investors to remember is that if a stock has a high yield, that may mean more risk.

Figure 1: Big Bump for Banks: The financial sector (candlestick) posted a sharp rally Wednesday as bank stocks surged amid rising interest rates. Utilities (purple line), one of the rate-sensitive sectors, didn’t fare so well, however. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

ECB Watch Begins: Despite the political hiccups in Italy and Spain last week, the European Central Bank (ECB) could still be on the path toward tighter monetary policy. More indication of that came Wednesday, when Bundesbank president Jens Weidmann made comments at a conference in Berlin that suggest the bank is growing more comfortable with the pace of inflation in the currency area and the idea of ending its €2.55 trillion quantitative easing program later this year, TheStreet.com reported.

"For some time now, financial market participants have been expecting that the asset purchases will end before 2018 is out," Weidmann said. “As things stand, I find these market expectations plausible.” Remember Weidmann’s name, as TheStreet.com said he’s a possibility to replace Mario Draghi as ECB president next year. The ECB gathers next week, and investors are likely to monitor Draghi’s post-meeting press conference for any indication of how quickly potential policy changes might come.

Truck Stop: Keep an eye on negotiations between the Teamsters and UPS (UPS), because this week, the union announced that members voted more than 90% in favor of going on strike if there’s no deal before the current labor contract expires Aug. 1. The union last went on strike in 1997, many years before UPS had to handle all those cardboard boxes with the yellow swoosh that tend to show up regularly on many people’s doorsteps these days (that’s a reference to Amazon.com (AMZN), by the way). Though Aug. 1 is still a while off and negotiations might be worked out by then, keep in mind the possible consequences if nothing gets resolved. In Q1, e-commerce represented a $123.7 billion market in the U.S., according to Statista. Many other companies, including brick-and-mortar stores like Target (TGT) and Wal-Mart (WMT)—both of which have upped their e-commerce games recently—might find themselves burdened along with AMZN and other online retailers if a strike takes place, and a prolonged work stoppage could potentially even take a bite out of U.S. gross domestic product (GDP).

Offense Playing Defense? Many market analysts consider the tech sector an area that investors often go into when they’re feeling bullish about the economy and innovation. The sector can be volatile, and isn’t necessarily one for people who might worry about the potential of losing money in a downturn. However, recent gains in tech might reflect a turnabout where some investors see the sector as a place to play defense, at least a bit. With political and trade turmoil hitting some of the industrial and financial stocks and rising interest rates biting at the heels of the traditional “defensive sectors” like telecom and utilities, there’s a sense among some that tech provides a refuge at this point. Still, anyone who takes a big position in tech should remember that it can often be a bumpy ride, and doesn’t typically provide the stability that traditional defensive sectors sometimes do.

Good Trading, 

 JJ

@TDAJJKinahan 

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