Stock Rally Looks Set for Pause Amid Mixed Signals on Europe

Equities futures were essentially flat as the geopolitical focus remained on Europe, where the news flow was a bit of a mixed bag.

Print Street Statue
5 min read

(Thursday Market Open)  After a whirlwind two days in the market, today could be a welcome breather. Markets can often settle into a tighter trading range ahead of big economic releases such as tomorrow's unemployment report. 

The geopolitical focus seems to be on Europe, where the news flow was a bit of a mixed bag. While worries about a second election in Italy continued to ease, concerns about trade with the Continent could continue to ratchet up.

Tariffs and Trade Policy Heating Up

It looks like investors might be focusing on the U.S. decision announced Thursday to hit the European Union with steel and aluminum tariffs. Mexico and Canada are also included in the new tariff regime.

Of course, the concern for some American companies, and their shares on Wall Street, is that the EU could retaliate. Trade tensions in recent weeks have been mostly focused on U.S.-China issues, so a spread of trade worries could rattle the market.

Investors Regaining Risk Appetite?

On Wednesday, worries about Italy potentially pulling out of the eurozone appeared to evaporate faster than steam off an espresso. The easing of those fears, which had seemed to have influenced  a stock selloff on Tuesday, appeared to lead to a solid bounce in U.S. equities Wednesday.

Italian bond yields fell likely helped as fears of a second election there this year eased. With that worry abating, demand for safe-haven Treasuries slackened and the yield rose on the 10-year Treasury. The dollar dropped against a basket of major currencies, but gold was nearly unchanged. Remember that gold didn’t move too much on Tuesday either, one indication that market fear might have been more focused on Europe than inflation in the United States. 

The marked change from Tuesday’s decidedly risk-off mood helps to show that long-term investors probably don’t have much to worry about when they see a stock market decline based on the headlines of the day. Implied volatility as measured by the Cboe Volatility Index (VIX) dropped on Wednesday (see figure 1).

The S&P 500 (SPX) sectors were a sea of green, with energy stocks by far the leader. . They apparently got a boost as oil prices rose in part on a Reuters report saying OPEC and non-member countries led by Russia would keep output cuts in place.

Looking Ahead: Tomorrow's Unemployment Report

Investors are likely looking toward the jobs report tomorrow. According to a consensus of economists polled by, non-farm payrolls are expected to show an increase of 190,000, a better showing than last month's tepid 164,000 increase. Many analysts are also keeping a close watch on average hourly earnings, slated to come in up 0.3% according to a consensus estimate. After the retreat in the U.S. 10-year from above 3%, any signs of inflation pressure could push the rate back toward the highs from a couple weeks ago.

Figure 1: Volatility Getting Volatile: Volatility zoomed up Tuesday and then took a dive Wednesday, as this two-day chart of the Cboe’s VIX shows. After rising to a high near 19 late Tuesday as concerns flared over Europe’s economy, VIX began to fall by the end of that day and continued to cruise lower Wednesday. Still, it remains above levels near 13 seen last week, and well above the levels below 10 seen for much of last year, an indication that market turbulence isn’t necessarily over. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Consumer Confidence: The U.S. consumer seems to be giving a thumbs up to the economy, according to the Conference Board’s latest consumer confidence index. The index increased to 128 in May, above the 127.5 expected by economists polled by It seems that confidence in economic growth is strong, and that worries about inflation eating into purchasing power aren’t necessarily at the forefront of shoppers’ minds. As put it: “The key takeaway from the report is that consumers' assessment of current conditions is at a 17-year high, which matches up neatly with the understanding that the unemployment rate is at a 17-year low.”

GDP and Consumer Spending: Speaking of economic growth, the latest GDP estimate showed that the not-too-hot, not-too-cold scenario continued during Q1. The government’s second estimate for Q1 GDP came in at 2.2%, slightly under the 2.3% expected by economists polled by That reading is an indication  that the economy is chugging along at a moderate pace, perhaps not so fast that the Fed would need to accelerate the pace of rate hikes. Still, it did show a slowdown from 2.9% in Q4. Notably , Q1 personal consumption expenditures growth was revised slightly lower. It might be interesting to see whether the consumer confidence numbers (see above) end up leading to stronger consumer spending.

Beige Book: In late April and early May at least, consumer spending was soft, according to the Fed’s latest Beige Book. But overall, economic activity expanded moderately. The labor market continued to be tight, with shortages of qualified workers leading many firms to increase wages and compensation packages. Still, overall wage increases were modest in most Fed districts. It looks like the economy’s Goldilocks trend has continued and the Fed  appears to be on track to raise rates again in June. The Fed Funds futures market put the odds of a 25 basis point hike in June at about 91%, as of Wednesday afternoon.

Good Trading, 



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