The final week of May was a seesaw affair on Wall Street without much conviction or direction. Choppy trading seemed to reflect uncertainty on several fronts, including Federal Reserve interest rate policy, China’s economic bumps, and the ongoing Greek debt saga. Macro news at home and abroad will remain in focus as we head into a busy first week of June capped by Friday’s closely watched May payrolls and unemployment report.
In China, stock markets drew rocky trading as the Shanghai Composite and Shenzhen Composite lost 5.5% and 6.5%, respectively, on Thursday alone. The decline continued Friday, and now stock participants the world over will likely be watching to see if Chinese markets stabilize this week.
In Europe, equities markets were broadly lower Friday and were wobbly early Monday as well, and now eyes will be on Greek debt negotiations ahead of a June 5 payment deadline from Greece to the International Monetary Fund. There’s growing concern that even if Greece can scrape together its June 5 payment, doing so makes late-June and July payments exceedingly challenging. What this means big picture isn’t entirely clear but the discussion certainly includes a potential Greece exit from the European Union.
Before that, on Wednesday, the European Central Bank meets to discuss monetary policy. ECB President Mario Draghi’s post-meeting press conference could potentially stir up volatility in the currency and bond markets, and that could spill over to commodities and equities.
Europe continues to work hard to convince the world it’ll be all right. ECB Vice President Vitor Constancio said in a speech in Barcelona on Saturday that the ECB’s policies have contributed to a broad-based economic recovery in the euro area and haven't led to generalized overvaluations in assets prices, MarketWatch and other news outlets reported.
After last week’s back-and-forth action, the S&P 500 (SPX) shed 9% and trimmed its monthly gain to 1%. Of course, much of last week’s loss was due to the 1% one-day skid after the three-day Memorial Day break. A solid bounce ensued Wednesday, but two days of lackluster action left the broader market with losses for the week. In fact, most of May’s sell-offs were immediately met with interested buyers. On another positive note, the tech share-studded NASDAQ Composite logged a gain topping 2.5% for the month of May.
For the month, however, energy was the only losing SPX sector after dropping 5%. Basic materials, utilities, and industrials lagged the broader market in May as well. However, relative strength was seen in financials, technology, and health care.
|May||Year to Date|
Technology is now the top-performing sector in 2015, but all nine broader sectors are in positive territory year to date and the S&P 500 index is up nearly 2%. Indeed, overall levels of market volatility seem to be easing from earlier this year.
Case in point, the CBOE Volatility Index (VIX), which tracks the expected volatility priced into S&P 500 options, shed 4% in May and is now well below (by some 27%) the 19.72 level that was in place at the end of December (figure 1). It will be interesting to see if Greece headlines or other murky world events are enough to stir some short-term protection seekers that will drive volume into VIX.
It’s not just the broad stock market that’s brewing market calm (or complacency?). Implied volatility eased in the technology-heavy NASDAQ 100 as well as for gold, oil, and the emerging markets, as shown in the table below.
|May||Year to Date|
|S&P 500 Volatility||VIX||-4%||-27%|
|NASDAQ 100 Volatility||VXN||-10%||-24%|
|Russell Small-Cap Volatility||RVX||-17%||-29%|
|Emerging Markets Volatility||VXEEM||-6%||-15%|
And on the Home Front?
Looking forward, macro news at home and abroad could be the next catalysts for VIX and other measures of volatility because it’s a slow week for stock-specific news. Outside of a handful of consumer names including Lululemon (LULU) and Krispy Kreme (KKD) reporting quarterly results mid-week, there are (arguably) no earnings releases that have broad market significance.
But the economic calendar is loaded with data. In addition to manufacturing, construction spending, personal spending numbers, and auto sales early in the week, ADP offers a first peek at the May jobs numbers with its private-sector report Wednesday morning. Jobless claims are due Thursday before monthly jobs data prints Friday morning.
The MarketWatch consensus calls for a gain of 218,000 payrolls this month, nearly on pace with the 223,000 new jobs reported for April. The unemployment rate is expected to hold at 5.4%, while average hourly earnings growth could heat up to 0.3% from April’s 0.1% gain.
These numbers just raise that big question: Where is the consumer spending their paychecks? It’s not yet clear.