July ended largely with a whimper on Wall Street, which may suit stock market bulls just fine. When the commotion stirred by a washout in commodities prices and a slide for Chinese stocks settled down (for now), the broad-based S&P 500 (SPX) was up some 2% for the month. Its gain returned the stock market mood to neutral, tipping key gauges of market volatility almost back to 2015 lows.
July started with fireworks. The SPX suffered a two-week slide and dropped to multi-month lows through July 8. It then bounced, and thanks to a 1.5% advance last week, finished the month with respectable gains. Now, once again, a flood of economic data—capped by the marquee monthly jobs report—and earnings will test risk perceptions heading into the early trading days of August.
Fears Subside, But For How Long?
The CBOE Volatility Index (VIX) often moves opposite to the SPX; the index stuck to that pattern last month. The market’s so-called “fear gauge” finished July down 35%, and after dipping below 12 Friday, is once again at the lower end of this year’s range (figure 1). VIX is a far cry from its July 9 high of more than 20—an area of psychological significance for the stock market.
The drop is part of a larger decline across the U.S. options market. While VIX tracks the implied volatility priced into SPX options, the NASDAQ 100 Volatility Index, as measured by VXN, dropped 26% in July. Blue-chip and small-cap volatility fell sharply, too (see the table below).
But it was a different story beyond the major stock market averages. While euro currency and emerging markets volatility also edged lower last month, crude oil volatility moved up 18%. Ongoing weakness in Brazil’s equity markets also motivated a rally in its volatility measure, raising questions about undercurrents in global markets.
|July||Year to Date|
|S&P 500 volatility||VIX||-35%||-38%|
|NASDAQ 100 volatility||VXN||-26%||-27%|
|Russell small-cap volatility||RVX||-26%||-35%|
|Emerging markets volatility||VXEEM||-4%||-7%|
|Data through midday Friday, July 31|
Commodities volatility will likely continue to influence stock trading. The CBOE Crude Oil ETF Volatility Index (OVX) moved higher and could track additional gains after oil erased $13 per barrel since June 1; it now trades below $48. The trend is weighing on the energy-stock sector.
At the same time, the falling price of gold is putting pressure on the metals and mining stock space. The yellow metal was up $5 to $1,092 Friday as sellers came up for air after driving gold to five-year lows in recent sessions. Further weakness in key commodities could fuel concerns about the global economic outlook and potentially trigger an uptick in stock risk perceptions.
Jobs Report Headlines Busy Week
Looking forward, domestic economic data will likely drive the market mood in the week ahead. In addition to manufacturing, factory orders, and trade balance numbers, the closely watched monthly payroll report is due out Friday morning (see the full calendar in figure 2 below).
Because of ongoing uncertainty about the start date and pace of interest rate hikes from the Federal Reserve, the next round of job numbers could potentially rattle the bond pits. Economists polled by MarketWatch expect 215,000 new nonfarm hires on July payrolls, just off the 223,000 added in June (other Street economists expect July’s number could be closer to 225K). The Street expects the unemployment rate to hold at 5.3%. Average hourly earnings are expected to tick up 0.2% after a flat reading in June.
This report is always closely watched but it takes on more weight the closer we get to what many believe is the inevitable interest-rate tightening currently on ice at the Federal Reserve. The Fed has maintained a go-slow approach and it could take an unusually hot jobs report to stir the policy panel to action.
The earnings calendar remains chock full of quarterly reports. Some 75% of companies due to report results have already done so and just shy of 75% has met or beaten largely lowered earnings per share expectations. Sure, revenue hasn’t been fabulous, it appears that Wall Street correctly braced for realistic earnings.
Although more than half of Q2 results are already in the books, it’s still a busy week for results from technology, energy, financial, and gold mining names.
Overseas markets will likely continue to hold some sway over U.S. action. Yes, the broad averages overcame such distractions late last month but the first August trading day already has China, and Greece, back in the headlines. A report showed that China’s factory activity contracted more than initially thought last month, tightening by the most in two years. The final Caixin/Markit China Manufacturing PMI dropped to 47.8, from 49.4 in June, logging the fifth straight month of contraction.
What’s more, the Athens Stock Exchange reopened after weeks of closure to a 23% selloff, including banking shares down as much as 30% at one point today.