US equity markets fell sharply on Monday as heightened risk-off trading took hold of investor sentiment, following through on the previous week’s setup. Tuesday through Thursday markets attempted to stage a reversal that was ultimately marred by flagging volume and deteriorating market internals (A/D). Friday’s price action was very telling in that it confirmed for investors that the U.S./China trade-centric narrative, that has become the dominant directional driver of prices in recent weeks, remains in place.
The “rally” that materialized Tuesday through Thursday did manage to allow the S&P 500 and Nasdaq to close above their respective 50-day moving averages on Thursday, only to succumb to renewed selling pressure on Friday.
Friday’s price action across all three major indices, market internals on both the NYSE and Nasdaq, and the subsequent technical failure for the Nasdaq and S&P 500 on Friday all set up the market for what should be a week of tough sledding ahead.
As we have discussed in notes over the years, volume is the indicator that allows investors to see where the institutional bias is. Given the price action that has materialized over the past three weeks, it is clear that institutional investors and managers have increasingly looked to reduce risk – particularly to the names that have the greatest exposure to U.S./China trade. Monday’s sharp sell-off was accompanied by an elevated volume. The subsequent three-day bounce failed as volume tapered off. Volume on the NYSE on Friday rose 13.45%; Nasdaq volume also rose +2.16 as markets moved lower.
Another theme we have discussed over the years – the last day of the week’s price/volume action – provides insight into how institutional investors and managers view the near-term prospects for equity markets. And again, last Friday’s price action speaks to a shared “risk-off” outlook. On Friday, the Nasdaq led the way lower, falling 1%. Though less severe, the Dow Industrials (-0.6%) and S&P 500 (-0.6%) also lost ground. The Nasdaq and S&P 500 closed below their respective 50-day moving averages.
According to several media sources, U.S./China trade talks have stalled. On Friday, Bloomberg columnists, Michael P. Regan, and Sarah Ponczek penned a very insightful piece on the state of the trade talks between the United States and China. The title of the article says it all: “The Art of the Deal Meets The Art of War.” In many respects, the article provides a reason to suspect that not only is a trade deal likely to be a long, drawn-out process, it is also an example of how differently these two cultures look at trade – through the lens of time. One gets the impression that these trade talks have significantly more to them than simply a bilateral trade deal. Culture, nationalism, and historical perspective all inform the conversation. My sense is that it would be wise to expect tariffs to continue to rise on both sides, and for that narrative to act as a headwind for trade-centric names over the near-term, and potentially significantly longer.
With floundering trade negotiations now a dominant theme in investor outlook and with Q1 earnings season coming to a close, equity markets remain vulnerable.
Adding additional unpriced uncertainty into the market, anti-Brussels political parties across Europe continue to gain ground and public support. The UK European Union Parliamentary elections will be held on Thursday; Europe-wide results are expected next Sunday. The Brexit Party, founded by former UKIP leader Nigel Farage, is expected to now win the most votes in what would be a stunning defeat for Prime Minister May and the long-standing binary British political establishment. In the event the Brexit Party does manage to garner the most votes in the UK for the EU parliamentary elections, expect no end to the epitaphs for the great post-WW2 experiment.
The EU is in the midst of the largest internal political reordering in its post WW2 history. That reordering has already taken meaningful shape in what is loosely referred to as the Visegrád Group, or V4.
This week’s economic calendar highlights:
On Tuesday we receive existing home sales data for the month of April. Econoday consensus is 5.370 M versus March’s 5.210 M. Last month’s report did reflect contraction on a M/M (-4.9%) and Y/Y (-5.4%) basis. On Wednesday, the EIA Petroleum Status Report for the week ending in 5/17, and the FOMC Meeting Minutes from the last meeting, come out. Minutes are always released 3 weeks after the announcement. Weekly Jobless Claims and new home sales hit the tape on Thursday. We round out the week on Friday with Durable Goods Orders for April. Econoday consensus is calling for a 2% contraction for new orders.