Not unexpectedly, US equities took it on the chin last week. The lopsided trade lower was fueled largely by the increasingly widely shared view that US/China trade talks are not only stalled, but perhaps headed for an intractable state. Any stock that is even remotely exposed to the China-centric trade narrative got hammered. The trade lower last week was the fifth consecutive weekly loss for the Dow Industrials and left all three major US equity market indices hovering above their respective 200 DMAs.
Given the geopolitical, trade, and global economic backdrop investors are faced with, this test of the 200 DMA will be meaningful.
US equity investors would welcome some good news but little appears to be in the offing, save possibly the earnings due this week in the software space. Though Q1 earnings season is winding down, we do hear from several significant software companies; Workday (WDAY), Veeva Systems (VEEV), Palo Alto Networks (PANW) and Okta (OKTA) this week. Software is a rare sector of growth that has bucked the broader market trend lower. As a sector, software has posted a year-to-date gain of 30.2%. Not a dividend-rich space but one that is certainly well insulated from the trade narrative that has hampered the broader market.
Not only is the risk-off trade being manifest in equities, but it is also being priced into US notes as well. The 10-year closed the week yielding 2.324% – its lowest closing yield since September 1, 2017. On an intraday basis, the 10-year yield ticked down to 2.2940%. Lower bond yields, lower equity prices and clear indications of risk off, all speak to additional pricing weakness for US equities in the near term in spite of the fact that we could see an attempt by all three major equity indices to hold above their respective 200 DMAs.
Adding a degree of uncertainty to the mix for investors, the EU Parliamentary results over this past weekend indicated that establishment political parties are under siege. Clear indications of populist fervor littered the results. From the UK to France to Italy. From Hungry to Austria, upheaval is the theme. Uncertainty appears to have taken hold on the continent. As a result, there is now one more factor that could potentially drive additional pricing pressure on equities both domestically and globally.
Last week’s economic data releases did little to shift near-term investors sentiment. Jerome Powell’s speech on Monday focused on risks to the financial system with a focus on corporate debt – which has risen to record levels since the great recession. Existing home sales for April, released Tuesday, were weaker than Econoday consensus (5.194 M versus 5.350 M). The IEA Petroleum Status Report reflected another week of modest inventory builds across all three verticals – crude: +4.7 M bbl, Gasoline: +3.7 M bbl, and distillates: +0.8 M bbl. The FOMC Minutes were in line with expectations. Weekly Jobs Claims (211 K) continue to speak to full employment. Durable Goods Orders for April were in line with expectations, -2.2% versus – 2.1%.
This week’s economic calendar highlights include Q 1 GDP (p), International Trade in Goods, and Weekly Jobless Claims on Thursday. Personal Income and Outlays for April are released on Friday at 8:30 am.
Requiescat In Pace – Bill Fitzpatrick – former fellow NYSE member