Last week, we saw the stock market wrap up the week with a bullish hue, although trading remained volatile as market participants grappled with a multitude of factors. Throughout the week, the S&P 500 swayed broadly between 4,100 and just above 4,200 where it closed on Friday, its peak since the previous August.
At the start of the week, the market was constrained by ambiguity surrounding the debt ceiling, with inconsistent updates regarding the level of progress made. Anxiety intensified when Fitch Ratings slapped a Credit Watch Negative on the nation’s AAA rating. Yet by Friday, worries about the debt ceiling seemed to ease, encouraged by reports of significant advancements made by negotiators and a potential agreement in sight.
Fed Talk On Rate Hikes
There was also an undercurrent of concern among investors due to comments from Federal Reserve officials on impending rate hikes:
Minneapolis Fed President Kashkari, an FOMC voter, pointed out that ceasing in June is a tough decision, but if the Fed does pause, it doesn’t automatically imply the end of the tightening cycle. According to Bloomberg, St. Louis Fed President Bullard, who isn’t an FOMC voter, thinks two additional rate hikes are needed this year.
Fed Governor Waller declared in a policy rate hike speech that flexibility is necessary for the June decision and that combating inflation remains his top priority. In a CNBC interview, Cleveland Fed President Loretta Mester, a non-FOMC voter, suggested that the data indicates further tightening of monetary policy may be necessary.
Economic Indicators Support Rate Hikes
The week’s economic indicators supported the concept that further rate hikes may be in the offing. In brief, Q1 GDP saw an upward revision to 1.3% from 1.1%, jobless claims for the week were lower than expected, and Friday’s Personal Income and Spending Report indicated robust consumer spending and a year-on-year increase in PCE and core-PCE Price Indices.
In response to the release of the Personal Income and Spending Report, market watchers raised their expectations for a 25 basis point rate hike at the June FOMC meeting. Per the CME FedWatch Tool, the likelihood of such a rate hike in June climbed to 65.4%, up from 17.4% the previous Friday and 13.7% a month ago.
Earnings Report
Other focus points for market participants were company-specific news that could stir the market. Notably, NVIDIA (NVDA) and Marvell Technology (MRVL) witnessed substantial growth following their impressive quarterly results and forward-looking statements, contributing to a 10.7% weekly boost in the PHLX Semiconductor Index (SOX). Thanks to this week’s gains, the SOX is now up 18.4% for the month.
Furthermore, a string of retail earnings reports led to uneven market swings in both directions.
Market Trend – AI Surge
The spotlight this week remained steadfastly on artificial intelligence, with Nvidia’s impressive results capturing the attention of investors and propelling the technology sector to new heights. It’s noteworthy that the leading US technology giants, including Apple, Microsoft, Alphabet, Amazon, Nvidia, and Meta Platforms, have seen an average surge of +69.3% since the year’s onset, constituting virtually all the gains in benchmark indices like the S&P 500 and the Nasdaq 100.
Continuing the trend, mega caps outshone the rest. The market-cap-weighted S&P 500 saw a 0.3% rise this week, against a 2.2% increase in the Vanguard Mega Cap Growth ETF (MGK). However, the Invesco S&P 500 Equal Weight ETF (RSP) fell by 1.2%.
Mega cap stocks continued to dominate within the S&P 500 sector performance. The only sectors that ended the week with gains were information technology.
Yesterday was Memorial Day, a holiday, and therefore, the markets were closed. The extended weekend provides an opportunity for market players to digest the recent events and potentially gear up for upcoming challenges and opportunities.
This past week was characterized by constant adaptation and flexible strategies, with investors monitoring a wide range of indicators – from economic data to company announcements to Federal Reserve comments. The stock market demonstrated its ability to weather multiple crosswinds, displaying the inherent volatility and unpredictability that makes it both an exciting and challenging field.
CALENDAR & MOVERS
- Thursday: ISM Manufacturing PMI (May)
- Friday: Unemployment Rate (May)
- Ukraine-Russian War Escalation
- Debt Ceiling Talks
We expect the market to be very volatile due to Debt Ceiling and Ukraine war. If that wasn’t enough Friday’s Jobs Report will make or break Fed Rate hikes!
This week there will be the release of US consumer sentiment data on Tuesday, followed by inflation statistics from Germany and Australia, as well as US employment figures on Wednesday. The week will also see the unveiling of the ISM manufacturing index and the US jobless rate on Friday. Furthermore, a handful of corporate earnings are slated to be disclosed. Among the most noteworthy are those of HP, Salesforce, Crowdstrike, and Broadcom.
Ukraine War Escalation
This morning the Russian capital, Moscow, was hit by a swarm of kamikaze drones, marking the most severe attack on the city since World War Two. The drones reportedly flew within earshot of President Putin’s palace, and one was shot down just a ten-minute drive away from the estate. Some drones targeted wealthy suburbs where Putin’s oligarch friends have luxury residences.
These strikes follow recent unprecedented missile attacks on Ukraine. Although it is not confirmed, speculation suggests that these attacks were likely a counterstrike by Kyiv’s forces. A Ukrainian presidential aide denied direct involvement but acknowledged that such attacks were predicted to increase. There are also suggestions that these attacks could be a “false flag” operation by Putin to discredit Ukraine. This event marks the second attack on Moscow after drones targeted the Kremlin earlier in May, perceived as an assassination attempt on Putin.
Debt Ceiling – Conservatives Backing Out
We are seeing a lot of press about not supporting the deal and I tend to think it is far from a done deal. The United States proposed deal to raise the $31.4 trillion debt ceiling is facing opposition from hard-right Republican lawmakers, signaling potential difficulties in passing the bipartisan agreement through Congress before the U.S. runs out of money next week. Key critics include Florida Governor Ron DeSantis and Republican Representatives Chip Roy and Ralph Norman. This opposition illustrates the challenges that President Joe Biden and top congressional Republican Kevin McCarthy will need to address to get the bill passed by the Republican-controlled House and Democratic-controlled Senate.
In addition, there are concerns from the Democrats’ side as well. Representative Raul Grijalva, a progressive Democrat, expressed disappointment over changes to environmental rules included in the bill. This bill also includes measures to speed up the permitting process for some energy projects, claw back unused COVID-19 funds, and tighten work requirements for food aid programs.
The proposed deal has received a positive initial reaction from financial markets, although there are concerns that the spending cuts secured by McCarthy could potentially impact U.S. growth. Meanwhile, Republicans argue that significant spending cuts are necessary to manage the national debt.
BONDS
On the macroeconomic front, the Fed’s minutes revealed a disparity among committee members. There are those advocating for the continuation of the rate hike cycle and those arguing for a pause or even a shift towards monetary easing, while the impacts of tightening measures on inflation, banks, and ultimately the economy are evaluated. The release of the PCE Core report on Friday provided further ammunition for the proponents of rate hikes, or the “Hawks”. Coming in slightly above expectations both monthly (+0.4% against a forecasted 0.3%) and annually (+4.7% against an anticipated +4.6%), it echoed the less-than-stellar UK inflation figures from earlier in the week. The struggle to control inflation appears far from over. Indeed, the US 10-year yield surged beyond its previous range by exceeding 3.64%, suggesting potential for further growth towards 4-4.10%.
COMMODITIES
Oil & Energy
This week saw the continuation of oil prices’ rebound, albeit in a measured manner. European Brent crude nudged towards USD 76 per barrel, while its US counterpart, WTI, hovered around USD 72 per barrel. Despite an overall air of negativity around riskier assets, oil has found support in positive news, especially from the US. Oil stockpiles witnessed a substantial decline this week, by roughly 12.5 million barrels, in stark contrast to the anticipated increase of 1.9 million barrels. Additionally, recent drilling data from the US confirms a reduction in operational rigs. Thus, US producers are seemingly adopting a conservative medium-term approach, as market watchers predict a tighter oil market in the second half of the year.
Precious Metals & Gold
Bear Trend Alert: A downward spiral is currently engulfing the industrial metals sector. The reasons: inconsistent economic data from China, a strengthening dollar, and a resurgence of risk aversion. Copper now trades at $7,900 per metric ton on the LME, a significant drop from just over $9,000 a little over a month ago. Zinc too has plunged to $2,222. Nickel ($21,000) and tin ($2,452) are witnessing similar trends. Gold, impacted by the rising US dollar, has struggled to recover. However, the precious metal has managed to stabilize at $1950.
CRYPTOCURRENCY
Bitcoin’s struggles continue, as it marks its fourth consecutive week of decline, currently hovering around the $26,500 mark. In contrast, Ether seems to be weathering the storm better than its peer, registering a slight gain of over 1% and standing above $1,800. Cryptocurrencies are yet to capitalize on the surge in US technology stocks, with which they have historically been correlated. The prevailing regulatory ambiguity in the US for the crypto-asset industry casts a shadow on the future, hindering the crypto-market’s capacity to regain positive momentum.
