Weekly Financial Market Recap and Outlook
While there are a number of key economic indicators out this coming week, crude oil prices should continue to take center stage on Main Street and Wall Street, remaining the focus for traders, consumers, and the Federal Reserve. Let’s take a look at action in the financial markets, and some strategies as we kick off a new trading week.
The economic data highlight last week was a surge in May’s unemployment rate to 5.5 percent – overshadowing the fact that payroll losses were modest and not as bad as expected. Otherwise, the economic data were soft but generally a little better than expected.
Equity Market
Major stock market averages declined last week amid a surge in crude oil prices to yet another new record and the bearish employment report. Losses on Friday, June 6, offset what had been the biggest day of gains in almost two months on Thursday. The employment report raised fears of recession, pulling Treasury yields and the U.S. dollar down, and led to a sharp increase in crude oil prices. By the end of the day on Friday, an $11 per-barrel surge in crude oil prices had pummeled stocks (except in the energy sector). The Dow Jones Industrial Average dropped 395 points – its largest one-day fall in 15 months.
For the year-to-date, major stockindexes are down from year end as follows: the Dow down 8.0 percent; the S&P 500, down 7.3 percent; the Nasdaq, down 6.7 percent; and the Russell 2000, down 3.3 percent.
Turning to futures, the June S&P 500 index posted a reversal down on Friday, June 6, in reaction to the bearish jobs data. The market spiked below Tuesday’s low at 1369, setting the stage for lower prices. Momentum indicators, the Stochastics and the Relative Strength Index (RSI) are oversold (diverging) but are neutral to bearish, signaling that sideways to lower prices are possible near-term. Friday’s close below Tuesday’s low at 1369 opens the door for a larger-degree decline during the first half of June. Closes above 1409 are needed to confirm that a short-term low has been posted.
The market is highly volatile, and market action Friday issues a caution alert today as we start off the week. Watch for an early bounce, and attempt to hold under 1372 as a zone for further pullback. Expect support under the lows during the first hour of trading for neutralizing the market mid-session.
Credit Markets
Treasury interest rates were down last week, primarily on flight-to-safety and in reaction to a weak employment report. Worries over the health of financial firms were a key theme for the week. The euro currency rose the most against the dollar since April (and gained versus the yen and the pound as well) after European Central Bank president Trichet said an interest rate increase next month is possible, and the euro’s climb against the dollar continued Friday after the poor U.S. employment report.
Most rates headed down on Monday and Tuesday. Economic data were soft early in the week and data either met or came in better-than-expectations and were not the cause of the easing in rates. Indeed, flight to safety was spurred by news of management shakeups. But on Friday, Treasury yields generally fell by double-digit basis points on the spike in the May unemployment rate. The past week’s dip in rates was a mild reversal of the uptrend in rates over recent weeks.
The payroll survey is more reliable than the household survey due to its much larger sample size, and markets focused on the household survey as the civilian unemployment rate spiked to 5.5 percent in May, from 5 percent in April. The last time the unemployment rate jumped half a percentage point was February 1985, and a 5.5 percent unemployment rate was last seen in October 2004.
Crude Oil
Crude oil prices surged over $16 per barrel the last two days of last week and July futures set another record high, settling at $138.54 on Friday to close out the week. Prices soared for several reasons: the declining dollar against the euro after the ECB suggested it might increase interest rates, heightened rhetoric in the Middle East against Iran, technical buying as hedge funds that had bet on a decline in crude prices were forced to exit their short positions, and on Chinese shortages. Crude oil had been under selling pressure early in the week amid concerns about future Asian demand as governments across the region began cutting fuel subsidies to alleviate strains on public finances. Robust Asian demand has been a key driver of rising oil prices, so the prospect that a reduction in subsidies that could weaken consumption prompted some hedge funds to bet oil prices would fall. However, they were forced to buy back these positions after oil prices reversed direction sharply on Thursday.
Financial Fundamental Reports: Week of June 9 – June 13, 2008
Date CT Release For Consensus Prior
Jun 09 09:00 Pending Home Sales Apr -1.0% -1.0%
Jun 10 07:30 Trade Balance Apr -$59.5B -$58.2B
Jun 11 09:30 Crude Inventories 06/07 NA -4802K
Jun 11 13:00 Fed's Beige Book
Jun 11 13:00 Treasury Budget May NA NA
Jun 12 07:30 Export Prices ex-ag. May NA 0.6%
Jun 12 07:30 Import Prices ex-oil May NA 1.1%
Jun 12 07:30 Initial Claims 06/07 NA 357K
Jun 12 07:30 Retail Sales May 0.6% -0.2%
Jun 12 07:30 Retail Sales ex-auto May 0.7% 0.5%
Jun 12 09:00 Business Inventories Apr 0.4% 0.1%
Jun 13 07:30 Core CPI May 0.2% 0.1%
Jun 13 07:30 CPI May 0.5% 0.2%
Jun 13 09:00 Mich Sentiment-Prel. Jun 57.5 NA
Good luck and good trading!
Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com. Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page.
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