Market Recap: The S&P 500 dropped -0.28% to finish the day at 2744.45. Bond yields dropped -7 basis points on expectations of an interest rate cut by the Federal Reserve. Gold was strong yesterday, finishing up 1.28% and closing above 1327.90. Markets are oversold and we expect a short-term bounce to materialize.
Economic Data: US construction spending was unchanged from the month prior. The ISM manufacturing PMI declined to 52.1. Economic growth continues to slow domestically.
Chart of the Day: Gold broke out of a bullish pennant pattern that could potentially mean a lot of further upside.
Sector Spotlight: The internet sector was under pressure yesterday after the announcement that the DOJ was beginning a probe into Google. We wonder if this is just the beginning of a major crackdown on big tech. The First Trust Internet Sector ETF (FDN) reacted negatively to the news, and closed below its 200 day moving average.
Low volatility factor versus high beta: The low volatility factor broke out to new intermediate term highs relative to high beta (SPLV:SPHB). The breakout is confirming the defensive rotation and risk off behavior of market participants.
Small caps: Small caps bounced yesterday against large caps and the gap between volatility (inverse) and this particular ratio is starting to close. The bounce in small caps is welcome given the rapid drop in this particular ratio over the last month. Technically, this ratio flashed a positive divergence, suggestive of a possible bounce in broader markets.
How low can you go? The yield curve (3 month T-bill minus 10 year T-note) continued to move deeper into negative territory yesterday as interest rates on the 10 year Treasury bond dropped 7 basis points. The market is pricing in a high probability (over 50%) of a rate cut in June. Federal Reserve board member, Bullard, expressed the potential need for a rate cut in an interview yesterday. Historically, the Fed doesn’t just stop at one rate cut.
News from Bloomberg:
President Trump told Theresa May he sees “a very, very substantial trade deal” with the U.K. The second day of his visit is underway and may be livelier than yesterday’s pomp and pageantry. A news conference later today will give Trump another chance to meddle in British politics—he’s all but certain to be asked about Boris Johnson and Nigel Farage.
Investors’ growing conviction that the Fed will lower interest rates in coming months is putting officials under scrutiny. Chairman Jerome Powell’s appearance at a Fed conference today gives him a chance to recalibrate expectations before the June 18-19 meeting. Governor Lael Brainard appears at the same event and New York chief John Williams is also up.
China warned its citizens against U.S. travel. The travel advisory cited “frequent” shootings, robbery and theft. The Xinhua report came a day after China cautioned its students studying in the U.S. to be vigilant as the Trump administration steps up restrictions on academic visas and intensifies its scrutiny of Chinese researchers working in America.
Republican lawmakers may take legislative action against Trump’s plan to impose a tariff on Mexico. They discussed putting forward a motion that stymies the declaration of emergency underpinning his move, a person familiar said. Senate Republicans also warned the White House that Congress may hold up a new Nafta deal.
U.S. stock-index futures rose as investors eased off on haven assets, sending Treasuries to their first decline in a week. European equities shrugged off technology weakness, while Asian shares drifted lower. The pound erased a gain as U.K. economic data disappointed. Gold fell and the yen was marginally lower. Oil slid.