Stocks were hit hard on Tuesday in a way we haven’t seen since late April as a combination of stronger economic data (remember, good news is bad news because rate hikes) and troubles in the Greek bailout negotiations as the June 5 payment deadline to the International Monetary Fund approaches.
The dollar and Treasury bonds were up. Pretty much everything else was slammed.
In the end, the Dow Jones Industrial Average lost 1%, the S&P 500 lost 1%, the Nasdaq Composite lost 1.1% and the Russell 2000 lost 1.1%. The Dow Jones fell to test trendline support near the 18,000 level — a benchmark the bulls haven’t been able to pull away from since it was first crossed in December.
The decline boosted the CBOE Volatility Index (VIX) nearly 16% as the two-week long lull on volatility was broken. That pushed up the VelocityShares Daily 2x VIX Short Term ETN (NASDAQ:TVIX) positioned carried by Edge subscribers to a gain of nearly 7%.
Crude oil fell 3.3% to finish at $58.03 a barrel — losing the $60 a barrel level that’s been the dividing line between bulls and bears since late April — as traders reacted to Friday’s surprising Baker Hughes drilling rig count showing the 24th straight week of count declines. But the count only declined by one. The horizontal rig count actually increased by four, the first weekly gain since November.
All of this suggests a floor in production declines could be getting put in — something that will weigh on prices via more supply unless global demand can bounce back soon.
Energy stocks were the day’s laggards as a result, falling 1.6% as a group. That boosted the June Exxon Mobil Corporation (NYSE:XOM) puts recommended to Edge Pro subscribers to a gain of nearly 30% since first recommended last Tuesday.
The economic calendar was full. May consumer confidence was in line with expectations but flat on a month-over-month basis. The May preliminary Markit PMI services activity index declined slightly from April, which was in line with expectations.
Regional Dallas and Richmond Fed manufacturing surveys were soft … but then, these reports are largely ignored.
The S&P/Case-Shiller and FHFA March home price indices were mixed as April home sales accelerated, setting the stage for price gains this summer as inventory tightens, according to Capital Economics. You can see this in the chart above comparing months’ supply of unsold homes vs. prices.
But the big news was the advance April durable goods report, which was slightly stronger than expected once the decline in the volatile civilian aircraft sector was removed. Less transportation, the data widely topped estimates (growing 0.5% on a monthly basis) gains as the March data was revised upward.
Paul Ashworth at Capital Economics believes the data points to a pickup in investment spending as the earlier disruption caused by severe winter weather and the West Coast port dispute fades. This points to a big rebound in GDP growth for the second quarter, which, if it happened, would raise the pressure on the Federal Reserve to raise interest rates for the first time since 2006 — and sooner rather than later.
The team at Deutsche Bank notes that durable goods orders are now up for two months in a row after five consecutive declines. With core orders outpacing core shipments over the last two months, production should see a lift in the current quarter in their view.
If so, their equity strategy team worries about the risk of a 5%-plus stock market pullback this summer as long-term bond yields keep rising, and bond prices come under pressure, no matter what the Fed does on higher inflation expectations driven by better economic news.
Another factor to watch is the renewed strength of the U.S. dollar, with the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) moving back over its 50-day moving average — threatening to keep the pressure on commodities including crude oil on the back of better economic data.
Crude oil weakness weighed on stocks earlier this year. It could do so again.
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