It’s finally happening.
After weeks in the doldrums, some excitement is finally returning to the stock market as the Dow Jones Industrial Average slices below the 18,000 level for the first time since early May while the S&P 500 lost its 50-day moving average near 2,100.
A continuation of the recent surge in Eurozone government bond yields pushed U.S. equity futures down sharply on Thursday morning — with the selling continuing into the cash session.
In the end, the Dow Jones Industrial Average and the S&P 500 lost 0.9%, the Nasdaq Composite lost 0.8% and the Russell 2000 lost 1.1%.
A number of catalysts are in play:
- Fractious Greek bailout negotiations, on reports Athens will miss Friday’s deadline for a $375 billion debt payment to the International Monetary Fund, requesting June’s multiple payments be bundled into a single payment later this month.
- A stronger-than-expected eurozone inflation report on Tuesday and comments from European Central Bank chief Mario Draghi on Wednesday that recent bond market volatility was here to stay.
- The IMF also cut its U.S. GDP growth forecast and urged the Federal Reserve to delay its first rate hike until 2016.
How bad is it?
The 10-year German bond yield has already suffered its largest two-day rise since 1998 while the 30-year U.S. Treasury yield surged above 3.1% on Wednesday to return to levels not seen since early October. Big gains were also seen in Australian and Japanese bond yields.
Stocks just couldn’t ignore all this any longer, amid extended sentiment and breadth measures that had been narrowing for weeks.
The economic calendar was relatively light ahead of Friday’s big jobs report with non-farm productivity soft (likely due to a shortage of physical investment by the corporate sector). Unit labor costs jumped at a 6.7% seasonally-adjusted annual rate, a potential pinch point on profitability going forward — and something investors should keep an eye on.
All 10 major stock sectors finished in the red with energy and materials leading the way down on crude oil weakness and strength in the U.S. dollar. West Texas Intermediate lost 2.8% to close at $58 ahead of Friday’s OPEC meeting.
Short crude oil/energy stocks are one of my favorite trade themes right now as energy inventories remain high and Saudi Arabia ramps up production alongside U.S. shale producers. Storage capacity limits could be tested as soon as September, according to my research.
Edge subscribers are carrying a 10%+ month-to-date gain in their ProShares UltraShort Crude Oil (SCO) position while Edge Pro subscribers are carrying a 98%+ gain in their June Exxon Mobil (XOM) puts.
Expect move fireworks on Friday as traders digest the May payroll report (which will be closely examined for clues on the pace and timing of potential Fed rate hikes) and the outcome of OPEC’s first meeting since the “no-change” decision last November precipitated the slide in energy prices into the lows set earlier this year.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
