U.S. equities erased some of the gains seen yesterday, with tech issues applying pressure, along with energy stocks following a sharp decline in crude oil prices on oversupply concerns amid a flood of output coming from Libya and Nigeria. Meanwhile, an uncertain political landscape also contributed to the uncertainty. Treasuries were higher with the economic calendar again empty, while gold was little changed and the U.S. dollar gained ground.
The Dow Jones Industrial Average (DJIA) fell 62 points (0.3%) to 21,467, the S&P 500 Index declined 16 points (0.7%) to 2,437, and the NASDAQ Composite decreased 51 points (0.8%) to 6,188. In moderately-heavy volume, 811 million shares were traded on the NYSE and 2.5 billion shares changed hands on the NASDAQ. WTI crude oil declined $0.92 to $43.51 per barrel and wholesale gasoline lost $0.03 to $1.42 per gallon. Elsewhere, the Bloomberg gold spot price decreased $1.37 to $1,242.47 per ounce, and the dollar index, a comparison of the U.S. dollar to six major world currencies, was 0.2% higher at 97.76.
Lennar Corp. (NYSE:LEN $54) posted a Q2 profit of $0.91 per share, well above the FactSet consensus estimate of $0.79, on a 19% year-over-year (y/y) increase in revenues to $3.3 billion, also eclipsing the $2.8 billion forecast. Chief Executive Officer Stuart Miller said the strong results “were supported by an improved macroeconomic environment, renewed optimism, wage and job growth, and increased consumer confidence.” He added that despite recent housing reports the company is seeing the market revert more to normal than the slow and steady recovery pace of the last several years. Shares were nicely higher.
Biopharmaceutical company PAREXEL International Corp. (NASDAQ:PRXL $87) confirmed that it will be acquired by private equity firm Pamplona Capital Management for $88.10 per share in cash, or an enterprise value of roughly $5 billion, including debt. The purchase price represents about a 5% premium to yesterday’s closing price and a near 28% premium since early May when speculation of a deal surfaced. Shares of PRXL were higher.
The NASDAQ pared yesterday’s rally, and its best day since November, which has lagged the Dow and S&P due to the recent pressure on technology issues.
Economic calendar remains quiet, gets in motion tomorrow
Treasuries were higher, as the economic calendar was again void of any major releases today. The yield on the 2-Year note was 1 basis point (bp) lower at 1.35%, the yield on the 10-Year note was down 3 basis points (bps) at 2.16%, and the 30-Year bond rate declined 5 bps to 2.74%.
Treasury yields have been in a trading range amid a host of domestic and European political uncertainty, mixed economic data, and last week’s highly-expected rate hike by the Fed and details of the process in beginning to shrink its balance sheet sometime this year.
The economic calendar is scant this week, and won’t get moving until tomorrow, where housing will take center stage with the release of existing home sales, with economists forecasting a slight downtick during May to an annual rate of 5.55 million units, as well as weekly MBA Mortgage Applications. More housing data will come later in the week via the new home sales report. Manufacturing and business activity will also likely be on tap, with data from Markit's preliminary Manufacturing and Services PMIs and the Kansas City Fed Manufacturing Index. Other reports of note include weekly initial jobless claims and the Index of Leading Economic Indicators.
A couple of Federal Reserve officials spoke yesterday, with some hawkish comments coming from Federal Reserve Bank of New York President William Dudley, with a host of other speeches at various engagements slated for today and throughout the remainder of the week. We believe the market will likely largely look past the expected FOMC rate hike, and focus more on any information with regard to the Fed’s balance sheet.
It is now expected that the Fed will begin the process of slowly reducing its bloated balance sheet by the end of this year, but that process (and commentary surrounding it) could be a source of elevated volatility in the months to come.
European equities lower on oil, politics and Brexit worries; Asia mixed
European equities finished lower, with pressure coming from energy stocks amid the tumble in crude oil prices, and as Brexit talks were in focus after negotiations officially began yesterday in Brussels. According to Reuters, chief negotiators from the European Union (EU) and the U.K. agreed that dialogue up through October should focus on expatriate citizens’ rights and the settling of financial accounts.
The British pound added to its recent slide versus the U.S. dollar amid the uncertainty, as well as Bank of England Governor Mark Carney’s comments on his continued worries of the impact of Brexit on the U.K. economy, and after signaling that as a result he isn’t in any rush to begin adjusting interest rates. Adding to the mix, investors continue to struggle with the recent U.K. election that surprisingly resulted in a hung parliament and fostered uncertainty surrounding Brexit negotiations and whether they will yield hard or softer exit terms. Amid the political turmoil overseas, are the upcoming elections in Italy and Germany later this year.
In economic news, Spain’s trade deficit widened more than expected for April, and producer prices in Germany matched expectations. The euro is also modestly lower versus the greenback and bond yields in the region are mixed.
Stocks in Asia finished mixed, as yesterday’s optimism over the MSCI’s decision on China cooled a bit. Investors are waiting to see if MSCI will include the Asian nation’s A-shares in its emerging markets indexes when it announces its decision later this week. This will be the fourth shot at MSCI inclusion for China after being passed over the prior three attempts. Whispers on the Street currently put the odds of inclusion at 50/50.
Japanese equities rose, with the yen losing ground, and following a report that showed noted improvement in the nation's business sentiment, hitting its highest level in nearly a decade. Mainland Chinese stocks and those traded in Hong Kong fell on tempered hopes of MSCI’s upcoming decision, while investors also begin to look toward high-level talks between the U.S. and China that begin tomorrow, with U.S. officials not hiding its intent to continue to pressure China on help with the North Korea issue. Elsewhere, South Korean securities ticked lower and Indian listings were flat.
Australian markets fell on the heels of Moody’s downgrade of twelve of the nation’s lenders, including its four largest banks, and after the Reserve Bank of Australia released the minutes from its last monetary policy meeting which showed the central bank was concerned about household debt and wage growth, despite being positive about economic progress going forward.
Items set for release on tomorrow's international economic calendar include Japan's All-Industry Index, industrial orders from Spain, and public sector net borrowing from the U.K.