In a quiet week marked by declining volatility, the U.S. equity market again experienced a dichotomy in stock price performance. The S&P 500® Index surrendered half of a percent, while the S&P 600 Index gained 1.6%. This brings the year-to-date performance for the two indices to +1.5% for the S&P 500® and +7.1% for the S&P 600. Energy was last week’s strongest performer, driven by the refinery sector, as gasoline prices rose 2%. The collapse of Venezuelan crude supplies is creating a bottleneck at the start of the summer driving season. Following close behind last week was the material sector, adding 1.6% for the period on gains in the agricultural chemical and fertilizer segment. Shares of utility stocks suffered the worst declines last week, as the group slipped 2.8% thanks to the ten-year Treasury bond breaking and sustaining above the 3% threshold to close the week at a 3.056% yield. The technology sector was the second worst performer for the week, as the 24% decline in shares of Symantec and the 11% drop for Applied Materials inflicted collateral damage on their respective categories. Thanks to a 1.25% gain in the trade-weighted value of the U.S. dollar, most international markets were down for the week in dollar terms, as the MSCI EAFE® Index lost 0.6%, and the MSCI Emerging Market Index fell 2.3%. The advance of the dollar served to send precious metal prices down 2%. Agricultural prices rebounded with corn gaining 3% and wheat adding 6%.
As mentioned above, the U.S. dollar experienced a strong week versus global currencies, principally the euro. In Exhibit 1, you can see the relationship of the dollar versus the euro for the last year. Note that until recently, the trend was in the euro’s favor. That is, until the Italian election and the wrangling over the results, which concluded last week with a populist bent. What matters most here is the concern over Italian adherence to European Union mandates on budget deficits and banking reforms. Over the weekend, the incoming government in Rome was admonished by the French Finance Minister to respect the rules, which was met with a swift “Italians First!” response. The reason all this matters is, again, looking out for potential threats to customer assets. A financial crisis in Europe would impact U.S. markets. The European Central Bank (ECB) has been a major buyer of U.S. Treasuries and, with our issuance set to climb, now would be a bad time for the ECB to go MIA.
Exhibit 1 (Source: Bloomberg)
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Source: Unless otherwise noted, all statistics herein obtained from Bloomberg.
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