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With the rest of the world, I read the headlines today about attacks on joint-operated Japanese and Norwegian oil tankers near Hormuz with some concern. Is this an escalation of tensions with Iran and other states in the region? Or another step toward military involvement from the U.S.?
While it can be difficult to separate ourselves from the political and human safety issues related to events like this, the markets can still help us understand how sentiment is trending and whether large financial institutions are worried. Although they are not infallible, sentiment in the financial markets can help us measure confidence in general.
In this case, the price of oil and related commodities spiked following the attacks. Crude oil and gasoline were both up over 2% at one point today, which has been a change of pace for a sector that has been in a downtrend for several weeks.
A short-term reaction like this in the energy market is typical after bad news from that region of the world. However, if market participants were really worried, we would have seen a bigger reaction in safe-haven assets like long-term Treasury bonds, the U.S. dollar, Swiss franc, and Japanese yen.
For example, safe-haven assets rallied during the Arab Spring protests in late 2010 and the civil unrest during the Greek financial crisis in 2011. However, as you can see in the following chart, along with a very mild reaction in safe-haven assets, investors allowed energy prices to drop back toward yesterday’s open. At this point, it appears that traders are taking a wait-and-see attitude toward the risk of a military escalation in the Persian Gulf.
As I mentioned in yesterday’s Chart Advisor, investors are focusing on the Fed’s announcement next week before committing much more to the market. The futures market is pricing in at least a 0.25% rate cut when the Fed’s FOMC statement is released on Wednesday. That has created the risk of missed expectations, but in my experience, the Fed rarely misses the action predicted by the fed funds futures, so I don’t think investors should be too concerned.
The S&P 500 remained roughly where it opened the week on Monday without a lot of additional news to push prices around. Oddly, interest rate-sensitive stocks like consumer staples and utilities pulled back despite falling long-term rates. A single day’s movement doesn’t qualify as a trend, but this behavior could be caused by investors preparing to buy more aggressively if the Fed’s statement meets expectations next week.
Risk Indicators – Retail Still Outperforming
In yesterday’s Chart Advisor, I mentioned that falling gasoline prices could be a benefit for consumer stocks, and today’s volatility in the energy market was not significant enough to justify any adjustments to that outlook. Furthermore, I was encouraged by outperformance in consumer goods and services overall, despite an otherwise slow day.
As you can see in the following chart, the SPDR Consumer Discretionary ETF (XLY) was up much more than the S&P 500 today, which continues its outperformance since the beginning of June. Like most indexes and ETFs that track consumer discretionary stocks, XLY is disproportionately overweight to Amazon.com, Inc. (AMZN), which can distort its performance, but I still feel that this is a valid positive sign for the market in the short term.
What would add weight to a positive outlook for consumption would be better performance in transportation stocks. This is a good time to pay attention to shipping because FedEx Corporation (FDX) reports its earnings on June 25 before earnings season kicks off in July. If transportation and shipping companies start to improve (except where energy shipping is a drag), then the outlook for the market should be more positive than it is now.
Bottom Line – Waiting for the FOMC
As I mentioned previously, the few days before a major FOMC announcement tend to be aimless while investors wait to see whether the Fed will meet expectations. External issues like trade tariffs, and now the potential for military conflict in the Persian Gulf, are potential spoilers, but sentiment indicators are still calm.
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