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The S&P 500 got hammered 2.09% on Monday after Greece’s Prime Minister Alexis Tsipras, who just botched the debt deal negotiations with the creditors, called for a referendum on July 5 on whether to accept reform measures demanded by the creditors. Mr. Tsipras also shut Greek banks and imposed capital controls, meaning the amount of money people could withdraw was restricted. Basically, he is telling the Greek people that you are no longer allowed to move your money around freely.
Adding to the market’s woes, Puerto Rico's Governor Alejandro Garcia Padilla dropped a bombshell on bond holders and said that the U.S. commonwealth is facing a financial crisis and cannot pay back more than $73 billion in municipal debt. The governor wants to restructure debt and postpone bond payments and called on Washington to make changes to U.S. bankruptcy laws to include Puerto Rico.
The S&P 500 got some support ahead of Thursday’s June U.S. nonfarm payrolls report after ADP, a private payroll processor, said on Wednesday that businesses added 237,000 jobs in June, more than the economists’ forecast for a gain of 220,000 jobs. The report is a measure of nonfarm private sector employment of about 400,000 U.S. businesses which are clients of ADP.
The Institute for Supply Management (ISM) also said on Wednesday that its manufacturing index rose to 53.5% last month, from 52.8% in May, exceeding Wall Street's expectations of 53.2% rise. A reading over 50% indicates more companies are expanding. Their Employment index rose to 55.5% from 51.7% in May, reflecting growing employment levels from May at a faster rate, said the ISM.
The U.S. Department of Labor said on Thursday that the June jobs numbers came in with a 223,000 increase, below estimates of a 230,000 gain. The April and May numbers also got knocked down by a 60,000 revision. Although the unemployment rate is 5.3%, the total June nonfarm payroll employment contracted 16.48% year-on-year. The Department of Labor also said more than 400,000 people left the labor force, pushing the labor force participation rate to a 38-year low at 62.6%, meaning 93.6 million Americans, 16 years and older, did not have a job and were not actively trying to find one.
Average hourly earnings remain unchanged at $24.95, as higher pay manufacturing and construction jobs showed no change over the month. Most of the jobs gained are in the lower pay retail and leisure services sectors. From the labor force participation rate and average hourly earnings, the U.S. Federal Reserve may have to think twice about raising the rate by September. Despite the wobbly U.S. economy and the below target inflation rate, some Fed members are still eager to hike the rate in September as they are concerned to fall behind the curve.
Another concern is that the Fed could be running the risk of losing control of bond yields if they don't do anything after a lot of hype. Since the Fed's committee removed the key word "patient" from its March 18 statement, the 10-year U.S. Treasury yield has skyrocketed 24.35%, from 1.93% on that day, to 2.4% on Thursday.
The IMF and World Bank urged the Fed last month not to hike the rate until 2016. The Fed is risking losing their credibility if they decide to hike the rate in September, and it botches the U.S. and global economy next year.
Greece's Prime Minister Alexis Tsipras could be facing an unpleasant surprise with Sunday’s referendum if there is a “Yes” vote. Greece Finance Minster Yanis Varoufakis, already said on Bloomberg TV that he’ll resign if there is a “Yes” vote. Mr. Tsipras said late Thursday that he will travel to Brussels on Monday and sign the deal, regardless of the referendum vote outcome. There is no response from Brussels yet. Based upon previous reactions from Brussels lately regarding Greece, one may say that everyone has had enough with Mr. Tsipras. From a risk management prospective, “don’t count on anything on Monday”.
For the shortened holiday week, the U.S. dollar index inched up 0.67% higher to close at 96.29 on Thursday, despite that the Greek debt drama seems to have no end in sight. The 10-year U.S. Treasury yield tumbled 3.61% for the week to close at 2.4% on Thursday as the probability of the Fed’s rate hike in September was substantially reduced. The S&P 500 recouped some of its big losses on Monday and managed to close at 2,076.78 on Thursday, down 1.18% for the week.
The best performing S&P 500 sector for the week was Utilities, up 1.01%, as investors rotated money out of high risk sectors into safe havens. The worst performing sectors for the week were Energy and Materials, down 1.88% and 1.83%, respectively. The WTI crude price dropped 5.28% for the week to close at $56.50 per barrel, after the U.S. Energy Information Administration (EIA) said on Wednesday that the commercial crude-oil inventories in the U.S. rose by 2.4 million barrels in the week ended June 26. Analysts surveyed by The Wall Street Journal had expected a decline of 1.2 million barrels. Baker Hughes. [NYSE:BHI], the U.S. largest oilfield services company, said on Thursday that the number of active oil drilling rigs climbed by 12 to 640, the first gain since December.
From our technical viewpoint, a descending channel chart pattern has now emerged in the S&P 500 chart. The S&P 500 bounced off the pseudo 200-day SMA trendline support. The S&P 500 may attempt a channel breakout next week as the earnings season is just weeks away.
All eyes will be on Greece next week, as the global markets will be impacted by the outcome of the Greek bailout referendum vote on July 5. It is anyone’s guess what the Tsipras leftist government is going to do next as Mr. Tsipras is trying to convince the Greek people that the “No” vote means a better deal for Greece, while the EU is saying the “No” vote could mean “You are out”.
If the S&P 500 makes a further pullback, the next supports are about 2,054.75, or 200-day SMA, and 2,040. Just a reminder, the last time that the S&P 500 broke down through the 200-day SMA was in mid-October 2014.
S&P 500 Summary: +0.87% YTD as of 07/02/15
Barclay Hedge Fund Index: +3.63% YTD
Outperforming Sectors: Healthcare +9.33% YTD, Consumer discretionary +6.98% YTD and Telecommunication services +1.45% YTD.
Underperforming Sectors: Information technology +0.78% YTD, Materials –0.28% YTD, Financials –0.42% YTD, Consumer staples –0.94% YTD, Industrials –3.81% YTD, Energy –6.87% YTD and Utilities –10.60%
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