Global equity markets turned in a relatively lackluster week with a backdrop of a weak dollar, falling interest rates, and rising oil prices (now up 96% off Feb lows). The S&P 500 reached its year to date high mid-week (within 1% of the May 2015 all-time high), before bouncing once again off of the 2,100 level and retreating toward the week’s end. Since the most recent low on May 19th, a well-documented trend has been healthy market breadth and small cap outperformance over large caps. Since May 19th, the S&P 500 index is up 3.88% while the average stock in the index gained 5%. The smallest 50 stocks are up 8.95% while the largest 50 gained just 3.35%. Also of interest in this most recent rally is that stocks with heavy institutional ownership, heavy international revenues, and heavily shorted stocks (+8.36%) all performed very strongly.
Interest rates tumbled last week signaling that deflation remains a primary concern. The 10yr U.S. Treasury fell from 1.71% to 1.64%, its lowest point since May 2013, while the same maturity government bond yields in Germany (0.01%), Japan (-0.155%), and the U.K. all hit all-time lows. These low overseas yields are certainly contributing to downward pressure on U.S. yields as investors favor U.S. bonds over most other major global markets. Yields in the U.S. high yield market are not signaling any trouble as spreads are near their lowest levels in a year and even energy companies have compressed below 1,000 basis points to their lowest levels since last July.
The global macro landscape remains focused on the upcoming British referendum June 23rd, and what looks likely to be a no-action FOMC meeting this week. The futures market indicates less than a 2% likelihood of a Fed rate hike this week. Interestingly, some U.K. surveys show a majority will opt to leave the EU, while others indicate they will stay. Meanwhile, a relatively light U.S. economic calendar last week saw a relatively encouraging April JOLTs report which reported total job openings returned to their highest level ever. Meanwhile, Michigan’s Confidence reported all time low consumer inflation expectations of 2.3% over the five years starting five years from today.
