Look Ahead: Volatility Rules as Bulls Try to Keep Control
After a week of wild swings, stock bulls will try to keep control of a market that has few catalysts in the lull between May's employment report and the next Fed meeting June 19.
U.S. data in the coming week includes Thursday's retail sales and weekly jobless claims, and PPI inflation data and consumer sentiment on Friday. But traders will perhaps be more focused on Tokyo early in the week when the Bank of Japan holds a two-day meeting that could make a difference to world markets still reeling from the past week's volatility.
The U.S. Treasury is also auctioning $66 billion in 3- and 10-year notes and 30-year bonds, of interest after another week of sharp moves in fixed income markets.
"The (Treasury) market is now cheap enough that I think those auctions should be fine. There's really no economic data that could really change things," said George Goncalves, Treasury strategist with Nomura Americas. "The BOJ is really important. They could discuss how they're proceeding with their policy. It will be interesting if they reference the volatility that's happened with the Nikkei and the yen."
Dollar/yen was down nearly three percent this past week, but saw huge, swift intraday swings as investors reacted negatively to Prime Minister Shinzo Abe's economic stimulus program, and as markets recalibrated around the important May jobs report Friday. The move ricocheted through global markets as big macro trades were unwound. The Nikkei continued its rapid decline, entering bear market territory temporarily Friday morning, just weeks after a rocket run higher, on the back of BOJ easing.
"You started off with the Nikkei and yen…They were like one-way trains, and it was the bond market that was under a lot of volatility.But now the bond market has calmed down. It will be curious to see what they say about that," Goncalves said.
In the past week, the Dow was up 0.9 percent to 15,248,after gyrations in both directions. On Friday, it finished up 207 points after May's jobs report showed that 175,000 nonfarm payrolls were created. The report was far from stellar but it was seen as strong enough to signal stability in hiring in a sluggish economy, and it was weak enough to keep the Fed from acting quicker to pare back its bond purchase program. Many in the markets believe the Fed will begin to taper off its $85 billion a month in bond purchases in September or later.
The S&P 500, after falling through its 50-day moving average Thursday, regained its footing and ended the week at 1643, up 0.8 percent. The 10-year was yielding 2.17 late Friday, capping a week of big swings, including a dip below 2 percent Thursday.
Analysts expect the volatility to continue but are divided on the trajectory for stocks. The S&P was about four percent off its highs on an intraday basis Thursday before it turned higher.
"Two weeks ago, the market was overheated. What the last week and a half did was a re-rack for the market, for those wanting to buy a dip," said Scott Redler, of T3Live.com. Redler said if the market can consolidate before moving back to the 1655 level, it could be heading into record territory again by July 4.
Analysts say that volatility has to do with a change in the way the bond market is viewed. Bond yields have been moving higher in anticipation of the Fed tapering off its purchases. In the week ending Wednesday, $9.1 billion in outflows hit bond funds, the second highest level since Lipper began compiling data in 1992.
"The thing we've identified as being the big switch here is this bond market volatility that's been introduced, and that's made the market more volatile. This has taken the stock market rally since the beginning of the year, and put it in perspective. I think that's going to be the hallmark of the second half of the year. It's the end of the 30-year bull market in bonds,"said John Canally, LPL Financial investment strategist and economist.
Canally said bond yield implied volatility, which has risen periodically through the financial crisis is elevated once more.
Goncalves, however, said yields could still move lower, if the economy weakens or stocks sell off sharply. "I still think the bond market overreacted to this thing. There's a very low appetite and no one really with strong appetite to buy. That's a sign of getting close to a top of a range. We've seen these yields around 2.20 for the past couple of weeks," he said. "If the BOJ doesn't disrupt the Japanese bond market and volatility calms down, I think Treasurys could rally a little bit after the auction,and then it matters how the market goes into the Fed meeting and how they communicate things."
Wells Fargo Advisors chief macro strategist Gary Thayer thinks Fed tapering comes later. "We think the fundamentals support the market where they are now. We don't think they're mispriced. I think the Fed is doing a good job. We'd be more concerned about Fed policy if the dollar were weakening and business and consumer confidence were going down," he said.
"One of the hurdles (for stocks) is we're moving into the summer season where there could be less liquidity and a little more volatility.That could be the challenge. The first part of the year when you have people investing for the year and flows are coming in. Over the summer time, we're not seeing a significant pullback but we could see volatility," he said.
What to Watch
Two-day Bank of Japan meeting starts
7:30 am: NFIB survey
10:00 am: Wholesale trade
10:00 am: JOLTS
1:00 pm: $32 billion 3-year note auction
1:00 pm: $21 billion 10-year note auction
0200 pm: Federal budget
8:30 am: Initial claims
8:30 am: Retail sales
8:30 am: Import prices
10:00 am: Business inventories
1:00 pm: $13 billion 30-year bond auction
8:30 am: PPI
8:30 am: Current account
9:15 am: Industrial production
9:55 am: Consumer sentiment