Week Ahead: U.S. Equities To Head Higher? Oil, Euro, Sterling Lower?

 | Jun 03, 2018 08:20AM ET

  • Russell 2000 posts third straight record, suggesting trade still key
  • NASDAQ finishes week less than half-percent from March record
  • SPX tech sector hits new record
  • S&P advances for the week, Dow declines
  • NFP beat boosts dollar
  • Oil hits lowest point since early April
    • h2 Glass Half Full Or Half Empty?/h2

    On Friday—after a week in which the major US equity indices whipsawed on a daily basis, jumping between gains one day and losses the next, driven by geopolitics and trade war fears—the Russell 2000 posted its third straight record, closing up 0.88% on the day; the NASDAQ Composite closed less than half a percent off its March record, up 1.51% on the day; the S&P 500 advanced 0.5% on the week, up 1.08% on the final day of trade, while the Dow, which closed +0.90% on Friday down 0.5% for the week.

    As well on Friday, the key Nonfarm Payrolls release for May, which came in at 223,000 jobs added to the economy, handily beat the 188,000 estimate.

    Do the numbers tell us something about what the coming week's trajectory for US stocks might be, on the heels of the past week’s turbulent and uneven results? Should traders focus on the glass half full via the S&P's upbeat weekly advance or should they instead recognize that the glass may be half empty, after the Dow's retreat for the week?

    While political instability in Europe, renewed tariffs and even the unexpectedly positive jobs report contributed to market choppiness, we believe the glass is half full and getting fuller.

    h2 Trade War Fears Increasing
    /h2

    Fundamentally, the US economy continues to chug along, as May’s employment report signals. In addition to jobs added, the unemployment rate fell to 3.8 percent, beating the expectation of 3.9 percent, for an 18-year low. Equally optimistic, the modest, 2.7 percent YoY average hourly earnings growth denotes a “Goldilocks Economy,” one that grows at a tempered and therefore sustainable pace, allowing the Fed to keep gradually raising rates while still supporting household spending.

    Concerns that Italian political instability would spread to the rest of Europe and beyond have dissipated for now, after the country's new populist government was sworn in on Friday , ending the deadlock that had earlier hampered the formation of a new coalition and threatened the stability of the eurozone and its single currency.

    The biggest fundamental fear as the new trading week begins remains the growing threat of a trade war, after the Trump administration implemented some of the previously announced tariffs on steel and aluminum imports from the EU, Canada and Mexico. Unanswered but critical questions for traders, such as whether ongoing negotiation might end the dispute and what kind of impact it would have on growth will likely drive the market narrative going forward.

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    Indeed, the fact that the Russell 2000—on which smaller, domestic-focused companies are listed—gained 1.3 percent on the week, plus hit fresh records three weeks running, is clear proof that trade and any uncertainty surrounding it now provides the strongest headwind for stocks. The small cap index also extended its rally for a fifth straight week, as it completed a continuation pattern.

    Technically, the S&P 500 confirmed its long-term uptrend, when it bounced off the triangular consolidation since late January. As well, the Dow Jones Industrial Average did not slip back into a downtrend. Moreso, its 0.5 percent decline for week should still be viewed as bullish, considering it trimmed a much deeper, 2.00 percent plunge. The NASDAQ Composite closed with a second weekly gain, completing a bullish pattern.