Michael Reinking:
Hello, I'm Michael Reinking, Senior Market Strategist at The New York Stock Exchange, and this is Market Storylines. Every week we are here to keep you up to date on the key trends and events driving global markets. We are recording on Thursday ahead of Memorial Day weekend, so let's dive into this week's Market Storylines.
Now, after the de-escalation of trade tensions with China, the S&P 500 closed higher in every session last week, ending up over 5%, reclaiming its 200 day moving average, and bringing the rally off of the lows to over 20%, leaving the index slightly higher for the year. Now, according to Goldman Sachs last Friday's options expiration was one of the largest for the month of May in history with much of that exposure in upside calls. Now with those positions rolling off, we questioned whether that would open the door for some volatility to be reintroduced back into the market this week.
Now, the first piece of tinder for that volatility came shortly after the close on Friday as Moody's cut the credit rating for US government debt. Now, this wasn't a shocking development as Moody's had the US on credit watch negative for about a year and was the last rating agency to maintain the top credit rating. And with said the single notch downgrade to Aa1 from Aaa reflects the increase over more than a decade in government debt and interest ratios to levels that are significantly higher than similarly rated sovereigns.
While this wasn't surprising, it did once again shine a light on the increasing political partisanship and growing fiscal deficits, as both of those things were on full display in Washington with the House of Representatives working on its version of a tax and spending bill, more affectionately known as One Big Beautiful Bill.
Now coming out of the weekend, Treasury yields at the long end of the curve were up over 10 basis points as we approached the opening bell, while S&P futures were down around 1%. However, Treasury started to catch a bit after the 30-year yield briefly crossed over 5%, and by the end of the day, the S&P 500 had recouped all of the initial losses. However, this provided some foreshadowing for the volatility that would come in the following days.
Now, Tuesday was kind of a quiet session with US indices pulling back modestly but trading completely within the previous day's range. However, sovereign debt markets were once again in focus after a very poor 20 year auction in Japan, which had its worst demand in over a decade. Now, like the US, Japan is facing its own fiscal issues, which the Prime Minister said was worse than Greece earlier this week. Now, at the same time, the Bank of Japan, which has been a big buyer of bonds for years, is trying to unwind its QE program, removing a source of demand. Now, the weak auction sent local yields up over 15 basis points, hitting the highest level in decades.
Now, this weakness bled into US Treasury markets during the US session with the long end coming under some pressure again ahead of a 20 year Treasury auction on Wednesday. Now, as the contours of the Big Beautiful bill continued to be hashed out in Washington, it was another quiet day in equity markets until that Treasury auction tailed at 1:00. Now, this triggered some additional technical selling in Treasuries, pushing yields through recent highs and led to a bit of an air pocket in US equity markets as there was a bit of a perfect storm following the recent rally, the technical conditions in place, and the thinning out of attendance ahead of the holiday weekend. Now, the S&P 500 fell over one and a half percent while small and mid cap indices were down nearly 3%, as those companies are more impacted by higher funding costs.
So let's talk about the 20 year Treasury and the impact of this auction. Now, the 20 year is often considered the black sheep of Treasury markets, and this was a small auction which would not normally garner much attention. It was not surprising to see a bit of a sloppy auction, but I wouldn't necessarily read too much into the reaction. Now, there seems to be a bit of a buyer strike for duration as investors weigh shifting supply and demand dynamics, Fed expectations, and growing fiscal deficits, which is increasing the term premium investors require to hold longer maturity paper.
Now, this morning, after a couple of long days of contentious deliberations, unlike the Knicks last night, House Republicans were able to close out the game, passing their version of the One Big Beautiful Bill before the self-imposed Memorial Day deadline. Now, this is the first step in a process and now the ball moves to the Senate, which will need a majority vote under the reconciliation process before a final bill is marked up. The administration is targeting a final bill on the President's desk around July 4th, but the real deadline is the X date, which the Treasury currently suggests is in the late summer. So this process is far from over.
This morning it was at once again the initial reaction in Treasury markets that got some attention as 30 year yields retested the 2023 highs just over 5.1% ahead of the open, which put equity futures under some pressure. Now yields have since reversed now a little bit lower on the day and equities have also stabilized. Now this morning the claims data held steady and flash PMIs showed some improvement from last month, which along with the corporate commentary throughout this week suggests the economy continues to hold up.
Now for the week, the S&P 500 is down around one point a half percent, which in the context of the recent move is not particularly alarming. It is worth noting that while 30 year yields are near multi-year highs, the 10 year, which is the key benchmark for financial markets and businesses, is about unchanged year-to-date and still about 30 basis points from its January high. As we've noted in the past episodes, as rates reset, it is not necessarily the level of rates, but the speed of the move and uncertainty as to where it stops that can create volatility in equity markets.
Now, as we close out this week, I'd expect attendance and volumes to thin out. There isn't too much on the calendar tomorrow, though inflation data in Japan could get some attention overnight. Now after the close, the preliminary addition and deletions for June's Russell Reconstitution will be released. Now, looking ahead to next week, US markets are closed on Monday. The key economic data comes at the end of the week with revisions to GDP and PCE, the Fed's preferred gauge of inflation.
Now this week, the late cycle tech and retail earnings have been pretty good. Those reports will continue to flow in next week with all eyes on the Nvidia earnings after the close on Wednesday.
That's going to do it for this week. I hope you enjoy the long weekend and some time with friends and family. Remember, you can always watch Market Storylines on our tv.nyc.com or our YouTube channel or listen on the Inside The Icehouse Podcast feed. I'm Michael Reinking. Thanks for joining me and I'll talk to you again next week.
Speaker 2:
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