U.S. equity markets began June on a very weak note, as stocks plunged across the board thanks to weak data which undermined investor confidence in a recovery. The Dow finished the day down close to 280 points–a 2.2% drop–while the Nasdaq and the S&P 500 both suffered losses of about 2.3% thanks to steep falls in the financial, basic material, and high tech sectors. After this tumble, investors also pulled their money out of commodities as well, as all of the energy products saw heavy losses on the day while most of the soft commodities sank too (led by 3% losses in both the sugar and coffee futures contracts). Even safe havens were not immune as silver resumed its downturn from early May, falling by 4.2% in the session. In fact, only gold and a few grain commodities managed to finish the day in positive territory. This wasn’t surprising given the ‘flight to quality’ during Wednesday trading; the U.S. dollar index rose by 0.4% to finish just below the 75 mark thanks to gains against many of the commodity currencies such as the Canadian and Australian dollars. This push to greenbacks allowed the 10 year note the opportunity to gain sharply on the day as yields for this benchmark fell by over 11 basis points to well below the 3.00% mark. “The barrage of very weak data was correct in predicting a consistently weak ADP report, and there will be a significant reduction in market expectations for Friday’s payroll number, even if the consensus is moved only modestly lower,” said Richard Gilhooly, U.S. director of interest-rate strategy at TD Securities. “If nonfarm payrolls is similarly weak, a 20-basis-point rally would appear to be in the cards.”
One of the biggest winners in the ETF world was the iPath S&P 500 VIX Short-Term Futures ETN (VXX), which soared higher by 6.3% on the day. Today’s gains came thanks to continued worry over the health of the global economy as many traders sought this ETN as shelter from the storm. In fact, today’s volume was nearly 31.2 million shares; a huge increase from the fund’s daily average of roughly 18.2 million, suggesting that close to half of the shares outstanding traded hands today. This high level of interest in the product was largely thanks to the incredibly weak data which hit virtually every sector of the American economy. First, investors sold off securities thanks to a disappointing bad ADP jobs report which showed that just 38,000 jobs were created in the month of May–far short of the expected increase of 210,000. Shortly thereafter, investors faced the ISM manufacturing index which showed that the benchmark dropped to 53.5, below the consensus range and roughly seven points below the prior reading. This deluge of bad news caused the major sell-off in the market today and led many to the safety of U.S. Treasury bonds as well as VXX [see more on VXX's Fact Sheet].
One of the biggest losers in the ETFdb 60 was the Financial Select Sector SPDR (XLF), which sank by 3.4% in Wednesday trading. These sharp losses were the result of the fears of the slowdown in the broad economy impacting the banking sector. This is because many assume that with lower levels of jobs and a stagnant economy, demand for loans will be lower and those that are outstanding will be tougher for borrowers to pay back. This assumption hit the large borrowers that do a lot of consumer lending especially hard as Wells Fargo fell by 5% while Bank of America and PNC averaged a loss of close to 4.1% on the session. However, the investment sector wasn’t immune either as Goldman Sachs tumbled by 3.2% and Morgan Stanley slid by 4.2% as well, suggesting that the sell-off was pretty broad and deep in the financial sector. “It’s going to be a tougher environment for banks,” said Jason Ware, an equity analyst with Salt Lake City-based Albion Financial. “The question is whether this is a 3- to 6-month economic slowdown, or something more protracted.” [see holdings of XLF here]
Disclosure: No positions at time of writing.