Focus set to remain on geopolitics
The last three trading sessions in May are likely to be influenced by geopolitical issues rather than economic data. The ongoing US-China trade negotiations, the mystery surrounding the US-North Korea summit, and uncertainty in European politics are all likely to impact the market this week. Oil (USO) price volatility could also impact markets.
Last week (ended May 25), traders’ sudden realization that the supply decline because of sanctions on Iran and disturbances in Venezuela could be offset by increased production from Russia and OPEC (Organization of the Petroleum Exporting Countries) countries led to a sharp fall in the energy sector (XLE). This decline could continue if the negative outlook for crude prices persists this week.
Payrolls expected to bounce back in May
Many traders are waiting for US non-farm payroll data, which is scheduled to be released on Friday. Their focus will likely be on average hourly earnings growth rather than the number of jobs added. If average hourly earnings increase more than expected, inflation (TIP) expectations could rise, boosting interest rates. Higher interest rates could put upward pressure on yields and the US dollar, while equity markets could be subjected to some selling pressure if yields rise too quickly.
Could there be some sector rotation?
Last week, we saw sector rotation within the S&P 500 (SPY), with the defensive utilities (XLU) sector gaining the most (1.3%). The energy, materials, and financial sectors (XLF) fell 4.5%, 1.4%, and 0.36%, respectively. The energy sector was down because of lower crude oil prices, the materials sector has remained under stress because of tariffs, and financials were impacted by lower bond yields. Increased concerns about geopolitical tensions could lead to demand for safe-haven bets and continued sector rotation in the week ahead.