Oil prices edged above March and May highs as OPEC+ weighs in on Russia issue

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(Wednesday Market Open) Better than expected earnings report from Salesforce.com RCMP leads the stock higher, gaining more than 9% in premarket trading. Stock index futures point to a higher open as investors try to rebound from yesterday’s retreat.

Market potential movers

Despite the positive news from Salesforce, the title may struggle to find its footing. The 10-year Treasury yields (TNX) is up another 2.5 basis points, adding to yesterday’s 10 basis points as the Fed’s balance sheet cleanup begins on June 1. Rising yields could put pressure on growth stocks, which means the consumer discretionary and technology sectors could have a tough day.

Treasury yields could come under further pressure oil futures, which were up 1.6% before the stock market opened. The upcoming OPEC+ meeting could be interesting for Russia, as other countries may choose to increase production to enter Russian oil markets. However, OPEC members could risk losing a valuable partner with Russia as the Russian-Ukrainian war has nations picking sides.

The Cboe Market Volatility Index (VIX) is lower this morning, but the last two times it has hit this level in the past month and a half, it has been rising. Just as stocks seem to be absorbing bad news and building a bottom, this could be a pivotal level for traders.

After opening, investors will see key ISM Manufacturing reports and JOLTS job postings. US manufacturing was weaker, according to the ISM report. Almost every month, the report reflected a slowdown from January 2022. Manufacturing is expected to fall again. However, the labor market remains strong. JOLTS are expected to be lower than previous months, but still near all-time highs.

Market Minutes Review

Stocks failed to extend the rally that ended a nearly two-month losing streak on its last trading day in May, one of the most tumultuous market months in recent memory. The S&P500 (SPX) and the Dow Jones Industrial Average ($DJI) ended nearly flat with its April close as investors turned their attention to key employment data arriving later in the week.

A Memorial Day filled with news on Europe’s toughest energy sanctions yet against Russia, rising global inflation and the Fed’s latest moves set an uncertain stage for the week’s market rally to continue. last.

All but two of the S&P 500 sectors ended lower on Tuesday, with consumer discretionary stocks the biggest gainer, up 0.76%, followed by communication services, up 0.41%. The S&P 500 fell 0.6% on Tuesday after ending its seven-week decline ahead of the long weekend, while the Dow Jones Industrial Average ($DJI) lost 0.7%, leaving both major indexes virtually unchanged for the month at the close. The Nasdaq Compound ($COMP) fell 0.41% on the day.

The Conference Board’s monthly report showed that consumer confidence fell slightly in May compared to previous months, and Crude Brent rode a rollercoaster ride before ending up 1% after European Union leaders announced an oil embargo on Russia, their toughest energy sanctions to date. And in a key report on the direction of the housing market, the S&P Case-Shiller home price index showed house prices rose more than 20% in May, even as interest rates were increasing.

Although cloud software leader Salesforce beat both upper and lower estimates, its CEO said he expects to be more “measured” in future hires. Investors will likely be watching today’s Job Openings and Job Turnover (JOLTS) report, tomorrow’s jobless claims numbers and Friday’s May jobs report for signals as to whether the country’s still hot labor market could finally cool down. Estimates show nonfarm payrolls likely fell to 320,000 in May from 428,000 in April.

CHART OF THE DAY: BACK TO HIBERNATION? The S&P 500 (SPX — candlesticks) tested historic bear market territory on May 20 to close Tuesday near its starting point at the top of the month. Data sources: ICE, S&P Dow Jones indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three things to watch out for

It’s time to relax: June 1 marks the first day of the Federal Reserve’s plan to shrink its pandemic-era balance sheet, which hit nearly $9 trillion at the height of the crisis. A large portion of Fed bonds are expected to simply mature and not be replaced, which will not directly affect Treasury prices. However, without the Fed buying bonds, bond markets could experience liquidity problems. Lower liquidity could lead to greater volatility in bond markets.

Tuesday, the 10-year Treasury yield (TNX) jumped 2.74% to 2.84%, or 10 basis points. Rates are expected to continue to rise as the Treasury market seeks to lure investors into bond markets to make up for lost demand from the Fed. The last time the Fed tried to clean up its balance sheet in September 2019, overnight rates soared as bank reserves got too low. However, the Fed has attempted to account for this risk by setting up a standard repo facility that will function as a permanent safety net. Bank reserves are also more than double what they were in 2019.

Wheel greasing: Treasuries could also come under increased pressure from rising oil prices. WTI Crude Oil Futures continue to climb slightly and are currently trading above their March and May highs. Last week, BofA Global Research warned that Brent crude oil could hit $150 a barrel without Russian oil exports. The International Energy Agency (IEA) estimated last week that Russia had already cut production by almost a million barrels of oil a day.

NATO and its allies have struggled to present a united front against Russia due to the need for Russian oil. Countries like Italy and Hungary continue to depend on Russian imports.

Don’t Fly in June: Data from Schroders shows that June has the worst record in terms of number of stock market gains for the S&P 500, FTSE100, MSCI World and EURO STOXX 50 from 1987 to 2018. December, April and October were the best months for the market. gains while June, August and September were the worst. Of course, past performance is not a predictor of future results, the old adage of “sell in May and leave” has historically shown some merit.

If yields rise in June due to the Fed’s lack of liquidity and/or rising oil prices, we could see a continued revaluation of stocks as we have seen in the first five months of 2022.

Notable Calendar Items

June 2: Broadcom Earnings AVGOlululemon LULUand Hormel Foods HRL

June 3: Employment Situation Report, ISM Non-Manufacturing PMI and Crowdstrike Earnings CRWD and DocuSign DOCUMENT

June 7: US trade balance and JM Smucker’s income SJMVerint Systems VRNTand Cracker Barrel CBRL

June 8: Campbell’s Soup Earnings pcb

June 10: May Consumer Price Index (CPI) and preliminary results from the University of Michigan Consumer Sentiment Index

TD Ameritrade® Commentary for educational purposes only. SIPC member.

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investment advice.

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Felix J. Dixon