Uncertainty surrounding the future of the Italian government sent equity markets lower around the globe on Tuesday as U.S. investors returned to the trading desk for the first time this week following an extended Memorial Day weekend. The S&P 500 lost 1.2% on Tuesday, settling at a three-week low, while the Dow and the Nasdaq ended lower by 1.6% and 0.5%, respectively. The small-cap Russell 2000 showed relative strength, settling lower by just 0.2%.
On Sunday, Italian President Sergio Mattarella moved to block the formation of a euroskeptic government, vetoing the economic minister nominee of an anti-establishment coalition that's aiming to come to power. The president's veto puts Italy on track for a snap election, which some insiders fear could become a de facto referendum on Italy's membership in the European Union. Italy's major stock index, the MIB, dropped 2.7% on Tuesday, extending its two-week decline to 12.1%. Italian debt also dropped, sending the yield on the Italian 10-yr bond seven basis points higher to 3.18%, a fresh four-year high.
Separately, Spain's major stock index, the IBEX, tumbled 2.5% on Tuesday after the country's parliament agreed to a vote of confidence in Prime Minister Mariano Rajoy's leadership following a corruption scandal involving 29 individuals with ties to Mr. Rajoy's People's Party. The vote is scheduled for Friday.
In a flight to safety, European investors bid up German bunds, sending the 10-yr bund yield eight basis points lower to 0.25%, which is its lowest level in nearly a year. American debt was also in demand, pushing yields lower across the curve. The yield on the benchmark 10-yr U.S. Treasury note, for instance, dropped 16 basis points to 2.77%, which is a fresh seven-week low. The 10-yr yield is now about 35 basis points below the seven-year high it hit less than two weeks ago on May 17.
Financial shares sold off sharply in reaction to the sudden decline in yields. The S&P 500's financial sector ended lower by 3.4%, closing at the bottom of the sector standings by a comfortable margin; the next-worst performing group was materials with a loss of 1.8%. On the flip side, the rate-sensitive utilities (unch) and real estate (+0.3%) sectors were the top performers.
European political worries weighed heavily on the euro, which dropped 0.8% against the U.S. dollar to 1.1539, hitting its lowest level in nearly a year. The dollar's relative strength didn't bode well for most dollar-denominated commodities, including crude oil. West Texas Intermediate crude futures dropped 1.7% on Tuesday to $66.78 per barrel, slipping further from the three-and-a-half year high they hit last week. In addition to a strengthening dollar, concerns that Saudi Arabia and Russia are planning to ramp up production have weighed on crude prices as of late.
Some late buying brought the major U.S. stock indices up from their lowest marks of the day in the final minutes of the session. At its session low, the S&P 500 was down 1.6% at 2677, which is just five points above its 50-day moving average. Meanwhile, the Dow was down as much as 2.0%, and the Nasdaq was down as much as 1.1%.
Reviewing Tuesday's economic data, which was limited to the Conference Board's Consumer Confidence Index for May and the S&P Case-Shiller Home Price Index for March:
- The consumer confidence reading for May increased to 128.0 (Briefing.com consensus 127.5) from the prior month's revised reading of 125.6 (from 128.7).
- The key takeaway from the report is that consumers' assessment of current conditions is at a 17-year high, which matches up neatly with the understanding that the unemployment rate is at a 17-year low.
- The Case-Shiller 20-city Index increased 6.8% in March (Briefing.com consensus +6.4%), while the February increase was left unrevised at 6.8%.
On Wednesday, investors will receive a number of economic reports, including the weekly MBA Mortgage Applications Index, the ADP Employment Change report for May (Briefing.com consensus 183K), the second estimate of first quarter GDP (Briefing.com consensus 2.3%), both the Advance International Trade in Goods (Briefing.com consensus -$70.7 billion) and Advance Wholesale Inventories reports for April, and the Fed's Beige Book for April.
- Nasdaq Composite +7.1% YTD
- Russell 2000 +5.7% YTD
- S&P 500 +0.6% YTD
- Dow Jones Industrial Average -1.5% YTD