Market may get a boost if Fed delays rate hike

LAST week, stocks finished flat because of a nasty shock from the jobs market but the implications of that report could boost the market this week, should they change the hawkish tone at the US Federal Reserve.

Jobs growth slowed to a crawl in May, with the US economy adding a mere 38,000 jobs instead of the roughly 100,000 economists had expected, for the slightest growth rate since 2010. That was partly a function of the strike at Verizon, one of the largest US employers, said Quincy Krosby, market strategist at Prudential Financial.

The disappointing data raises the stakes even further for Federal Reserve chair Janet Yellen's speech in Philadelphia on Monday. "Investors have been looking at each piece of data, particularly employment release, through the prism of the Fed," explained Ms Krosby. On Monday, "she has the opportunity to change the message to the markets and perhaps in essence suggest that she needs to see more proof that the economy does, in fact, have a stronger underpinning".

Any such assurance could well fuel a surge in some of the areas that were beaten down during intermittent rate-hike panics of the last six months - raw materials, energy, telecommunications and utility stocks.

For raw materials and energy, the rate picture is one of several shifting dynamics. Metals miners have gained in recent weeks because the US has imposed levies on steel imports from China and brought trade cases against steelmakers there.

The almost doubling of oil futures in the last three months was predicated on the idea that a reduction in activity on US shale oilfields would help clear the global glut. In the old days, wells were shut in for years, causing long upward and downward cycles in oil prices. Now, however, US drillers appear reluctant to plug wells with cement and have become more nimble in their responses to oil-price movements.

Meanwhile, the pace of change in the renewable-energy industry has taken many by surprise. Solar and wind power are becoming cost-competitive with fossil-fuel plants and mass-market electric cars looking closer than ever. China is spearheading this charge into the alternative energy sector. The oil-based global economy is under such threat that Saudi Arabia is developing a Plan B. "It is clearer now more than ever that technology has massively altered the energy landscape," said analysts at brokerage Morgan Stanley, in a research note.

For utilities and telecoms, rates are the biggest factor. These relatively safe, dividend-paying businesses compete with Treasury bonds for investment from retirees seeking to live off dividend payments. At times when Treasury rates are high, retirees don't need to take the risk of company failure or plunging electricity or service prices that come with utility and telecom stocks.

Those sectors led the stock market in the first quarter when the Fed postponed hikes because of economic fears and could do so again this week if Ms Yellen foreshadows another postponement.

But the positive implications of a delayed rate hike for those sectors is offset by the negative implications for the much-larger financials sector.

One reason the stock market has been flat for almost 18 months is the constant rotation from sectors that benefit from higher rates into those that are hurt by them, and vice versa.

Financials were among the hardest-hit after the jobs report on Friday. Banks and lenders benefit from higher rates because they can earn more money on loans. Loans of all stripes are generally tied to Treasury rates and interest charged on them goes up automatically when benchmarks are shifted. Banks have much more discretion on the interest they pay out on deposit accounts so they can profit on the "spread" between interest earned and interest paid.

The other big event this week is the finale of primary season. While Hillary Clinton is almost sure to defeat Bernie Sanders based on the delegate count, her victory could yet be a Pyrrhic one. Should Mr Sanders win the grand prize - California - many of his supporters will likely feel disenfranchised. After all, California is the most populous state and, arguably, the heartland of the modern Democratic party. Sanders supporters have already threatened to abandon the Democratic party they feel has organised against their movement. To be sure of beating Donald Trump, Mrs Clinton would need the support of this young and energetic Sanders movement.

Polls conducted by the Los Angeles Times found that Mr Sanders leads among voters eligible to vote on Monday. Mrs Clinton leads among registered Democrats and those with a proven record of voting, but that may not be enough.

Usually, Wall Street traders embrace anti-regulation candidates like Mr Trump. This time, however, the candidate's unpredictability and stance on trade make him a bigger unknown. This summer, stocks could fall if the Democratic Party remains divided and "The Donald" emerges as the favourite to take the White House.