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Situation in Iraq Begins to Take a Toll on US Markets


Today's financial recap and tomorrow's financial outlook.

US markets continued to sell off today. The S&P 500 (INDEXSP:.INX) finished down 0.71% and was down as much 18 points today. Small-cap stocks outperformed while high-beta tech stocks fared very poorly. A number of catalysts caused the weakness. Iran announced that it had sent Revolutionary Guard troops into Iraq to help fight extremist militants who had begun advancing on Baghdad. Together with the Iraqi army, the two groups had recaptured the town of Tikrit. However, investors expect this violence to continue to spread and the Iraqi government has now asked the US for military aid in the form of air strikes and weapons. The US said today that it would consider the use of drone strikes, but no troops would be used.

The May retail sales report showed less growth than economists had expected, although the prior month's sales were revised up to even out the shortfall. Retail sales rose 0.4% month-on-month, short of the 0.6% expected, but April was revised up to +0.4% from +0.1%. The weakness in core groups such as apparel, food & drinking, and restaurants overshadowed the strength in auto sales, which kept a bid to Treasuries throughout the day. Jobless claims rose to 317,000 in the week ending June 7, up from 313,000 in the prior period.

Crude oil jumped nearly 2% today as the market began to reprice the potential supply lost if rebels seized Iraq's oil fields. In addition to the production, a significant amount of foreign-produced oil flows through Iraq's pipelines, which could also be lost. Oil service and production stocks were also up strongly. However, due to a 1.8% aggregate increase in jet fuel prices today, many airline stocks underperformed the market badly. Jetblue (NASDAQ:JBLU) was down 4.85%. (NASDAQ:AMZN) announced a new music streaming feature for subscribers to its $99 per year Prime delivery and digital content service. In keeping with the broader tech selloff, Amazon shares fell 2.74%.

Also see: Amazon Prime Music Review: An Early Look From a Spotify Fan

Tesla Motors (NASDAQ:TSLA) CEO Elon Musk said that the company would not pursue patent lawsuits against competitors who want to use Tesla technology.  Musk explained that Tesla "was created to accelerate the transition towards sustainable transports," and that litigation would work against that goal.

Tomorrow's Financial Outlook

The main catalyst for risk assets tomorrow will be any further developments in Iraq overnight and early tomorrow morning. There are two economic reports scheduled tomorrow: May producer prices and results of the preliminary June University of Michigan/Reuters consumer confidence index. The producer prices report is expected to increase by 2.4% year-on-year, which should cause market participants to question whether the rise could cut into further economic activity as manufacturers might be unable to pass on the price increases. The consumer confidence is expected to rise to 83.0 from 81.9 last month.

A series of big Chinese economic reports are due out overnight: May retail sales, industrial production, and fixed asset investment. All are expected to show nominal increases from the prior months.

There are no major earnings reports scheduled for tomorrow.

Twitter: @Minyanville

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