Weekly Market Update – 18 June 2018 BMO

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WEEK IN REVIEW – 11 to 15 June 2018 :
Little Changed Following Headline-Heavy Week

There was a steady stream of noteworthy news this week, but none of the headlines moved the S&P 500 in a significant way. The benchmark index ended the week almost exactly flat, adding less than one point. The tech-heavy Nasdaq outperformed, adding 1.3%, while the Dow lagged, losing 0.9%.

This week’s story really began over the weekend when the annual Group of Seven meeting, which was held in Quebec, ended on an uncharacteristically contentious note. President Trump was prepared to sign the customary joint statement, but changed his mind following what the White House deemed as “inappropriate” comments from Canadian Prime Minister Justin Trudeau.

The world then turned its attention to Singapore, where President Trump met with North Korean leader Kim Jong Un on Tuesday in a historic summit that marked the first ever meeting between a sitting U.S. president and a North Korean leader. The meeting ended with a joint statement in which North Korea reaffirmed its commitment to completely denuclearize and the U.S. promised “security guarantees” – including the suspension of military exercises on the Korean Peninsula. The two nations will engage in follow-up negations to work out the specific details.

Monetary policy took center stage midweek when the U.S. Federal Reserve released its latest policy directive. The Fed decided to raise interest rates for the second time this year, increasing the fed funds target range by a quarter point to 1.75% to 2.00%, and upped its interest-rate forecast to include a total of four rate increases this year – up from three in March. The market had expected the rate hike, but the updated forecast took some by surprise.

Overseas, the European Central Bank released its latest policy directive on Thursday. As expected, the ECB left its key policy rate unchanged and announced a plan to end its asset purchase program. The ECB in September will cut its monthly purchases in half, from EUR30 billion to EUR15 billion, and then end purchases altogether three months later – although it will continue to reinvest the principal from maturing securities. As for interest rates, the ECB said they will remain at their present levels “at least through the summer of 2019.” That statement was credited with sending the euro down more than 1.0% against the U.S. dollar.

The Bank of Japan also conducted a policy meeting this week, but made no changes to its key interest rate. However, the BoJ did downgrade its view on inflation, further highlighting the difference between the BoJ, which is struggling to end its crisis-era stimulus, and the Fed, which continues to progress on a path to normalization.

Back in the States, media names were in focus after a federal judge on Tuesday ruled in favor of AT&T (T) in its drawn-out legal battle with the Justice Department. The ruling allowed AT&T to move forward with its acquisition of Time Warner (TWX), which it closed on Thursday, and set the stage for more merger activity in the future. Comcast (CMCSA), for instance, outdid Disney’s(DIS) all-stock bid for the bulk of 21st Century Fox’s (FOXA) assets following the ruling, offering $65 billion in cash.

In politics, trade war fears were reignited on Friday after President Trump confirmed that he’s approved a 25% tariff on $50 billion worth of Chinese goods. China responded swiftly, announcing that it’ll impose a 25% tariff on $34 billion worth of U.S. goods on July 6, the same day the U.S. tariffs are scheduled to take effect.

(Excerpts from Briefing.com)

Friday Update: Trade War Fears Re-Enter the Mix

Trade war fears weighed at the start of Friday’s session, but stocks rebounded intraday, leaving the major averages just modestly lower. The S&P 500 was down as much as 0.7%, but ended with a loss of just 0.1%. The Nasdaq slipped 0.2%, retreating from Thursday’s record high, while the Dow lost 0.3%.

President Trump confirmed before the open that he’s approved a 25% tariff on $50 billion worth of Chinese goods and warned of additional tariffs should China retaliate. Unfazed by the threat, Beijing announced that it will impose a 25% tariff on $34 billion worth of U.S. goods starting on July 6, which is when the U.S. plans to impose its tariffs. Beijing also noted that a tariff on another $16 billion worth of U.S. goods could be imposed at a later date and said any previously negotiated agreements, including China’s offer to buy nearly $70 billion of U.S. goods, will be invalid.

The S&P 500 sectors ended Friday pretty evenly split between green and red. Five groups advanced, led by the countercyclical consumer staples (+1.3%), utilities (+0.7%), and telecom services (+1.2%) spaces, while six groups declined. The energy space (-2.1%) finished at the back of the pack by a wide margin as crude prices tumbled.

West Texas Intermediate crude futures dropped 2.7% to $65.06 per barrel, their worst close since hitting a two-month low on June 6. Crude traders have their eyes on next week’s OPEC/non-OPEC meeting where oil producers are expected to raise their production targets in order to combat falling output from Venezuela and Iran.

In addition to energy, the top-weighted technology sector (-0.5%) also underperformed, with mega caps Apple (AAPL) and Microsoft (MSFT) dropping 1.0% and 1.3%, respectively. Adobe Systems (ADBE) also struggled, losing 2.4%, despite beating quarterly earnings estimates.

Elsewhere, AT&T (T) completed its acquisition of Time Warner after the Department of Justice decided against applying for a delay of Tuesday’s ruling, and shares of General Motors (GM) spiked intraday following a Bloomberg report that the company is having early discussions with banks about strategic options for its self-driving car unit Cruise Automation.

U.S. Treasuries were fairly volatile on Friday, with the yield on the 10-yr Treasury note drifting between 2.89% and 2.94%. The benchmark yield eventually settled two basis points below its Thursday close at 2.92%, while the yield on the 2-yr Treasury note lost three basis points, dropping to 2.55%.

Overseas, the Bank of Japan kept its key interest rate unchanged, as expected, but downgraded its view on inflation.

Reviewing Friday’s economic data, which included the Industrial Production and Capacity Utilization report for May, the preliminary reading of the University of Michigan Consumer Sentiment Index for June, and the Empire Manufacturing report for June:

Market Internals – Friday 15 June

Dollar: Dollar Index Holds its Ground

The U.S. Dollar Index was little changed at 94.80 after spending Friday inside a narrow range. The Dollar Index capped a daylong climb with its best settlement of the year while the session had been a lot more mixed, leaving the Index on track to gain 1.3% for the week. The greenback has retreated modestly against the euro and the pound, but it has continued rising against the Australian dollar and the Canadian dollar. The dollar’s performance against emerging market currencies has been mixed, but it is worth noting that the Argentine peso has slid to a fresh record low after surrendering a short-lived gain that was forged after former Wall Street trader Luis Caputo replaced Governor Federico Sturzenegger at the Central Bank of Argentina.

Bonds: Busy Week Capped With Gains

U.S. Treasuries finished a jam-packed week with gains across the curve. The trading day began amid reports that President Trump would call for the imposition of a 25.0% tariff on $50 billion worth of goods imported from China. This was met with a swift response, as Chinese officials called for a 25.0% tariff on $34 billion worth of imports from the United States to be imposed on July 6th while a tariff on another $16 billion worth of goods could be imposed at a later time.

Treasuries built on their opening gains through the first two hours of Friday’s session, but the advance found resistance near last week’s high. The market backtracked in midday action, but the selling abated once Treasuries approached their opening levels. The yield curve faced intraday pressure, but the 2s10s spread returned to unchanged at 37 bps by day’s end while the 2s30s spread expanded by a basis point to 50 bps.

The yield curve flattened as the 2 and 5 year yields advanced while the 10 and 30 year yields retreated for the week. The spread between the 5s10s narrowed to only 12 bps from 16bps the previous week while the 10s30s narrowed to 13bps from 14bps the previous week. 

 Commodities 

The Bloomberg Commodity Index settled at 89.22, lower than 90.98 the previous week as Metals, Energy and Grains continued their slides for another week.

Crude: Energy gets hit, WTI settles at $65.06/barrel, Brent $73.44/barrel

The spread between WTI and Brent narrowed to $8.38 from $10.70 the previous week.

EIA petroleum data for the week ended June 8

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.1 mln barrels from the previous week. At 432.4 mln barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories decreased by 2.3 mln barrels last week and are in the upper half of the average range. Both finished gasoline and blending components inventories decreased last week. Distillate fuel inventories decreased by 2.1 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories increased by 3.7 mln barrels last week and are in the lower half of the average range. Total commercial petroleum inventories decreased by 1.8 mln barrels last week.

Natural gas inventory showed a build of 96 bcf vs a build of 92 bcf in the prior week. Working gas in storage was 1,913 Bcf as of Friday, June 8, 2018, according to EIA estimates. This represents a net increase of 96 Bcf from the previous week. Stocks were 785 Bcf less than last year at this time and 507 Bcf below the five-year average of 2,420 Bcf. At 1,913 Bcf, total working gas is within the five-year historical range.

Baker Hughes total U.S. rig count decreased by 3 to 1059 following last week’s increase of 2.

Metals: Fall Back

Agriculture: Grains lower for another week

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THE WEEK AHEAD

Week 25 tends to start a little bullish but becomes bearish midweek and ends very bearish over our 10 and 15 year models. The 5-year average has been mildly bullish.

Benchmarks (21 year average) for wk25:

Key Economic Dates

Week 25

The US will publish existing home sales, building permits and housing starts, and flash Markit PMIs. Elsewhere, the BoE will decide on monetary policy. Other important releases include: UK CBI factory orders; Eurozone flash Markit PMIs; and Japan inflation, trade balance and Nikkei Manufacturing PMI.

Mon 18 June

Tue 19 June

Wed 20 June

Thu 21 June

Fri 22 June

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SUMMARY

Is that a new high on the benchmarks with the possibility of a new low? If it is, this is a nice gradient for an uptrend that breaks the parabolic nature of the last two years. If this persists through the next month, I might be inclined to think that we’ve begun the next leg up.

One glaring observation for the past week is the divergence between the benchmarks especially between the DJIA and the Dow Transports;

I’ll be watching for more of these price-to-price divergences in the coming sessions especially when the variances have been as wild as the past week.

In the meantime, the hikes keep coming and will continue to keep coming in spite of earlier speculations. This usually gives the market more upside legs.

To learn more about the relationship between the 10yr Yield, the FFR and the Market, read this article: Riding the Rate (The Fed Funds Rate, The Market & 2016

The Fed’s projections for the coming years also hint at more market upside as rates are expected to hit more than 3% by 2020.

Trade Wars aside, I reckon the rest of the month will be seeing higher highs. I am still cautious but less so. However, there isn’t a lot to choose from during this period to be reliably long.

As the end of June closes in, don’t forget the habitual (and illegal) Portfolio Pumping that could happen – given the year so far hasn’t been hugely profitable for the funds – as well as the Index Addition changes amongst the mid and small caps as the Russels swop around their components.

Guess I’ll stick with the indices and oil for now.

Happy Hunting!

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For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive enviroment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life, consider the Pattern Trader™ Tutorial.

If you want to know more about the Tutorial, download our promo slides here: The Pattern Trader™ Tutorial 2018

Send your queries, requests, bookings to:
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Find out more about the Pattern Trader Tutorial here:
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Selamat Hari Raya 2018

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Weekly Market Update – 11 June 2018 BMO

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WEEK IN REVIEW – 04 to 08 June 2018 : Third Straight Weekly Advance

The U.S. equity market advanced for the third week in a row, with the benchmark S&P 500 index adding 1.6%. The Dow Jones Industrial Average was particularly strong, adding 2.8%, while the Nasdaq Composite and the Russell 2000 touched new record highs, finishing the week with respective gains of 1.2% and 1.5%.

There were several notable corporate headlines this week, starting on Monday when the executive chairman and former CEO of Starbucks (SBUX), Howard Schultz, announced that he will be stepping down. In talking about his future plans, Mr. Schultz failed to rule out a run for the White House, prompting speculation that he’ll challenge President Trump in 2020.

Elsewhere in the consumer discretionary space, Tesla (TSLA) shares spiked on Wednesday after CEO Elon Musk said it’s “quite likely” that Tesla will hit its target for producing 5,000 Model 3 electric vehicles per week by the end of June. Retailers soared this week, sending the SPDR S&P Retail ETF (XRT) higher by 6.3%, following comments from Evercore ISI Research, which suggested that fears about Amazon’s (AMZN) ever-growing footprint may be overblown. Some short-covering activity also likely helped push retail shares higher.

Meanwhile, in the tech space, Facebook (FB) came under scrutiny once again following news that the social media company has data-sharing partnerships with at least four Chinese electronics companies, including one flagged as a national security threat by American intelligence officials. Separately, Apple (AAPL) shares dropped on Friday following reports that the company has asked its supply chain to prepare around 20% fewer components for iPhones debuting in the second half of 2018.

In Washington, Commerce Secretary Wilbur Ross said the U.S. has struck a deal to end crippling sanctions against Chinese telecom giant ZTE that includes a $1 billion penalty and the implementation of a U.S.-chosen compliance team to monitor the company going forward. ZTE will also be required to change its board of directors and its executive team. On a related note, China is reportedly ready to approve Qualcomm’s (QCOM) proposed acquisition of NXP Semi (NXPI).

Leaders from the Group of Seven (G7) kicked off their annual summit on Friday in the small Canadian resort town of La Malbaie. This year’s meeting is expected to be more contentious than usual due to President Trump’s decision to impose tariffs on imports of steel and aluminium. French President Emmanuel Macron has threatened to exclude the U.S. from the annual joint statement, symbolizing the strained relationship between the U.S. and its allies.

In Europe, the ECB’s Chief Economist, Peter Praet, said the European Central Bank will discuss how to wind down its asset purchase program at next week’s policy meeting after officials agreed that inflation is moving towards the central bank’s target of 2.0%. The euro responded by rallying against the U.S. dollar, adding nearly 1.0% for the week.

The Fed will also be meeting next week, and it’s all but certain that officials will hike interest rates for the second time this year. The question is whether the updated interest-rate projections, which will be released alongside the rate-hike decision on Wednesday, will call for one or two more hikes this year.

(Excerpts from Briefing.com)

Friday Update: Stocks Tick Higher, Extend Weekly Gains

The major averages ticked up between 0.1% and 0.3% on Friday, extending their weekly gains to 1.2%-2.8%. Stocks opened modestly lower as technology shares weighed, but the consumer staples and health care sectors helped turn things around later in the session. The day was pretty quiet in terms of headlines, although the Group of Seven (G7) did kick of its annual summit in Quebec.

President Trump is expected to be on the outside looking in at this year’s G7 summit after his decision to impose tariffs on steel and aluminum imports was met with resistance from U.S. allies. The president further stirred the pot on Friday by saying the G7 — which used to be the G8 before Russia got thrown out in 2014 for its annexation of Crimea — should let Russia back into the group. Investors weren’t spooked by the tension though, nor were they fazed by reports that Chinese government hackers stole massive amounts of highly sensitive data from a U.S. Navy contractor.

Nearly all S&P 500 sectors advanced on Friday, but gains were modest for the most part. The consumer staples sector was an exception though, adding 1.3%. Monster Beverage (MNST) was the top-performing consumer staples component, rallying 5.0%, following its annual shareholder meeting. The health care sector also showed relative strength, climbing 0.7% in a broad-based rally.

The energy (-0.2%) and utilities (unch) sectors were the only groups to finish Friday in the red, but the top-weighted information technology group also lagged, closing just a tick above its unchanged mark. Within the tech space, Apple (AAPL) lost 0.9% following reports that it has asked its supply chain to prepare around 20% fewer components for iPhones debuting in the second half of 2018, and Broadcom (AVGO) dropped 2.5% despite reporting better-than-expected quarterly results on Thursday evening.

Elsewhere, U.S. Treasuries finished Friday on a flattish note, with the yield on the benchmark 10-yr note ticking up one basis point to 2.94%. Meanwhile, West Texas Intermediate crude futures slid 0.3% to $65.76 per barrel, and the U.S. Dollar Index climbed 0.1% to 93.56 to end a four-session losing streak.

Market Internals – Friday 08 June

Dollar: Skid Snapped

The U.S. Dollar Index remains higher by 0.2% at 93.55 after being up 0.4% at its best level on Friday. The Dollar Index is looked to snap a four-day skid, but maintaining Friday’s gain was been a struggle. Overnight dollar strength helped the Index climb to its opening level from Tuesday, but selling pressure appeared as the focus turned to the Wall Street session. The Index spent Friday morning action in a steady retreat, pausing near the middle of today’s range. The dollar has had a mixed showing against emerging market currencies, but the market has heard from yet another central banker. The Brazilian real surged by nearly 5.0% against the greenback after Central Bank of Brazil President Ilan Goldfajn pledged to defend the real through currency swaps and other instruments, if needed.

Bonds: Treasuries Pause Ahead of Fed Week

U.S. Treasuries ended the week on a flat note after spending the Friday session inside a very narrow range. Treasury futures advanced in overnight action, but returned to little changed by the start of the cash session. Intraday action saw very limited movement in longer tenors, as 10s and 30s hovered near their flat lines until the close while the 2-yr note outperformed. The slope of the yield curve steepened a touch this week, as the 2s10s spread expanded to 46 bps from 42 bps while the 2s30s spread widened to 60 bps from 57 bps. Next week will be busy on the central bank front, considering the Federal Reserve is expected to announce a 25-bps rate hike on Wednesday while the European Central Bank could provide some guidance about the end of its asset purchases on Thursday morning.

The yield curve steepened last week with the belly of the curve rising 4bps while the 2-year remained unchanged for a third week. The spread between the 5s10s remained unchanged at 16bps from the previous week while the 10s30s narrowed to 14bps from 15bps the previous week. 

 Commodities 

The Bloomberg Commodity Index closed at 89.98, lower than 90.72 the previous week as Energy and Grains continue losses.

Crude: WTI finds support at $65

The spread between WTI and Brent remained wide at $10.70 from $11.00 the previous week.

EIA petroleum data for the week ended June 1:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.1 mln barrels from the previous week. At 436.6 mln barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 4.6 mln barrels last week, and are in the upper half of the average range. Both Finished gasoline and blending components inventories increased last week. Distillate fuel inventories increased by 2.2 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories increased by 4.0 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories increased by 15.8 mln barrels last week.

Natural gas inventory showed a build of 92 bcf vs a build of 96 bcf in the prior week. Working gas in storage was 1,817 Bcf as of Friday, June 1, 2018, according to EIA estimates. This represents a net increase of 92 Bcf from the previous week. Stocks were 799 Bcf less than last year at this time and 512 Bcf below the five-year average of 2,329 Bcf. At 1,817 Bcf, total working gas is within the five-year historical range.

Baker Hughes total U.S. rig count increased by 2 to 1062 following last week’s increase of 1.

Metals: Precious Bounce, Copper Strenghtens

Agriculture: Grains All Lower

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THE WEEK AHEAD

Week 24 is June Triple Witching Week (wk24 – 11 to 15 June 2018). In Singapore, Malaysia and Indonesia, Friday 15 June is a public holiday in observance of Hari Raya Puasa – Markets will be closed.

Benchmarks (21 year average) for wk24:

Key Economic Dates

Week 24

Next week the Fed, the ECB and the BoJ will decide on monetary policy. Key economic releases include: US inflation, retail trade, industrial output and Michigan consumer sentiment; UK inflation, wages, unemployment, industrial production, retail sales and trade balance; Japan machinery orders; and China industrial production, retail sales and fixed asset investment.

Mon 11 June

Tue 12 June

Wed 13 June

Thu 14 June

Fri 15 June

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SUMMARY

Seems like the  markets want to get out of this four month funk. But every time it does, something or other pulls it back into its sideways range. This week, monetary policy from the U.S., Eurozone and Japan could be the reason we continue this consolidation. The bulls seems reluctant to back any bull-run as seen by the drop in volumes every time the market makes a run.

I’m sticking to caution. I like the run, no doubt … but I am not going to get complacent now.

Happy Hunting!

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We’re having our last Introductory Session for the Pattern Trader™ Tutorial June 2018 Batch on Tuesday, June 12th.

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive enviroment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life, consider attending the Pattern Trader™ Tutorial Introductory Session first by registering here: Pattern Trader™ Tutorial Introductory Session.

If you want to know more about the Tutorial, read here: The Pattern Trader™ Tutorial 2018

Click here now to make a huge difference in your life:
Pattern Trader™ Tutorial Introductory Session

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Find out more about the Pattern Trader Tutorial here:
Pattern Trader™ Tutorial 2018

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The schedule for the June batch is here:
Pattern Trader™ Tutorial Batch 94 June 2018

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PATTERN TRADER™ TUTORIAL (SG) INTRODUCTORY SESSION

We’re having our last Introductory Session to the Pattern Trader™ Tutorial June 2018 Batch on Tuesday, June 12th.

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive enviroment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life, consider attending the Pattern Trader™ Tutorial Introductory Session first by registering here: Pattern Trader™ Tutorial Introductory Session.

If you want to know more about the Tutorial, read here: The Pattern Trader™ Tutorial 2018

PTTadBannerGold

Click here now to make a huge difference in your life:
Pattern Trader™ Tutorial Introductory Session

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Find out more about the Pattern Trader Tutorial here:
Pattern Trader™ Tutorial 2018

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The schedule for the June batch is here:
Pattern Trader™ Tutorial Batch 94 June 2018

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Weekly Market Update – 04 June 2018 BMO

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WEEK IN REVIEW – 28 May to 01 June 2018 : Divergent Week

The stock market finished the week on a mostly higher note as investors digested an easing of the political crisis in Italy, fresh tariff-related developments, and the Employment Situation report for May. The S&P 500 (+0.5%), the Nasdaq Composite (+1.6%), and the Russell 2000 (+1.3%) advanced, while the Dow Jones Industrial Average (-0.5%) finished a step lower.

U.S. markets opened the week on Tuesday following a three-day Memorial Day weekend. Sellers dominated that Tuesday session after Italian President Sergio Mattarella blocked the formation of a euro-skeptic government, vetoing the economic minister nominee of an anti-establishment coalition that was aiming to come to power. Italian bond yields surged in reaction as some feared the veto would prompt a snap election that could turn into a de facto referendum on Italy’s membership in the European Union. The Italian political crisis calmed down on Thursday evening, when President Mattarella approved the formation of a ruling coalition between Italy’s anti-establishment Five Star Movement and right-wing League party, effectively silencing the prospect of a snap election later this year.

Elsewhere in Europe, Spain endured some political drama of its own this week as Prime Minister Mariano Rajoy was ousted on Friday in a no-confidence vote following a corruption scandal involving 29 individuals with ties to his People’s Party. Pedro Sanchez, the leader of the Socialist Party, will succeed Mr. Rajoy as prime minister. Separately, German financial giant Deutsche Bank hit a 16-month low on Thursday after The Wall Street Journal reported that it’s on the Federal Reserve’s list of troubled banks.

Back in the U.S., the stock market rebounded from its Tuesday slide on Wednesday with energy shares leading the charge following reports that OPEC and Russia will keep production cuts in place until at least the end of the year. West Texas Intermediate crude futures rallied on Wednesday in reaction, but still finished the week lower by 3.0%.

Stocks stumbled for a second time on Thursday when the Trump administration announced that it will let steel and aluminum tariff exemptions expire for the EU, Canada, and Mexico. The White House’s decision, which elicited retaliatory responses from the EU, Canada, and Mexico as expected, will result in duties of 25% on steel imports and duties of 10% on imports of aluminum, effective June 1.

Wall Street bounced back on Friday, bolstered by an easing of the political tension in Europe, news that the June 12 summit with North Korea is back on, and the release of the Employment Situation report for May, which featured a better-than-expected increase in nonfarm payrolls (+223K actual vs +190K consensus) and a lower-than-expected unemployment rate (3.8% actual vs 3.9% consensus). The average hourly earnings figure came in as expected, showing a month-over-month increase of 0.3%.

The key takeaway from the employment report is that it still had a Goldilocks hue to it, having been accented with strong job growth and only moderate wage inflation.  Furthermore, the strong job growth and low unemployment rate created some good feelings about the potential for a pickup in consumer spending that should aid the second quarter growth outlook.

Six of eleven S&P sectors declined this week, with financials (-1.3%), telecom services (-0.9%), and industrials (-0.7%) being the weakest performers. Conversely, energy (+2.5%), technology (+2.0%), and real estate (+1.7%) were the top-performing groups.

Retailers dominated the earnings front once again, with Costco (COST), Dollar General (DG), Dollar Tree (DLTR), lululemon (LULU), Ulta Beauty (ULTA), Dick’s Sporting Goods (DKS), and others reporting their quarterly results, which came in mixed. The SPDR S&P Retail ETF (XRT) settled roughly flat for the week.

U.S. Treasuries were volatile this week, eventually finishing with modest gains. The benchmark 10-yr yield, which moves inversely to the price of the 10-yr Treasury note, finished the week lower by three basis points at 2.90%. Meanwhile, the U.S. Dollar Index eked out a fractional gain, settling the week at 94.22.

(Excerpts from Briefing.com)

Friday Update: June Starts with a Bang

The month of May might have ended with a whimper, but the month of June started with a bang.  Driven by an easing of the political tension in Europe and another employment report out of the U.S. that produced strong job growth, modest wage growth, and the lowest unemployment rate since April 2000, the major indices put together a winning session that was punctuated by leadership from economically-sensitive sectors.

The gains for the major indices ranged from 0.9% for the Russell 2000 to 1.5% for the Nasdaq Composite.  Sellers were an outnumbered bunch on Friday, evidenced by an advance-decline line at the NYSE and Nasdaq that favored advancing issues by a more than 2-to-1 margin.

Leading the advance, which had a risk-on demeanor before the opening bell, was the information technology sector (+1.9%).  It kept good company, however.

Following in its footsteps were the materials (+1.5%), industrials (+1.2%), and financial (+1.1%) sectors.  The countercyclical health care sector (+1.2%) offered an added measure of support that made it challenging to knock the indices back to any considerable degree during Friday’s trading.

The bulk of today’s gains were logged within the first hour of trading.  They were solidified as the day went on by better than expected construction spending and ISM manufacturing data, as well as the news from the White House that the June 12 summit with North Korea in Singapore is back on in what it is apt to be a multi-step negotiating process for denuclearization of the Korean Peninsula.

Interestingly, the protectionist trade concerns that drove the market lower on Thursday were placed on the back burner on Friday.

Traders instead embraced the report out of Europe that Italy’s president gave a mandate to the anti-establishment 5-Star Movement and right-wing League Party to form a government, thereby avoiding the need for a snap election that some thought could end up being a referendum on Italy’s membership in the European Union.

That news triggered a risk-on tone in European markets that carried over to the U.S.  The reassuring employment report simply accentuated the positive bias that persisted throughout the trading day.

Reflecting the upbeat tone, 27 out of 30 Dow components registered a gain on Friday while only two of the 11 S&P sectors – utilities (-1.5%) and consumer staples (-0.03%) – ended with a loss.

The energy sector (+0.5%) for its part kept its head above water even though oil prices ($65.83, -$1.14, -1.7%) fell sharply in a technically-driven sell-off.

Treasuries were also weak on Friday as some of the safe-haven premium tied to European politics was unwound along with the notion that the Federal Reserve won’t raise the fed funds rate at least three times this year.  The 2-yr note yield increased seven basis points to 2.48% while the 10-yr note yield jumped eight basis points to 2.90%.

Reviewing Friday’s economic data:

Market Internals – Friday 01 JUNE

Dollar: Dollar Index Ticks Higher

The U.S. Dollar Index was up 0.3% at 94.23, turning slightly positive for the week. The greenback started the week on a higher note, looking to extend its recent rally, but a midweek slump returned action to levels from last Friday. The Index dipped in Thursday’s overnight action, but rallied back on Friday to unchanged in the early morning, rallying to a fresh session high after the release of a stronger than expected Employment Situation report for May (actual 223K; consensus 190K). Friday’s dollar strength was not widespread, as the British pound and select emerging market currencies advanced against the dollar.

Bonds: 10-Yr Yield Settles Near 50-Day Average

U.S. Treasuries ended the week on a lower note, but intraday action was limited, as Treasuries spent the day near their opening levels. Treasury futures retreated in overnight trade once it became clear that early elections would be avoided in Italy and Spain. Italy’s President Sergio Mattarella approved the formation of a M5S-Lega government while Spain’s Prime Minister Mariano Rajoy was forced out through a no-confidence vote, but acting Prime Minister Pedro Sanchez did not call for a fresh election just yet. Spanish and Italian debt climbed during the European session, and the improvement in risk tolerance weighed on Treasuries.

The Treasury complex dipped to fresh lows in response to a better than expected Employment Situation report for May, but spent the day in a slow climb off the opening lows. The Friday intraday rally pressured the 10-yr yield back below its 50-day moving average (2.908%) while the slope of the yield curve remained near its flattest level of the cycle. The 2s10s spread ended the day at 42 bps, down three basis points for the week, while the 2s30s spread compressed four basis points for the week to 57 bps.

The yield curve flattened last week with the longer maturities falling more while the 2-year remained unchanged. The spread between the 5s10s narrowed to 16bps from 17bps the previous week while the 10s30s narrowed to 15bps from 16bps the previous week. 

 Commodities 

The most significant occurrence this week is the $11 spread between WTI and Brent from $7 less than two weeks ago. The Bloomberg Commodity Index closed at 90.72, lower than 91.51 the previous week as a result of drops in Grains, Precious and Energy.

Crude: WTI crude oil slides lower, settles below $66/barrel  

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.2 mln barrels from the previous week. At 434.5 mln barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 0.5 mln barrels last week, and are in the upper half of the average range. Finished gasoline inventories increased, but blending components inventories decreased last week. Distillate fuel inventories increased by 0.6 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories increased by 2.0 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories increased by 1.8 mln barrels last week.

Natural gas inventory showed a build of 96 bcf vs a build of 91 bcf in the prior week: Working gas in storage was 1,725 Bcf as of Friday, May 25, 2018, according to EIA estimates. This represents a net increase of 96 Bcf from the previous week. Stocks were 788 Bcf less than last year at this time and 500 Bcf below the five-year average of 2,225 Bcf. At 1,725 Bcf, total working gas is within the five-year historical range.

Baker Hughes total U.S. rig count increased by 1 to 1060 following last week’s increase of 13.

Metals: Precious Falls, Copper Gains

Agriculture: Grains All Lower

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD

Historically, over the last 5 to 15 years, the second week (wk23 – 04 to 08 June 2018) has been mildly bullish. However, over the last 21 years, the twenty-third week has been divergent and volatile.

Benchmarks (21 year average) for wk23:

Key Economic Dates

Week 23

The US will publish trade balance, ISM non-manufacturing PMI, factory orders and JOLTs job openings. Elsewhere, the RBA and the RBI will decide on monetary policy. Other important economic releases include: China trade balance, inflation and Caixin Services PMI; UK Markit construction and services PMIs; and Australia Q1 GDP growth.

Mon 04 June

Tue 05 June

Wed 06 June

Thu 07 June

Fri 08 June

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

SUMMARY

2018 has so far proven to be a troublesome year, as predicted (by not selling off in May 2017). We already had a heads-up when the statistic for the Second Presidential Year showed up a bearish stat more often than not. Since February this year, the market has not been its usual self and once again, May did not sell off, triggering the possibility that 2019 will be more troublesome than 2018.

Now we face the unpredictability of June with the 50 and 200DSMA still looming ever closer to the benchmarks. The economic numbers still suggest that the US economy is still chugging along well, albeit with some softening that could become worrisome in the coming months of July, August and September.

Till then, I remain cautiously bullish and hedged, keeping my positions quick and sticking to tight stops.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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Weekly Market Update – 28 May 2018 BMO

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WEEK IN REVIEW – 21 May to 25 June 2018

Equities finished the week a tick higher, unfazed by what seemed like a continuous flow of geopolitical headlines. Most of the news centered on U.S.-China trade relations and the U.S.-North Korea summit – which, as of Thursday, is “officially” canceled, but more on that later. The Dow settled the week up 0.2%, the S&P 500 added 0.3%, and the Nasdaq outperformed, jumping 1.1%.

The week began on a positive note following weekend comments from Treasury Secretary Steven Mnuchin, who said that a U.S.-China trade war has been put “on hold” while the two nations continue to try and work out their differences, and following news that last week’s trade talks ended with China agreeing to buy more goods from the U.S. in an effort to reduce its trade surplus. China followed up that pledge by announcing early on Tuesday that it will be cutting import tariffs on U.S. automobiles (to 15% from 25%) and on some U.S. auto parts (to 6% from 8-25%).

However, the upbeat vibes faded later on Tuesday when President Trump revealed that the White House has yet to reach a deal with Beijing to save struggling Chinese telecom company ZTE. The news didn’t sit well with investors, who had been expecting the president to use ZTE, which has been severely hurt by U.S. sanctions, as a bargaining chip in trade negotiations with Beijing. Reports on Friday indicated that President Trump and China have finally reached a tentative deal on ZTE, but by then the focus had largely shifted to the ongoing situation in North Korea.

President Trump canceled his June 12 summit with North Korean leader Kim Jong Un on Thursday, stating in an open letter to Mr. Kim that he felt the meeting was “inappropriate” based on the “tremendous anger and open hostility” displayed in a recent statement from a North Korean official directed at Vice President Mike Pence. However, the president has left open the possibility of meeting with Mr. Kim, saying on Friday that dialog with North Korea has reopened and that the summit could still happen.

In other political developments, President Trump officially signed the Dodd-Frank reform bill on Thursday, which rolled back regulations on small and medium-sized lenders put in place following the 2008 financial crisis. The president also added that the rollback may be extended to larger banks in the future. Separately, The Wall Street Journal reported that the Trump administration is considering import tariffs on automobiles that could be as high as 25%.

Investors received on Wednesday afternoon the FOMC minutes from the May meeting, which came in more dovish than expected, helping to fuel a late-session rally. The minutes pointed to a rate hike at the June meeting, as expected, and suggested that the Fed may not be as aggressive with its rate-hike path as many had previously thought. The latter takeaway stems from the acknowledgement in the minutes that officials would be content to let inflation briefly run above their 2.0% target.

Overseas, the prospect of a populist government coming to power in Italy weighed on Italian debt, pushing the yield on Italy’s 10-yr BTP higher by 25 basis points to 2.47%. A flight to safety pushed both German and U.S. debt higher – thereby reducing bond yields. The 10-yr German bund yield dropped 18 basis points to 0.40 this week, and the 10-yr U.S. Treasury note yield dropped 13 basis points to 2.93%. Investors also expressed concern over the ongoing situation in Spain following Friday reports that the country’s opposition party is looking to oust Prime Minister Rajoy.

Meanwhile, reports that Saudi Arabia and Russia will soon relax their crude oil supply constraints to compensate for any production fallout in Venezuela and Iran sent crude prices sharply lower this week. West Texas Intermediate crude futures hit a fresh three-and-a-half year high on Monday, but finished Friday 6.4% below that level at $67.91 per barrel. A rise in the U.S. dollar also didn’t help matters, making commodities, which are priced in U.S. dollars, more expensive for holders of foreign currencies. The U.S. Dollar Index jumped 0.6% this week to 94.13, its highest level since mid-November.

Back on Wall Street, retailers dominated the earnings front once again, with Lowe’s (LOW), TJX (TJX), Target (TGT), Ross Stores (ROST), Best Buy (BBY), AutoZone (AZO), Tiffany & Co(TIF), Gap (GPS), Kohl’s (KSS), Advance Auto (AAP), and Foot Locker (FL) reporting their quarterly results. The results come in mostly better-than-expected, but a few companies missed bottom-line estimates, including Lowe’s, Target, and Gap. The SPDR S&P Retail ETF (XRT) settled the week higher by 0.3%.

The S&P 500 sectors finished the week on a mostly higher note, with seven of the eleven settling in the green. The rate sensitive utilities space (+3.1%) led the charge, underpinned by the decline in Treasury yields, while the energy sector (-4.5%) was by far the weakest group, suffering from the drop in crude prices. The other sectors finished with weekly gains/losses of 2.0% or less.

(Excerpts from Briefing.com)

Friday Update: Stocks Slip Ahead of Memorial Day Weekend

The stock market ended Friday on a mostly lower note, but managed to keep in positive territory for the week. The S&P 500 declined 0.2% on Friday, closing the week higher by 0.3%. The Dow also dropped 0.2% on Friday, trimming its weekly gain to 0.2%, while the Nasdaq ticked up 0.1%, extending its weekly advance to an impressive 1.1%.

North Korea-U.S. relations were in focus once again on Friday after a North Korean official responded with a conciliatory tone to President Trump’s Thursday decision to cancel his scheduled summit with North Korean leader Kim Jong Un, saying that North Korea is still willing to meet with the United States. President Trump later revealed that communication has reopened with North Korea, adding that the summit could still happen — possibly even on the originally scheduled date of June 12.

Separately, the Trump administration has reportedly reached a deal with Beijing to save struggling Chinese telecom company ZTE that involves ZTE paying a fine, hiring compliance officers, and changing its management. There were also reports that, in connection with the ZTE deal, the U.S. is pushing for approval of the proposed Qualcomm (QCOM)/NXP Semi (NXPI) merger. The merger has been approved by eight of the nine required global regulators, with Chinese approval still pending.

Energy shares dropped sharply on Friday, pushing the S&P 500’s energy sector lower by 2.6%. The energy sell off coincided with a tumble in crude oil futures, which further retreated from Monday’s three-and-a-half year high following reports that Saudi Arabia and Russia are thinking about reducing supply constraints to make up for any production fallout in Iran and Venezuela. West Texas Intermediate crude futures lost 4.0% on Friday, settling at $67.91 per barrel, marking a fresh three-week low.

Outside of energy, most S&P 500 groups finished within 0.4% of their flat lines. Within the consumer discretionary space (+0.2%), retailers were all over the place following another batch of earnings reports. Ross Stores (ROST) and Gap (GPS) dropped 6.8% and 14.6%, respectively, after missing earnings estimates for the first quarter, while Foot Locker (FL) surged 20.2% after beating both top and bottom line estimates.

In the bond market, U.S. Treasuries extended their weekly gains, sending yields lower across the curve, thanks to some inflows from European investors, who sought some security from continued political uncertainty within the region following reports that the main opposition party in Spain is seeking to remove Prime Minister Mariano Rajoy. The yield on the benchmark 10-yr Treasury note finished Friday five basis points lower at 2.93%, closing the week with a loss of 13 basis points.

Elsewhere, the U.S. Dollar Index advanced 0.4% on Friday to 94.13, marking its best close since mid-November.

Reviewing Friday’s economic data, which was limited to April Durable Orders and the final reading of the University of Michigan Consumer Sentiment Index for May:

U.S. markets will be closed on Monday in observance of Memorial Day.

Market Internals – Friday 25 May

Dollar: Dollar Index Remains Resilient

The U.S. Dollar Index was up 0.5% at 94.20, for its third advance of the week. The Dollar Index took a step back on Thursday, and continued inching lower in overnight trade. The Index marked a session low around 6:30 ET on Friday, but bounced back swiftly, rising to a fresh swing high in mid-morning trade. The Dollar Index has climbed 0.6% since last Friday, looking to record its fifth weekly advance over the past six weeks.

Bonds: Rebound Extended

U.S. Treasuries ended the week on a higher note with the belly of the curve showing relative strength. The Friday affair was fairly quiet, as Treasuries started the day with modest gains, hitting highs during the opening 90 minutes of the cash session. However, today’s advance represented the third consecutive day of solid gains amid growing political uncertainty in Europe. In Italy, Prime Minister-designate Giuseppe Conte has yet to form a cabinet with reports pointing to uncertainty whether euroskeptic Paolo Savona will be named economy minister. Meanwhile in Spain, opposition parties have taken aim at Prime Minister Mariano Rajoy after 29 people related to Mr. Rajoy’s party were convicted of corruption-related offenses on Thursday. The developments underscored the relative attractiveness of U.S. Treasuries in the face of aggressive net short positioning. This week’s rally lifted the 10-yr note and the 30-yr bond to their best levels since late April while the 30-yr yield settled just below its 50-day moving average (3.10%).

The yield curve flattened last week with the 10-year maturity falling 14 basis points as the 2-year retreated by only 6 basis points. The spread between the 5s10s narrowed to 17bps from 18bps the previous week. 

Commodities 

The Bloomberg Commodity Index closed at 91.51, higher than 90.41 the previous week.

Crude: Brent-WTI spread widens to $8.56 as   

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.8 mln barrels from the previous week. At 438.1 mln barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 1.9 mln barrels last week, and are in the upper half of the average range. Finished gasoline and blending components inventories increased last week. Distillate fuel inventories decreased by 1.0 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories increased by 0.7 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories increased by 6.7 mln barrels last week.

Natural gas inventory showed a build of 91 bcf vs a build of 106 bcf in the prior week. Working gas in storage was 1,629 Bcf as of Friday, May 18, 2018, according to EIA estimates. This represents a net increase of 91 Bcf from the previous week. Stocks were 804 Bcf less than last year at this time and 499 Bcf below the five-year average of 2,128 Bcf. At 1,629 Bcf, total working gas is within the five-year historical range.

Baker Hughes total U.S. rig count increased by 13 to 1059 following last week’s increase of 1.

Metals: Gains led by Precious

Agriculture: Grains Rise

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD

The coming week is a shortened week in the U.S. for Memorial Day and in Singapore, Malaysia and Indonesia for Vesak/Wesak/Waisak Day.

It is interesting to note that although the first trading day of June (Friday 01 June) tends to be bullish, when it goes down, it can be rather tragic as in 2008, 2009 and 2010 with an average -1.1% loss and in 2011 and 2012 with an average loss of -2.2%.

The twenty-second week of 2018 (wk22 – 28 May to 01 June) is a shortened week as Monday is a holiday:

Key Economic Dates

It will be a shortened but busy week. The US will publish the jobs report, the second estimate of GDP growth, personal income and spending, PCE prices and pending home sales. Elsewhere: China official PMIs, Japan unemployment, Euro Area inflation and unemployment, and GDP growth for India, Brazil and Canada will also be in the spotlight.

Mon 28 May

Tue 29 May

Wed 30 May

Thu 31 May

Fri 01 June

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE MONTH AHEAD

June is the final month of Quarter Two and the last of the “best eight months” on NASDAQ. The month is known for its unpredictable nature.

June 2018 has twenty-one (21) trading sessions with no public holidays. June starts well but swings down and up and down from week to week for the rest of the month.

June Trivia

SUMMARY

So as May draws to a close with only three sessions remaining, the odds of a “Sell-In-May” is highly unlikely. After 21 weeks of trading, the Dow Jones Industrial Average is barely up by +0.1% YTD while the S&P500 has a bit more at +1.8% YTD. Tech strength stays unabated with the Nasdaq Composite gaining +7.7% YTD, the best gains amongst all the benchmarks and sector indices.

As of Friday’s close, the DOW is only 774 points (3.2%) above its 200DSMA. June’s seasonal statistics on the DOW and S&P500 doesn’t seem to suggest that the benchmarks could fall below that critical average before the mid-year. There is also the Index Addition amongst the Russells along with the possibility of Portfolio Pumping towards the end of June that usually rallies the broader market. Given the current state of the US economy, there is still no real reason to worry about any recessionary threat that could tank/crash the market in the near term.

The real worry is that if June doesn’t correct and instead rallies higher, valuations are going to get crazier than they have already been. According to the Shiller PE Ratio, in spite of the correction since February, valuations still remain very lofty at 32.34 when the long term median has been only half of that.

Such lofty valuations do not gel well with the US growth at 2.3% (when its long term median has been around 3.18%) amidst rising inflation at  2.5 percent in April 2018, up from 2.4 percent in March 2018.

This could have a very telling effect on earnings when Q3 earnings season comes round in July. But that’s a story for another day. For now, I’ll be watching the last three days of May for the unlikely last-minute correction as well as effect that falling oil prices and a rising dollar may have on the broader market.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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Weekly Market Update – 14 May 2018 BMO

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WEEK IN REVIEW – 07 to 11 May 2018: Buyers Re-emerge Following Q1 Earnings Season

Buyers returned to the market this week following a three-week absence during the thick of the first quarter earnings season. The S&P 500, the Dow, and the Nasdaq finished with sizable weekly gains, adding between 2.3% and 2.7% apiece – enough to put the S&P 500 and the Dow back into positive territory for the year (+2.0%, +0.5% YTD). The Nasdaq is now up 7.2% year-to-date.

The stock market got off to a slow start this week as investors digested President Trump’s decision to pull the U.S. out of the Iran nuclear agreement and restore the “highest level of economic sanctions” against Iran. The president was scolded by European allies, which wanted the U.S. to remain in the agreement, while Iran’s response was more violent with lawmakers burning the American flag in parliament.

Tensions in Middle East were further escalated later in the week when Israel struck nearly all of Iran’s military infrastructure in Syria in response to an Iranian missile attack on Israeli-held territory.

Outside of a brief pause, stocks had a mostly muted reaction to the headlines, but crude oil futures took off, with WTI crude establishing a new three-and-a-half year high ($71.26/bbl), as the restoration of U.S. sanctions on Iran – which is OPEC’s third-largest oil exporter – and the looming threat of conflict within the oil-rich region prompted investors to bet on a disruption to crude supply on the global market.

The S&P’s energy sector benefited from the rise in oil prices, adding 3.8% this week, but the industrials, technology, and financials sectors finished with similar weekly gains, adding between 3.4% and 3.6%. In total, nine sectors finished the week in the green, while two – consumer staples (-0.5%) and utilities (-2.3%) – finished in the red.

Stocks started taking off on Wednesday and carried that momentum into Thursday’s session; the S&P 500 added 1.9% in those two days alone, catapulting above its 50-day moving average to a nearly two-month high. Technology shares rallied over that two-day stretch, reminiscing last year’s tech-charged surge, with Apple (AAPL) extending its streak of record closes to five in a row on Thursday (the streak was then broken with a small loss on Friday).

Investors received some important inflation data on Thursday – namely, the Consumer Price Index for April – which helped further fuel the bullish bias, coming in slightly below estimates (+0.2% actual vs +0.3% consensus), and thereby tempering concerns that the Fed might have to be more aggressive in its path to normalization.

Overseas, the Bank of England voted 7-2 in favor of keeping its official bank rate and its asset purchase program unchanged on Thursday, but BoE Governor Mike Carney added that interest rates will likely go up by the end of the year. Separately, President Trump announced that his summit with North Korean Leader Kim Jong Un will be held on June 12 in Singapore, a positive stride in the quest for global peace.

The stock market ended the week with a flat performance on Friday. Volatility picked up temporarily in the afternoon when President Trump released a blueprint for lowering drug prices, but order was restored after it became clear that the blueprint still lacked many specific details.

(Excerpts from Briefing.com)

Friday Update: Wall Street Locks In Big Weekly Gains

Equities ticked higher on Friday, locking in big gains for the week, as a positive performance from the health care sector narrowly outweighed a modest pullback from the information technology group. The S&P 500 and the Dow added 0.2% and 0.4%, respectively, while the tech-heavy Nasdaq underperformed, closing a tick below its flat line. All three indices finished with weekly gains of more than 2.0%.

The market drifted flat to slightly higher for the bulk of Friday’s session, but volatility picked up briefly in the afternoon when President Trump unveiled a blueprint for lowering drug prices. The president plans to increase competition within the drug space and to change rules that have allowed some drugmakers to game the system. The blueprint lacked many details, however, prompting a sigh of relief from investors, who were worried about the possibility of imminent regulation. Health-related names rallied into the close, leaving the S&P 500’s health care sector with a gain of 1.5%.

Telecom services was the only group to outperform health care on Friday, largely thanks to Verizon (VZ), which rallied after JPMorgan upgraded shares to ‘Overweight’ from ‘Neutral’; the telecom services group finished with a gain of 2.1%, while Verizon shares ended higher by 3.0%.

The only other sectors to finish in the green were industrials, consumer discretionary, and utilities, but their gains were modest at 0.2% apiece. On the downside, six sectors finished in the red, but no group lost more than 0.5%. The technology group was among the worst performers, closing lower by 0.3%, which posed a problem for the broader market given the group’s huge influence; technology is the top-weighted S&P 500 sector, representing around a quarter of the broader market alone.

Shares of chipmaker NVIDIA (NVDA) declined 2.2%, retreating from an all-time high, amid a “sell the news” response to the company’s first quarter results, which came in better-than-expected. Separately, Apple (AAPL) shares broke their nine-session winning streak, slipping 0.4%, and shares of Symantec (SYMC) plunged 33.1% after the company announced that it has relayed concerns from an ex-employee to the SEC.

Outside of equities, U.S. Treasuries finished Friday on a flattish note, with the benchmark 10-yr yield holding steady at 2.97%. Meanwhile, WTI crude futures declined 0.9% to $70.70 per barrel, slipping from a three-and-a-half year high, and the U.S. Dollar Index dropped for the third day in a row, slipping 0.2% to 92.41.

Reviewing Friday’s economic data, which was limited to April Import/Export Prices and the preliminary reading of the University of Michigan Consumer Sentiment Index for May:

Investors will not receive any economic data on Monday.

Market Internals – Friday 11 May

Dollar: Rally On Hold

The U.S. Dollar Index was down 0.2% at 92.55, looking to avoid its first weekly decline in a month. The greenback extended its recent rally during the first half of the week, but some selling pressure has come through over the past two days. A weaker than expected CPI report and continued flattening of the Treasury yield curve have contributed to dollar’s backtracking, but the Index remains above its 200-day moving average (91.95), and well above its April low (89.23). Friday’s downtick in the Dollar Index has masked the dollar’s strong showing against emerging market currencies. On a side note, the Argentine peso (23.10) is on track to surrender 5.8% for the week after being down as much as 9.8% at today’s low (23.96). The peso has given up more than 12.0% over the past two weeks, as the country’s monetary and fiscal authorities struggle to prop up the currency.

Bonds: Week Ends in Subdued Fashion

U.S. Treasuries ended the week on a mostly flat note. The Treasury complex spent the Friday session inside a very narrow range, but the bias from the earlier portion of the week remained in place, as the long bond outperformed into the close, settling above its flat line. Intraday weakness in the 2-yr note drove the 2-yr yield to a session high of 2.55% before some afternoon buying lifted 2s into the green. The trading week saw the 2s30s spread compress four basis points to a new cycle low of 58 bps while the 2s10s spread ended the week unchanged at 44 bps after tightening to 42 bps on Thursday.

The yield curve flattened for a third consecutive week with the 5-year maturity rising against the 10-year while the 30-year yield dropped 1 basis point. The spread between the 5s10s tightened to 13bps from 16bps the previous week. The 10s30s tightened to 14bps from 18bps the previous week. 

 Commodities 

Baker Hughes reported that the active number of oil rigs in the U.S. rose for a sixth week in a row, climbing by 13 to 1045. Crude oil futures pulled back from a three-and-a-half year high, while natural gas futures also settled in the red. Outside of energy, metals and agriculture finished mostly lower, but copper futures did settle flat.

The Bloomberg Commodity Index closed at 90.04, higher than 89.67 the previous week in spite of falling from a more than three-month high on Friday, dropping 0.6% to 90.04.

Crude: WTI closes above $71, Brent is resisted at $77.90  

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.2 million barrels from the previous week. At 433.8 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories decreased by 2.2 million barrels last week, and are in the upper half of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories decreased by 3.8 million barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories increased by 2.3 million barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories decreased by 1.5 million barrels last week.

Natural gas inventory showed a build of 89 bcf vs a build of 62 bcf in the prior week : Working gas in storage was 1,432 Bcf as of Friday, May 4, 2018, according to EIA estimates. This represents a net increase of 89 Bcf from the previous week. Stocks were 863 Bcf less than last year at this time and 520 Bcf below the five-year average of 1,952 Bcf. At 1,432 Bcf, total working gas is within the five-year historical range.

Baker Hughes total U.S. rig count increased by 13 to 1045 following last week’s increase of 11.

Metals: Gold bounces, Silver and Copper continue to strengthen

Agriculture: Corn, Wheat correct, Soy continues to weaken

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE FORTNIGHT AHEAD

As I will be away next weekend, I am covering the next two weeks in this update. Thus, don’t expect an update next weekend.

The twentieth week of 2018 (wk20 – 14 to 18 May):

The twenty-first week of 2018 (wk21 – 21 to 25 May):

Key Economic Dates

Week 20

Next week the US will publish retail trade, industrial production, building permits and housing starts. Elsewhere, important releases include: UK wages and unemployment rate; Germany GDP growth; Japan GDP growth and inflation; China retail trade, industrial production and fixed asset investment; and Australia employment.

Mon 14 May

Tue 15 May

Wed 16 May

Thu 17 May

Fri 18 May

Week 21

The following week the US will publish its FOMC minutes, home sales, consumer sentiment and durable goods orders. Elsewhere, important releases include: OPEC meetings, ECB’s Monetary Policy Meeting, UK’s CPI, PPI and RPI, Flash manufacturing and services PMIs from the Eurozone, France and Germany.

Mon 21 May

Tue 22 May

Wed 23 May

Thu 24 May

Fri 25 May

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SUMMARY

The benchmarks have all turned positive YTD with the DOW and S&P swinging upward and away from their respective 200DSMAs this past week. It can be argued that the benchmarks have broken to higher-highs but I wouldn’t be too quick to assume that May is done and dusted yet. The most statistically volatile part of May is coming up these two weeks with Week20 expected to swing up and down and Week21 tending to be the month’s most bearish week.

I’m hedged and have tightened my stops given that I will be away and not likely to have regular access to my trading station. The tightening yield curve with the 10-year hovering just below 3% are going to be keenly watched if May presents a severe correction in its last two weeks.

Much to be nervous about but silly to deny if the break to higher highs happen.

Happy Hunting! See you in two weeks!

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Comments Off on Weekly Market Update – 07 May 2018 BMO

Weekly Market Update – 07 May 2018 BMO

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WEEK IN REVIEW – 30 April to 4 May 2018: Mixed Week Ends On A Positive Note

Equity indices finished the week mixed, with the S&P 500 and the Dow losing 0.2% apiece and the tech-heavy Nasdaq adding 1.3%. Investors digested the latest policy directive from the Fed, the Employment Situation report for April, and another big batch of corporate earnings — including Apple’s (AAPL) quarterly report.

The stock market kicked off the week on a lower note Monday, with telecoms leading the retreat after Sprint (S) and T-Mobile US (TMUS) agreed to an all-stock merger over the weekend. The deal, which capped four years of on-again, off-again talks, is aimed at creating a larger carrier to better compete with wireless giants AT&T (T) and Verizon (VZ).

Wall Street bounced back a bit on Tuesday, led by technology shares, which rallied ahead of Apple’s quarterly earnings release. Apple’s results crossed the wires on Tuesday evening, showing a better-than-expected bottom line. In addition, the tech giant raised its profit guidance for the current quarter, increased its share repurchase program by $100 billion, and raised its dividend by 16%.

Apple shares rallied more than 4.0% on Wednesday in reaction to the upbeat results/guidance, but the broader market struggled — a somewhat concerning signal considering Apple was among the top performers during last year’s rally and considering it’s the largest component in the S&P 500 by market cap.

The Fed’s latest policy directive was released on Wednesday afternoon, but contained few surprises. Fed officials unanimously decided to leave the federal funds target range unchanged at 1.50% to 1.75%, as expected. In addition, officials laid the groundwork for a rate hike at the June meeting and left the door open for another one to two hikes before the end of the year.

Equity indices shot lower at the start of Thursday’s session, with the S&P 500 busting through its 200-day moving average, but eventually rebounded to finish little changed. Tesla(TSLA) received a lot of attention in the media on Thursday after its CEO, Elon Musk, unconventionally dismissed analysts’ questions in the company’s earnings call, calling them “boring.”

The Employment Situation report for April crossed the wires on Friday morning, showing a lower-than-expected increase in nonfarm payrolls (164K actual vs 190K consensus), an in-line reading for average hourly earnings (+0.2% actual/Briefing.com consensus), and a lower-than-expected unemployment rate (3.9% actual vs 4.0% consensus).

The key takeaway from the report is that there weren’t a lot of big surprises in it, which effectively means the Fed is apt to stay on course for at least two more rate hikes this year.

Apple reemerged in the headlines on Friday after Warren Buffet revealed his company, Berkshire Hathaway (BRK.B), bought an additional 75 million shares of Apple in the first quarter. Apple jumped 3.9% in reaction, leading a broad-based rally that made a significant dent in the S&P 500’s weekly decline. The tech group was the top-performing sector on Friday, extending its weekly gain to 3.2%.

The technology sector closed at the top of the sector standings by a decent margin, while health care (-3.0%), telecom services (-4.6%), and consumer staples (-2.0%) finished at the back of the pack. In total, seven S&P 500 sectors settled the week in negative territory, while four groups settled in the green.

(Excerpts from Briefing.com)

Friday Update: S&P Nearly Recoups Weekly Decline In Friday Rally

U.S. equities rallied on Friday following the publication of the monthly jobs report, with technology names leading the charge — including Apple (AAPL), which rallied 3.9% after Warren Buffet revealed his company, Berkshire Hathaway (BRK.B), bought an additional 75 million shares of Apple in the first quarter. The Russell 2000 jumped 1.2%, the S&P 500 advanced 1.3%, the Dow climbed 1.4%, and the Nasdaq rose 1.7%.

Equity indices opened the session modestly lower, but things turned around quickly after the S&P 500 found support at its 200-day moving average. Stocks climbed steadily into the late afternoon, finishing near their best marks of the day. Friday’s gains brought the S&P 500 and the Dow within 0.2% of their flat lines for the week and left the Nasdaq with a weekly gain of 1.3%.

The Employment Situation report for April was released on Friday morning, but didn’t contain many surprises, reinforcing the notion that the Fed is on course for at least two more rate hikes this year. The report showed a lower-than-expected increase in nonfarm payrolls (164K actual vs 190K consensus), an in-line reading for average hourly earnings (+0.2% actual), and a lower-than-expected unemployment rate (3.9% actual vs 4.0% consensus).

Gains were broad-based on Friday, with all 11 S&P sectors settling in the green. The top-weighted technology sector (+2.0%) closed at the top of the day’s leaderboard, but seven groups in total finished with gains of at least 1.0%. The energy and utilities sectors finished at the back of the pack, but still added 0.4%-0.5% apiece.

Several well-known consumer names rallied after reporting better-than-expected quarterly earnings and revenues, including Pandora (P), GoPro (GPRO), and Shake Shack (SHAK), which spiked between 9.9% and 19.8%, and CBS (CBS), which climbed 9.1%. However, V.F. Corp (VFC) — which owns brands like The North Face, Lee, Wrangler, JanSport, and Dickies — declined 2.8% despite also beating top and bottom line estimates.

U.S. Treasuries saw some intraday movement on Friday, but ended mostly flat, with the yield on the benchmark 10-yr Treasury note closing unchanged at 2.94%. Meanwhile, WTI crude futures jumped 1.9% to $69.72/bbl, their highest close since November 2014, and the U.S. Dollar Index climbed 0.2% to 92.45 – a new 2018 high.

In geopolitics, two days of trade negotiations between the U.S. and China ended without a deal, as expected, but the two sides did agree to keep talking.

Market Internals – Friday 04 May

Dollar: Dollar Index Logs Third Consecutive Weekly Gain

The U.S. Dollar Index was up 0.2% at 92.57, hovering in the middle of Friday’s trading range. The greenback briefly overtook yesterday’s session high in immediate response to the April Employment Situation report (actual 164K; consensus 190K), which underwhelmed on all fronts. The greenback retraced its post-data rally in midday action, returning to levels from the early morning. The Index will record its third consecutive weekly gain, having climbed 3.1% during that stretch.

Bonds: Week Ends on Quiet Note

U.S. Treasuries saw some intraday movement on Friday, but ended mostly flat. The Treasury market started the day with modest gains that were briefly extended after the release of a weaker than expected Employment Situation report for April (actual 164K; Briefing.com consensus 190K). However, the early rally reversed just 25 minutes after the cash open. Treasuries dipped into negative territory in midday action, but reclaimed those slim losses ahead of the close.

The yield curve flattened for a second week with the 2-year maturity rising against the belly of the curve while the 30-year yield dropped 1 basis point. The spread between the 5s10s remained at 16bps from 16bps for the third time. The 10s30s widened slightly to 18bps from 17bps the previous week. 

 Commodities 

The Bloomberg Commodity Index closed at 89.67, higher than 89.40 the previous week.

Crude: WTI closes above $69, Brent is resisted at $75.  

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 6.2 mln barrels from the previous week. At 436.0 mln barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 1.2 mln barrels last week, and are in the upper half of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories decreased by 3.9 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories increased by 0.7 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories increased by 5.4 mln barrels last week.

Natural Gas inventory showed a build of 62 bcf vs a draw of 18 bcf in the prior week- nat gas prices fall to a new LoD : Working gas in storage was 1,343 Bcf as of Friday, April 27, 2018, according to EIA estimates. This represents a net increase of 62 Bcf from the previous week. Stocks were 903 Bcf less than last year at this time and 534 Bcf below the five-year average of 1,877 Bcf. At 1,343 Bcf, total working gas is within the five-year historical range

Baker Hughes total U.S. rig count increased by 11 to 1032 following last week’s increase of 8.

Metals: Gold continues seasonal decline

Agriculture: Corn, Wheat gain, Soy drops

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THE WEEK AHEAD

The nineteenth week of 2018 (wk19) is going to rock and roll quite a bit:

Key Economic Dates

This coming week, markets will focus on US inflation rate, Michigan consumer sentiment, JOLTs job openings, and producer and foreign trade prices. Elsewhere, the BoE will decide on monetary policy. Other important releases include: UK industrial and construction output and trade balance; China inflation, producer prices and external trade; and Australia business and consumer morale.

Mon 07 May

Tue 08 May

Wed 09 May

Thu 10 May

Fri 11 May

Earnings Season

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SUMMARY

A rock and roll week ahead, DOW and S&P flirting with the 200DSMA, more divergence between the benchmarks, more flattening on the yield curve, the dollar testing a familiar resistance at 92.50 and oil about to break $70 per barrel … The markets feel like they’re really on edge this May. The anticipation of something about to happen is as stifling and volatile as the weather these days. 

Regardless of the seemingly dovish nature of the latest economic numbers, the market seems to know that something else is brewing below the surface. It is making me nervous … or is it a case of paranoia? Whatever it is, I never deny my gut-feel. I am playing it extremely safe this week.

Happy Hunting!

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Comments Off on We Are Today, A Result Of Spending Yesterday

We Are Today, A Result Of Spending Yesterday

On 1st May 2012, I made a series of postings as the economy grew from having too much cheap money. It started with an innocent query on why thoughtless, lavish spending encourages unhealthy inflation instead of helping to stimulate the economy.

People were rushing madly into property launches buying more homes than they could live in, buying second and even third cars and living the life of dreams … even though they couldn’t afford it (read: debt).

Here are the links to all three original postings;

Inflation on the Little Red Dot had grown from less-than-nothing in 2009 to top out just below 6% by 2011. While fears of higher inflation or even hyper-inflation started making its rounds, I wrote about the similarities between Singapore in that current situation being akin to South Korea in the late ’60s/early ’70s, Taiwan in their ’80s heyday, Japan in the late ’80s and Thailand during the mid ’90s – they all grew so quickly and astronomically, only to fall dramatically into Deflation/Recession.

In hindsight, I was right. The fear of inflation/hyper-inflation was misguided. What I feared was scarier and soon realised.

Singapore fell into Negative Inflation (Deflation) for two years between November 2014 to November 2016. Growth since 2012 has been erratic, frequently falling into negative (q/q) contractions every three to five quarters (upside revisions were made regularly to eradicate those negative quarters).

The ramification of such an economic situation would bring about some long-term pain and keep growth muted for longer. Prices would continue to stay high and hurt the middle to lower income earners. They would in turn, borrow more or spend money they didn’t have.

And they did.

By 2014, it was clear that interest rates would rise. I wrote that the rising rates would magnify the debt that these free-spending people had accumulated. This nightmare would come back to haunt them; they would get stuck with the cars they couldn’t afford, mortgages that would likely be defaulted or fire-sold and have debts that they couldn’t clear with 20 months of salary.

We were in an economy flooded with foreign talent seeking to find greener pastures here. All they found was expensive and unaffordable grass that looked good on the surface but was a struggle to upkeep because the cost was too high. They packed up and departed. The ones that stayed behind were the upper income earners who could afford the lofty costs, who in turn kept prices high.

Since then, Singapore has earned the title of the most expensive country in the world to live in, winning that ‘accolade’ for five straight years while our growth remained muted.

Through the six years since I posted those three comments, I have taken a lot of flack from people who accused me of being a party-pooper, a wet blanket and an envious soul who couldn’t live the life of dreams.

For the last one year, I have been busy counselling/advising people who are in financial dire straits, facing bankruptcy and even struggling with psychological trauma as a result of the circumstances from six years ago.

This is one vindication I cannot be happy about. This is not something I would gloat about by being right.

What scares me more is that I have written about the next downturn possibly being one that stretches out over a long period of stagnation in what I call a “slow bleed”. Such slow bleeds widen the rich-poor gulf and makes life extremely difficult to get by on a meagre salary. The precursors of such an economy are a higher monetary policy situation, fewer job opportunities from massive redundancies, record high costs against a low or negative inflationary economy and a draw-down on spending/consumer consumption – all of which are happening right now.

The worst thing from hereon in is a bail-out to help us continue living in denial.

And it will happen.

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