Weekly Market Update – 21 August 2017 BMO

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Equities End the Week on a Lower Note

Wall Street had another disappointing week, its second in a row, as investors continued to drag the major U.S. indices from their all-time highs. The Dow, the S&P 500, and the Nasdaq finished with losses of 0.8%, 0.7%, and 0.6%, respectively, while the small-cap Russell 2000 underperformed (-1.2%), dropping to its flat line for the year.

Five sectors settled the week in the green–utilities (+1.3%), materials (+0.4%), real estate (+0.2%), consumer staples (+0.1%), and technology (unch)–while six groups finished in the red–energy (-2.7%), telecom services (-1.8%), consumer discretionary (-1.8%), industrials (-1.1%), health care (-0.8%), and financials (-0.5%).

The week’s most notable headlines in chronological order:

Thursday’s session was perhaps the most notable of the week as the S&P 500 registered its second-worst performance of the year. The major indices opened Thursday’s session with modest losses, but moved deeper into negative territory following a rumor that President Trump’s chief economic advisor Gary Cohn plans to resign from his position following the president’s controversial comments regarding last weekend’s events in Charlottesville, VA. The White House later declared that the rumor was “100% false”, but it did little to reverse the market’s downward trend.

True or not, the rumor didn’t do much to dispel the notion that working with the president could be a political liability, especially considering that it came on the heels of Mr. Trump’s Wednesday decision to disband his Manufacturing Council and Strategy & Policy Forum in response to several CEOs leaving the two groups. The chief executives cited Mr. Trump’s controversial Charlottesville comments as the reason for their departures. If Republicans in Congress start distancing themselves from Mr. Trump, it will be that much harder for him to push through his pro-growth agenda.

However, those concerns eased a bit on Friday after President Trump fired White House Chief Strategist Steve Bannon, a decision that was well received by the market. Mr. Bannon was the chief executive of Mr. Trump’s presidential campaign and has been described as perhaps the most polarizing figure within President Trump’s inner circle. Therefore, in the absence of Mr. Bannon, the thinking is that the president might dial back his rhetoric a bit, making it easier for the White House to work with Congress in passing the president’s pro-growth agenda.

The major averages finished in negative territory for the second day in a row on Friday, adding to their losses for the week. The Dow led the retreat, losing 0.4%, while the S&P 500 and the Nasdaq finished lower by 0.2% and 0.1%, respectively. For the week, the Dow, the S&P 500, and the Nasdaq finished with respective losses of 0.8%, 0.7%, and 0.6%.

Following this week’s events, the fed funds futures market now points to the March 2018 FOMC meeting as the most likely time for the next rate-hike announcement with an implied probability of 51.5%. Last week, the market expected the next rate hike to occur in June 2018 with an implied probability of 57.5%.

(Excerpts from Briefing.com)

Currencies: Dollar Defends Weekly Gain

The U.S. Dollar Index is off 0.2% at 93.47, but looking to remain slightly positive for the week. The Index started the week with two consecutive gains, but after two failed attempts at overtaking Tuesday’s high, the Index finds itself near the middle of this week’s range, up 0.4% since last Friday. The greenback saw overnight weakness against the yen, but recouped a portion of that loss intraday. A better than expected preliminary Michigan Sentiment Index for August (97.6; consensus 94.0) helped the dollar climb off its morning low and the modest rebound continued amid mild risk-on flows that followed late-morning reports of White House chief strategist Steve Bannon’s imminent departure from the administration. Mr. Bannon has been described as a polarizing figure within the administration, so his departure is being viewed as a chance to bridge the gap between Congress and the Oval Office. The S&P 500 hovers just above its flat line after backing off its midday high.

Bonds yields: Bumpy Week Ends on Quiet Note

U.S. Treasuries finished Friday on a mixed note after backing off their morning highs. The complex settled little changed for the week thanks to a mid-week rebound that erased losses from Monday and Tuesday. The long bond recorded a slim gain for the week while shorter maturities posted modest losses. The market climbed in morning action, hitting highs just ahead of the release of a better than expected preliminary Michigan Sentiment Index for August (97.6; consensus 94.0). The selling that developed in the data’s wake accelerated after it was reported that Steve Bannon will be leaving the administration. The chief strategist has been described as perhaps the most polarizing figure within President Trump’s inner circle, so it could be argued that his departure will make it easier for President Trump to find common ground with Congress. However, it could also be argued that the headline simply provided a good excuse for some selling after two days of solid gains. The 10-yr note briefly dipped beneath its overnight low around noon, but inched up into the close. Meanwhile, 2s settled near lows, compressing the 2s10s spread to 88 bps from 90 bps on Thursday, thus flattening the curve further for the second week.

Commodities: Crude falls for the third week, Precious drops, Copper gains. Baker Hughes total U.S. rig count decreased by 3 to 946 following last week’s decrease of 5.

Agriculture: Corn drops, Soy closes lower for the third week, Wheat rebounds.

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THE WEEK AHEAD

Looks like a rock-and-roll week ahead with a little bullish respite.

Monday 21 to Friday 25 August (Week 34)

The thirty-fourth week of 2017 (wk34) is usually mildly bullish but only after a volatile week. According to our Seasonal Model, the DIA, QQQ and SPY are showing an average of 60% reliability for a bullish trade across the 5, 10 and 15 year averages.

The 2017 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 34;

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Key Economic Dates

In the US, investors will be waiting for new and existing home sales, durable goods orders and flash Markit PMIs. Elsewhere, key data include UK and Germany GDP growth; Japan inflation rate and manufacturing PMI; and flash PMIs for the Eurozone, Germany and France.

Mon 21 Aug

Tue 22 Aug

Wed 23 Aug

Thu 24 Aug

Fri 25 Aug

Sat 26 Aug

SUMMARY

In the previous update, I mentioned;

With the Transports leading the way down and the small and mid caps showing increasing weakness, I am becoming wary (not bearish) as September pulls closer.

DIADJT

With Friday’s close, the Transports are now two closes below its 200DSMA which puts it in a technical bear market and only 13.7 points (0.15%) away from the year’s open. The Russell2000 index is also two closes below its 200DSMA and below the year’s open by 0.2 points.

As September closes in, it would be wise to keep your eyes wide open and tighten your stops in case we get a catalyst for the traditional sell-down or suffer the proverbial Portfolio Dumping phenomenon that tends to happen towards the end of Quarter.

Happy Hunting!

 

 

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