Weekly Market Update – 25 September 2017 BMO

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Holding Steady

Friday was another quiet day on Wall Street as the major U.S. indices hovered near their flat lines from start to finish. The S&P 500 (+0.1%) finished just a tick above its unchanged mark, as did the Nasdaq (+0.1%), thanks to a late-afternoon rally that left the benchmark index at its best level of the day. Meanwhile, the Dow (unch) settled with a slim loss and the Russell 2000 (+0.5%) outperformed, settling at a new all-time high.

Equities held steady this week as investors digested the latest FOMC policy directive, which was released on Wednesday afternoon. The major indices ticked up to new record highs in the first half of the week, but faltered a bit on the back nine. The S&P 500 ticked up 0.1% while the Dow (+0.4%) did a little better and the Nasdaq (-0.3%) did a little worse.

The Fed’s latest policy directive came in pretty much as expected. The FOMC unanimously voted to leave the fed funds target range at 1.00%-1.25% and announced that it will start its balance sheet normalization process in October. Meanwhile, the Fed’s so-called “dot plot” was unchanged from the one released in June, showing that the median FOMC member still anticipates an additional rate hike in 2017 and three rate hikes in 2018.

Accordingly, investors upwardly adjusted their rate-hike expectations, evidenced by the fed funds futures market, which now places the chances of a December rate hike at 72.8% – up from 57.8% last week and 31.9% the week before that. Bonds sold off for the second week in a row following the FOMC announcement, sending yields higher across the curve. The 2-yr yield climbed six basis points to 1.44%, hitting its highest level in nearly nine years, while the benchmark 10-yr yield also jumped six basis points to 2.26%.

Within the equity market, the heavily-weighted financial sector (+2.7%) finished near the top of the sector standings, benefiting from the prospect of heightened interest rates and some sector rotation. The financial group has trailed the broader market for much of the year, but has been making a come back over the last two weeks; the sector has added 6.9% since September 7.

The telecom services group (+3.8%) also put together a solid performance this week, trimming its year-to-date loss to 8.5%, amid reports that Sprint (S) and T-Mobile US (TMUS) are nearing a merger deal after more than four months of on-and-off talks. The two companies settled the week with gains of 10.8% and 4.7%, respectively.

On the flip side, the top-weighted technology sector (-0.7%) underperformed, thanks in large part to Apple (AAPL), which dropped 5.0%. There were rumors of softer-than-expected demand for the new iPhone 8, which hit stores on Friday, but this week’s slide was also likely due to some end-of-quarter profit taking following yet another solid three-month stretch for the company. AAPL shares will enter Monday’s session with a quarter-to-date gain of 5.5% and a year-to-date gain of 31.1%.

Countercyclical groups like health care (-1.2%), consumer staples (-2.3%), and utilities (-2.8%) also struggled this week while cyclical groups like materials (+1.0%), industrials (+2.0%), and energy (+2.0%) finished with sizable gains. Meanwhile, the growth-sensitive consumer discretionary and real estate groups lost 0.1% and 2.8%, respectively.

Sector year-to-date performance;

In politics, President Trump made his United Nations debut on Tuesday, taking a hard stance against North Korea. The hermit nation later criticized the president for his comments and threatened to test a hydrogen bomb in the Pacific Ocean.

Meanwhile, a new health-care bill written by Senators Lindsey Graham (R-SC) and Bill Cassidy (R-LA) gained support within the GOP this week, but its passage looks unlikely after Senators Rand Paul (R-KY) and John McCain (R-AZ) voiced their opposition and Senator Susan Collins (R-ME) said she is leaning towards voting ‘no.’ The GOP can only afford to lose two votes in the Senate, assuming Vice President Mike Pence votes in favor of the bill in the event of a tie.

Interesting to note that the Russells made significant gains in a week when the major indices were flat.

(Excerpts from Briefing.com)

Currencies: Dollar Trims Weekly Gain

The U.S. Dollar Index is lower by 0.1% at 92.15, narrowing this week’s gain to 0.3%. All in all, the Friday session proved to be quiet and not particularly volatile. The greenback saw light overnight selling, which boosted the yen, after North Korea threatened to conduct a nuclear test over the Pacific Ocean. The index notched its low around the start of the European session and spent the next few hours inching higher. Investors did not receive any economic data on Friday.

Bonds Yields: Down Week Ends on Higher Note

U.S. Treasuries ended the week on a mostly higher, but generally quiet, note. The Friday affair began with modest gains after the overnight session featured KCNA’s release of a statement that was attributed to North Korea’s Supreme Leader Kim Jong-un. The statement noted that ‘the highest level of countermeasure’ will be considered in response to President Donald Trump’s speech to the United Nations General Assembly. Later in the Asian session, North Korea’s Foreign Minister revealed that his country may conduct a nuclear test over the Pacific. The cash session featured sideways action as Treasuries built on their opening gains through the first hour of action, but returned to their opening levels in the late morning. The 10-yr yield rose six basis points for the week, but that masked flattening in the yield curve. Granted, the 2s10s spread remained unchanged for the week at 82 bps, but the 2s30s spread compressed to 136 bps from last week’s 139 bps and the 5s30s spread contracted to 93 bps from last week’s 97 bps.

Shorter maturity yields continue to strengthen to flatten the curve further.

Commodities: Oil gains, Metals fade

Crude continued its strength from the last two weeks to close above $50/barrel. Baker Hughes total U.S. rig count declined by 1 to 935 following last week’s decline of 8. Gold and Silver fell for another consecutive week, Copper consolidated below $3.00 for a second week. 

Agriculture: Corn continues to consolidate, Soy falls back, Wheat stalls. 

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THE WEEK AHEAD

Week 39 is the most treacherous week of September. It usually starts out bearish, becomes volatile midweek and sells off at the end of the week.

Monday 25 to Friday 29 September (Week 39)

The thirty-ninth week of 2017 (wk39) is bearish for the DIA and SPY across the 5, 10 and 15 year averages.

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The 2017 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 39;

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Key Economic Dates

Next week, the most important data for the US include the final estimate for GDP growth, PCE inflation, personal income and spending, durable goods and new home sales. Investors will also be looking for updated UK GDP figures; inflation for the Euro Area, Germany, France and Italy; Japan inflation and unemployment and China PMIs.

Mon 25 September

Tue 26 September

Wed 27 September

Thu 28 September

Fri 29 September

SUMMARY

MarketWatch published a great report with an amazing graphic regarding the current bubble.

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Click to expand and zoom in

In 2000, we had the dot-com bubble.
In 2007, we had the housing bubble.
In 2017, we have the everything bubble.”

I like how its called, “The Everything Bubble”. It comes as no surprise because historically, whenever the government or central bank threw cheap money at the market, it always resulted in a bubble of sorts. So they threw $4Tr over eight years at the market, act surprised that the market did well and now gawk at this massive asset (everything) bubble and ask, “how did that happen?”.

If and when this bursts, it will be the most massive capitulation of our time. If it doesn’t burst, then it will just delay the inevitable and make the eventuality even more spectacular.

Till then, I remain cautiously bullish.

Happy Hunting!

 

 

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