Weekly Market Update – 02 October 2017 BMO

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Wall Street Ends Q3 at Record Highs As Reflation Trade Returns

Enticed by the idea of a tax overhaul, investors pushed equities higher once again this week, sending the S&P 500 (+0.7%), the Nasdaq (+1.1%), and the small-cap Russell 2000 (+2.8%) to new record highs. The Dow lagged this week, but still managed to eke out a modest gain (+0.3%). The S&P 500 finished the third quarter with a gain of 4.0%.

Technology stocks weighed on the broader market on Monday as investors engaged in a sector rotation trade that left the S&P 500’s technology sector lower by 1.4%. Technology names were weak from the jump, but selling accelerated following comments from North Korea’s foreign minister, who said that President Trump effectively declared war against North Korea in his U.N. speech last week and, therefore, Pyongyang has the right to take countermeasures against the U.S.–including shooting down U.S. strategic bombers, even if they’re not in North Korean airspace.

Investors turned their attention to Fed Chair Janet Yellen on Tuesday as she gave a speech entitled “Inflation, Uncertainty, and Monetary Policy” at the NABE’s annual meeting. Ms. Yellen defended a gradual path of rate hikes despite continued uncertainty in the area of inflation, but her comments didn’t move the financial markets; equities finished the session flat.

Things turned around for the equity market on Wednesday as investors cheered the GOP’s tax reform outline, sending equities into positive territory for the week. Some of the most notable highlights of the plan include cutting the corporate tax rate to 20% from 35%, doubling the standard deduction, and reducing the number of tax brackets to three from seven. The plan calls for trimming the highest tax rate to 35.0% from 39.6%, but Congress will have the option to add a fourth bracket for the very top earners.

Details on how the government will make up for the immediate loss in tax revenue were limited. This topic will likely be an area of contention for the GOP going forward as many conservatives are opposed to the idea of driving up the federal deficit, which would probably be necessary to fund the tax overhaul–at least in the short term.

Market-moving headlines were scarce on Thursday, but that didn’t prevent the S&P 500 from ticking up and registering a new record close. Roku (ROKU) opened for trading on the Nasdaq exchange on Thursday and had a solid first day, settling 67.9% above its IPO price of $14.00 per share.

Investors pushed stocks higher once again on Friday after the core PCE Price Index–the Fed’s preferred gauge for inflation–for August came in below expectations, showing a month-over-month increase of 0.1% (Briefing.com consensus +0.2%). On a year-over-year basis, the core PCE Price Index is up 1.3%, down from 1.4% in the prior reading, and still a ways below the Fed’s target of 2.0%.

Still, the fed funds futures market projects that the next rate hike will occur at the December FOMC meeting with an implied probability of 77.9%, up from 72.8% last week. In Washington, President Trump said he plans to make a decision on who will become the next Fed Chair sometime in the next 2-3 weeks. Reports indicate that current Fed Chair Janet Yellen and former Fed Governor Kevin Warsh are the front runners for the appointment.

Equities ended the week, and the quarter, on a positive note, sending the S&P 500 (+0.4%) higher for the fourth session in a row. The benchmark index finished at a new record high, as did the Nasdaq (+0.7%) and the Russell 2000 (+0.1%), while the Dow (+0.1%) settled about eight points short of its record mark. For the week, the S&P 500 added 0.7%.

(Excerpts from Briefing.com)

Currencies: Dollar Edges Higher

The U.S. Dollar Index is up 0.1% at 93.13, looking to end the week higher by 1.1%. The Index is all but sure to secure its third consecutive weekly advance, returning into the middle of its range from August. The final session of the week was very quiet as the greenback showed modest overnight strength, but dipped to a session low after today’s economic data showed a slowdown in year-over-year core PCE to 1.3% in August from 1.4% in July. The index returned to its overnight high in short order, but could not overtake that level, dipping to its flat line, where it has hovered during afternoon action. The S&P 500 is up 0.3%, looking to end the third quarter with a gain of 3.8%.

Bonds Yields: 10-yr Yield Rests on 200-Day Average

U.S. Treasuries ended their third consecutive down week on a mostly lower note. The long bond posted a modest gain while shorter maturities finished in the red with the 10-yr yield settling right on its 200-day moving average of 2.326%. The 2s10s spread remained unchanged at 86 bps, but increased four basis points for the week as the reflation trade was reinvigorated by the outline of the Trump administration’s tax plan and hawkish remarks from Fed Chair Janet Yellen. Ms. Yellen’s speech on Tuesday strengthened expectations for a rate hike in December, but today’s batch of economic data included the core PCE Price Index for August, which continued its steady decline, slowing to 1.3% year-over-year from 1.4% in July. The core PCE Price Index stood at 1.9% in January. 10s, 5s, and 2s climbed to highs in response to the data, but the bid was reversed in short order. The long bond continued inching higher into the close while shorter maturities finished near their lows.

For the first time in months, the yield curve steepened and widened its spreads across the board.

Commodities: Oil continues to gain, Precious continue to fade, Copper unchanged for second week.

Crude continued its strength from the last three weeks to close above $51/barrel. Baker Hughes total U.S. rig count increased by 5 to 940 following last week’s decline of 1. Gold and Silver remain below their critical $1300/oz and $17/oz respectively and Copper remains unchanged below $3.00 for a third week. 

Agriculture: Corn and Wheat continue to consolidate, Soy bounces. 

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THE WEEK AHEAD

Week 40 starts the first trading session of Quarter Four, the final quarter of the year and the end of the worst six months on the DOW and S&P500.

Monday 02 to Friday 06 October (Week 40)

The fortieth week of 2017 (wk40) is rather strange having been bearish with a low rate of reliability (but not bullish) over 10 and 15 years and bullish over the last 5 years.

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The 2017 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 40;

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Key Economic Dates

In the US, the most important events will be nonfarm payrolls, wage growth, trade balance, factory orders and ISM PMIs. Elsewhere in the world: Markit PMIs; Japan Tankan business sentiment; Eurozone unemployment and retail trade; and Germany factory orders. Also, Australia and India will decide on monetary policy.

Mon 02 October

Tue 03 October

Wed 04 October

Thu 05 October

Fri 06 October

SUMMARY

Will this October be the correction we’ve been anticipating or become yet another Bear Killer Month? I remain bullish albeit with less optimism as this market reaches higher highs without a correction. There doesn’t seem to be anything to stop the bulls yet.

However, it is when you least expect it that the market makes its unexpected move to catch you with your pants down. I am staying on my guard and keeping things short and sweet and only stick to the high probability trades.

Happy Hunting!

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