Weekly Market Update – 09 October 2017 BMO

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Positive Week Ends on a Down Note

Stocks ended the week on a down note, giving back a small portion of their weekly gains. Losses were modest, however, with the S&P 500 (-0.1%) and the Dow (unch) settling just a tick below their unchanged marks. The tech-heavy Nasdaq (+0.1%) eked out a small victory, settling at yet another record high. For the week, the S&P 500 added 1.2%.

Stocks started October on the front foot, climbing to new record highs once again, despite the devastating shooting in Las Vegas on Sunday evening, which claimed the lives of more than 50 people and injured over 500 others. The major indices all settled the week in the green with the Dow, the Nasdaq, and the S&P 500 adding 1.7%, 1.5%, and 1.2%, respectively.

This week’s bullish bias had its roots in last week’s run to record highs, which was sparked by the release of the GOP’s latest tax reform outline. The House kept the ball rolling this week by passing a budget that slashes government spending in anticipation of decreased tax revenue. The GOP still has a long way to go, but the market liked the progress.

Excited by the idea of a tax overhaul, the S&P 500’s financial sector climbed 1.9% this week to finish comfortably ahead of the broader market. The financial sector has added 10.6% since closing at a three month low on September 7 and now trades just a tick behind the benchmark index for the year.

Automakers were strong this week after reporting largely solid U.S. sales figures for the month of September, which were helped by the replacement of vehicles lost to Hurricane Harvey and Hurricane Irma. General Motors (GM) showed particular strength, climbing 11.3%, after reporting a year-over-year increase of 12.0%.

Netflix (NFLX) also had a good showing, hitting a fresh all-time high, after UBS raised its target price to $225 from $190 and following news that the company will raise the price of its standard and premium video-streaming services. NFLX shares settled with a gain of 9.2%.

Equities did end the week on a down note, however, following a noisy Employment Situation Report for September. The market took the report with a grain of salt since it was tainted by the impacts of Hurricane Harvey and Hurricane Irma, but it didn’t do much to alleviate rate-hike concerns nonetheless, showing an increase of 0.5% in average hourly earnings.

As a reminder, average hourly earnings growth, which is positively correlated with inflation, has been tepid in recent months, putting the Fed’s rate-hike forecast into question. However, following Friday’s jobs report, the market now strongly believes the U.S. central bank will hike rates one more time this year, thereby achieving its goal of three rate hikes in 2017.

The fed funds futures market places the chances of a December rate hike at 93.1%, up from last week’s 77.9%.

It’s also worth pointing out that the CBOE Volatility Index (VIX) settled at an all-time low (9.19) on Thursday, signaling the market’s belief that volatility will remain subdued in the short term. The previous record low (9.31) was recorded nearly 24 years ago in December 1993.

Reviewing Friday’s September Employment Situation Report:

(Excerpts from Briefing.com)

Currencies: Dollar Edges Higher

The U.S. Dollar Index is down 0.1% at 93.87 after surrendering its Friday morning gain. The index is on track to gain 0.9% for the week after being up 1.3% for the week at its highest point of the day. The greenback rallied after the Employment Situation report for September (actual: -33K; consensus: 75K) showed a 0.5% increase in average hourly earnings, lifting the year-over-year growth rate to 2.9%, the highest level seen since the financial crisis.

Bonds Yields: 10-yr Yield Gains

U.S. Treasuries ended the week with modest losses after spiking off their morning lows. The trading day began with some light selling, which accelerated after the release of the Employment Situation report for September. The report missed headline expectations, showing a decrease of 33,000 in nonfarm payrolls (consensus: 75K), but average hourly earnings increased 0.5% (consensus: 0.2%), lifting the year-over-year growth rate to 2.9%, the highest level seen since the financial crisis. The spike in the wage growth rate solidified expectations for a rate hike in December, weighing on Treasuries. The post-data selling pressured the 10-yr note beneath its low from July, lifting the benchmark yield to a session high of 2.402%. However, buyers not only absorbed the offer, but then forced some weak-handed sellers to cover their positions, dropping the 10-yr yield back below its July high (2.396%). The high-volume reversal took place inside a 90-minute window, giving way to some late-morning/early-afternoon selling.

The yield curve rose across the board with the 2-yr maturities gaining the most.

Commodities: Crude gets pummelled to end the week lower

Crude retreated below $50/barrel after four weeks of gains. Baker Hughes total U.S. rig count decreased by 4 to 936 following last week’s increase of 5. Gold fell further and Silver rebounded while  Copper turned upwards to break a four week losing streak. 

Agriculture: Corn and Wheat resume their slides, Soy strengthens. 

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THE WEEK AHEAD

Week 41 is the start of Q3 Earnings Season beginning with the announcement of JPM’s and C’s numbers on Thursday. Friday will see WFC and BAC putting their results forward. It’s going to be a highly anticipated week for Financials.

Monday 09 to Friday 13 October (Week 41)

The forty-first week of 2017 (wk41) is Bullish over 10 and 15 years and bearish over the last 5 years for the DIA and SPY.

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The 2017 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 41;

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Key Economic Dates

In the US, the most important events will be the release of FOMC minutes, inflation and retail sales and the preliminary reading of Michigan Consumer Sentiment. Elsewhere, key data include UK industrial production, construction and trade; Australia business and consumer confidence; and China Caixin services PMI and trade.

Mon 09 October

Tue 10 October

Wed 11 October

Thu 12 October

Fri 13 October

SUMMARY

In spite of the shocker from the employment report, the market held its ground on Friday with some resilience. I wonder if the coming week (41) won’t see an after effect. I am likely to stay away from the bullish trade till the end of the week and watch for the earnings from the Financial Big Boys before deciding if I want to reverse the bear for a bull because week 42 is historically the most bullish week of October.

Happy Hunting!

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