Weekly Market Update – 04 December 2017 BMO

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Bullish Ahead of Senate Tax Vote

U.S. equities advanced this week, fueled by the prospect of a tax overhaul.

The Dow led the charge, moving higher by 2.9%, followed from a distance by the S&P 500 and the Russell 2000, which added 1.5% and 1.2%, respectively. Meanwhile, the tech-heavy Nasdaq declined 0.6% as technology stocks fell to some profit taking following a big year-to-date run.

Investors kept an eye on Washington throughout the week, awaiting the Senate’s vote on its version of a tax reform bill. Things appeared to be progressing nicely as the bill made its way through the Senate Budget Committee on Tuesday and Senator John McCain (R-AZ) voiced his support for the measure on Thursday.

However, the effort hit a bump in the road on Thursday evening when the Senate parliamentarian ruled that a revenue trigger within the bill–which would have raised taxes in the future if economic growth failed to make up for lost tax revenue–is not allowed under Senate rules.

The trigger was a key provision for several GOP Senators who are concerned about the tax overhaul’s potential impact on the national debt.

Senate Majority Leader Mitch McConnell (R-KY) suggested on Friday afternoon that a compromise to appease the aforementioned debt concerns had been reached, saying that the GOP has enough votes to pass the bill. However, an official vote has yet to take place.

The Senate’s promising progress on tax reform largely fueled this week’s rally, but equities also received support from Jerome Powell’s Fed Chair confirmation hearing, which took place on Tuesday. Mr. Powell’s comments were largely in line with the Fed’s current policy rhetoric, but he did sound a little more lax in the area of regulation.

There were a few developments that worked against the bulls this week, perhaps the most notable of which was former National Security Advisor Michael Flynn’s plea deal with Special Counsel Robert Mueller’s team–which is investigating Russia’s alleged interference in the 2016 U.S. presidential election.

Mr. Flynn pleaded guilty to lying to the FBI about his contacts with a Russian ambassador to the United States and agreed to cooperate with Mr. Mueller’s investigation. An ABC report indicated that Mr. Flynn is willing to answer questions about President Donald Trump, which reignited fears about a potential impeachment.

Also, North Korea launched a ballistic missile on Tuesday that landed in the Sea of Japan–specifically in Japan’s exclusive economic zone.

Nine of eleven sectors finished the week in positive territory. The top-performing groups were telecom services (+6.7%), financials (+5.2%), industrials (+2.9%), and energy (+2.7%), while the weakest sectors were information technology (-2.0%) and real estate (-0.5%).

The energy sector rallied after OPEC and non-OPEC nations, including Russia, agreed on Thursday to extend their production cut agreement by another nine months, as expected. Meanwhile, West Texas Intermediate crude futures finished in the red for just the second time in eight weeks, dropping 1.0% to $58.36 per barrel.

Within the industrial sector, transports showed particular strength, pushing the Dow Jones Transportation Average higher by 5.9%.

Following this week’s events, the CME FedWatch Tool still places the chances of a December rate hike at 100.0%.

(Excerpts from Briefing.com)

Dollar: Index Trims Weekly Gain

Bonds: Treasuries Climb; Spreads Tighten

Commodities: Crude Consolidates above $58p/b, Metals retreat

Baker Hughes total U.S. rig count increased by 8 to 923.

Agriculture: Corn and Wheat continues to rise, Soy consolidates

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THE WEEK AHEAD

Week 49 is the first trading week for December and the start of the month of the trading year. December 2017 has 20 trading sessions and one public holiday (Christmas, Monday 25 December).

Monday 04 December to 08 December (Week 49)

The forty-ninth week of 2017 (wk49) is flat-to-bearish over 10 and 15 year averages and very bearish over the five year average on our seasonal models on the SPY and DIA.

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The 2017 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 49;

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Key Economic Dates

The coming week will see the November jobs report in the US as the most important event. Elsewhere, China inflation and trade; Australia and South Africa GDP growth and interest rate decisions for India, Australia, Canada and Brazil will also be in the spotlight.

Mon 04 December

Tue 05 December

Wed 06 December

Thu 07 December

Fri 08 December

SUMMARY

Yields have closed to its tightest in ten years with the spreads between the 2/5, 5/10 and 10/30 at 4obps or less. The 5/10 is only 24bps and it won’t take much to flatten and invert from here.

Yields

The last two weeks have seen the benchmarks perform very much against its historical performance and in a most divergent manner. The last time I remember the benchmarks behaving so erratically was in August/September 2007 and January/February 2012.

If history is indeed repeating itself, then keep your eyes on the Yield Curve and the VIX.

VIX

And don’t get caught out if and when the fireworks begin.

Happy Hunting!

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