Weekly Market Update – 10 December 2017 BMO

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Waiting on Washington

Equities ticked higher this week as investors geared up for an end-of-year showdown in Washington.

The S&P 500 and the Dow Jones Industrial Average both advanced 0.4%, closing Friday’s session at fresh record highs, while the tech-heavy Nasdaq underperformed, losing 0.1%. Small caps struggled this week, pushing the Russell 2000 lower by 1.0%.

Investor sentiment was upbeat at Monday’s opening bell after the U.S. Senate passed its version of a tax reform bill over the weekend, allowing the GOP to enter the final stretch of its quest to rewrite the tax code. House and Senate Republicans are hoping to reach an agreement on a final bill and pass said bill in their respective chambers before December 22.

In addition to the GOP’s self-imposed tax reform deadline, December 22 is the new end date for government funding after Congress agreed to a two-week stopgap spending bill on Thursday evening. The risk of a government shutdown was on investors’ minds throughout the week, helping to keep the bulls in check.

With the legislative agenda for the rest of the year virtually set, investors appeared to be in wait-and-see mode for much of the week, taking some profits and readjusting their portfolios. However, the Employment Situation Report for November, which was released on Friday, helped equities finish the week on a positive note.

The Employment Situation Report for November showed a larger-than-expected increase in nonfarm payrolls (228K actual vs 190K consensus) and a smaller-than-expected rise in average hourly earnings (+0.2% actual vs +0.3% consensus).

In other words, job growth has remained strong while wages–which are positively correlated with inflation–have remained relatively subdued. This combination has proven to be highly beneficial for the stock market as it points to steady economic growth but leaves out the inflationary concerns that typically accompany said growth.

Corporate news was pretty light this week, but it’s worth noting that CVS Health (CVS) acquired health insurer Aetna (AET) for $207 per share in cash and stock. That price represents a premium of about 29% to where Aetna shares were trading before the Wall Street Journal reported that the companies were in talks in October.

The S&P 500’s eleven sectors finished the week mixed, with seven settling in the green and four closing in the red. The financial sector was the top performer, adding 1.5%, followed closely by the industrial group (+1.4%). Within the industrial space, transports showed particular strength, pushing the Dow Jones Transportation Average higher by 2.1%.

On the downside, the energy sector lost 0.7% amid a decrease in the price of crude oil; West Texas Intermediate crude futures declined 1.8% to $57.30 per barrel. The utilities space (-1.0%) also struggled as energy providers like Edison (EIX) faced outages due to wild fires in Southern California; EIX shares lost 11.1% for the week.

A positive vibe from overseas equity markets on Friday also contributed to the upbeat sentiment on Wall Street. Stocks in the Asia-Pacific region finished Friday broadly higher as investors rallied around China’s better-than-expected November trade surplus (+$40.21 billion actual vs +$35.00 billion expected). Japan’s Nikkei added 1.4%, finishing flat for the week.

Elsewhere, the Euro Stoxx 50 settled with a gain of 0.6% after the UK and the European Union reached an agreement on Brexit divorce terms. Britain will pay as much as GBP39 billion to complete the separation and there will be no hard border between Ireland and Northern Ireland. Talks will now turn to future trade relations.

In addition, Congress’ decision to pass a two-week stopgap spending bill, which delayed an impending government shutdown, helped underpin Friday’s advance.

Looking ahead, the Fed is widely expected to announce a rate hike of 25 basis points next week, which would bring the fed funds target range to 1.25%-1.50%.

(Excerpts from Briefing.com)

Employment Situation Report

Dollar: 50-Day Moving Average Reclaimed

Bonds: True-to-Trend Jobs Report Elicits Muted Response

Commodities: Crude closes below $58p/b, Metals continue weakness

Baker Hughes total U.S. rig count increased by 2 to 931 following last week’s increase of 6.

Agriculture: Grains retreat

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THE WEEK AHEAD

Week 50 is the second trading week for December and expiration week (Triple Witching) for December contracts.

Monday 11 December to 15 December (Week 50)

The fiftieth week of 2017 (wk50) is bullish over the 5 year average and bearish over the 10 year average on our seasonal models on the SPY and DIA. The 15 year average is bullish on the DIA and bearish on the SPY

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The 2017 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 50;

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Key Economic Dates

Next week, the most important event will be the Fed monetary policy decision. The ECB and the BoE will also provide an update on their monetary policy. Other key data include: US inflation rate, retail trade, industrial output and PMIs; UK inflation and unemployment; PMIs for the Eurozone, Germany and France; and China factory output and retail sales.

Mon 11 December

Tue 12 December

Wed 13 December

Thu 14 December

Fri 15 December

SUMMARY

Bitcoin has been the rage for the last two weeks. This week, the cryptocurrency broke all sorts of records by making the most gains in the quickest time. Barely breaking above 15000 on Wednesday by gaining 1000 points in a day, Bitcoin went on to get above 16000 in four hours on Thursday and then broke to 17,612 (+23%) that evening.

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This has become the second most vertical chart in financial history, after Tulip Mania.

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In the age of the “Everything Bubble” bubble, this one stands out as the most impressive … and the scariest of them all. And oh … the price fell straight back down below 15,000 and is languishing at 14,100 over the weekend.

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Friday AMC

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Sunday morning

The nature of the bubbled economy also brings out the scams, cheats and failures as liquidity dries up and financial products falter, as cash-flows slow and credit gets tight, and as costs rise and profits falter.

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Even having a huge and luxurious office next to SGX, your own painted livery on an international airline and having ministers and news networks associated to the business does not assure investors that the worst won’t happen. It was very upsetting to drive past the building to see a huge “FOR RENT” sign right on the door of the once behemoth institution.

This is why I have always advocated that everyone should take the effort to learn the business before investing in something you don’t understand or something a sale-person sold you. No matter how good, real and convincing the package looks, if you don’t know anything and everything about it, don’t buy it.

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http://www.tnp.sg/news/business/investors-file-police-reports-over-fintech-firm-sixcapital

BONUS!

Here’s an excerpt of our Annual Christmas Gathering regarding the yield curve and a certain pattern that has preceded every major economic and market downturn. Enjoy!

Happy Hunting!

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