Weekly Market Update – 18 December 2017 BMO

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Central Banks Take Center Stage

U.S. stocks climbed to new record highs this week as investors digested policy directives from several of the world’s most influential central banks and grew increasingly optimistic about the GOP’s chances of passing its promised tax overhaul.

The S&P 500 added 0.9%, the Dow advanced 1.3%, and the Nasdaq jumped 1.4%. All three major indices settled Friday’s session at fresh record highs. The Russell 2000 outperformed on Friday but the small-cap index closed -0.5% lower for the week.

The Federal Open Market Committee voted to raise the fed funds target range by 25 basis points to 1.25%-1.50% on Wednesday, as expected. Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari–the FOMC’s two most dovish members–dissented, saying they preferred to keep the target range unchanged.

In addition, the Fed’s so-called “dot plot” revealed that the median FOMC member still anticipates three rate hikes in 2018 and two in 2019. Both figures were unchanged from the projections released in September, even though the central bank acknowledged that overall inflation and core inflation have declined this year and are running below 2.0%.

U.S. Treasuries rallied in a curve-flattening trade on Wednesday following the decision, while the U.S. Dollar Index moved sharply lower. The 2yr-10yr spread ended the week at 52 basis points, which is six basis points below last week’s closing level. The U.S. Dollar Index finished the week higher by 0.1% at 93.94.

The flattening of the yield curve weighed on lenders, sending the S&P 500’s financial sector lower by 0.1%.

Elsewhere, the European Central Bank decided to leave its key policy rate unchanged, as expected, and reiterated that it will reduce its monthly asset purchases to EUR30 billion (from EUR60 billion) starting in January and continuing through September 2018–or beyond, if necessary.

The Bank of England also met this week, voting to leave its key rate at 0.50% and its asset purchase program at GBP435 billion, as expected.

In Washington, House and Senate Republicans reportedly reached an agreement on a final version of their tax reform bill on Wednesday, but Senator Marco Rubio (R-FL) pushed for some last-minute changes, saying on Thursday that he would vote against the measure unless it further expands the child tax credit for lower-income households.

GOP leadership worked to appease Mr. Rubio and earned his support, as well as the support of Senator Bob Corker (R-TN), on Friday. With the two Senators on board, it appears that the Republicans have enough support to pass their tax reform bill, but a final vote won’t take place until early next week.

On Wall Street, telecom shares within the S&P 500 jumped 4.0% this week, underpinned by the prospect of tax reform and the Federal Communications Commission’s decision to roll back the “net neutrality” rules put in place by the Obama administration back in 2015. The rules required broadband providers to treat all internet traffic equally.

In corporate news, Walt Disney (DIS) agreed to purchase select assets from 21st Century Fox (FOXA), including its film division and much of its TV operations, for $52.4 billion in stock. The two companies added 6.8% and 5.1%, respectively, helping the consumer discretionary sector (+1.1%) finish ahead of the broader market.

(Excerpts from Briefing.com)

Tax Relief in the Making

There’s little mystery behind today’s broad-based rally effort.  It has been forged on a sense of relief that the tax bill looks ready to make its way out of the conference committee with Senator Rubio’s backing.Senator Rubio caused a bit of a stir on Thursday when he said he would vote ‘No’ on a compromise bill that did not expand the refundability of the child tax credit.  That concern, reportedly, has been addressed and now Mr. Rubio is said to be in favor of backing the compromise bill.

The bill’s passage isn’t guaranteed until the vote in the House and Senate chambers guarantees its passing, yet there is no mistaking in today’s action that optimism is high that the bill is headed that way and eventually to the president’s desk for signing before Christmas.The Russell 2000, which was the sore spot yesterday on Mr. Rubio’s protestations, is the sweet spot today — up 1.9% and leading all major indices — as investors price in the expected benefits for domestic small-cap companies, which pay higher effective tax rates and will presumably benefit greatly from the cut in the corporate tax rate.

Another indicator pointing to the notion that it should be clear sailing ahead in the near term for the tax bill — and the stock market — is the CBOE Volatility Index.  It is down 10.8% to 9.36, as market participants are denouncing the need for hedging stock portfolios against downside risk.

That could of course spell big problems if the tax bill gets voted down, yet that seems to be far from the stock market’s base-case scenario, which is rooted in a best-case scenario of it passing and being signed into law before Christmas.

Dollar: Dollar Index Reclaims 50-Day Moving Average Again

The U.S. Dollar Index was up 0.5% at 93.96, returning above its 50-day moving average (93.80) after finding resistance near that level during Friday’s session. The dollar saw some overnight selling, but began staging a rebound during the European session, continuing its push into morning action. The morning rebound accelerated after the release of an in-line Empire Manufacturing report for December (18.0). The final thrust to a session high took place even though the November Industrial Production report (actual: 0.2%; consensus: 0.3%) missed expectations. Thanks to today’s rebound, the Index is on track for its third consecutive weekly advance, looking to eke out a slim gain of 0.1%.

Bonds: Long Bond Climbs Again

U.S. Treasuries ended the week on a mixed note, as shorter-dated maturities registered modest losses while the long bond continued its show of relative strength. A wave of selling developed in the wake of an in-line December Empire Manufacturing report (actual: 18.0) and continued through the release of below-consensus Industrial Production for November (actual: 0.2%; consensus: 0.3%). The 2-yr note and the 5-yr note saw some light intraday buying, but couldn’t climb too far above their morning lows. Meanwhile, the 10-yr note erased the bulk of its morning decline and the long bond powered to a fresh high after reclaiming its entire post-data loss. Reports from Washington suggested that the tax bill is back on track for passage after Senator Marco Rubio’s support was regained. That said, the Treasury market has questions about the plan’s ability to boost economic growth, evidenced by the decline in the 30-yr yield over the past three months. The yield curve flattening trend continued with the 2s10s spread compressing to 52 bps from last Friday’s 58 bps. The 2s30s spread contracted to 85 bps from 97 bps one week ago.

Commodities: Crude consolidates below $58p/b, Metals bounce back on seasonal run

Baker Hughes total U.S. rig count decreased by 1 to 930 following last week’s increase of 2.

Agriculture: Wheat consolidates, Corn and Soy continues weakness

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THE NEXT TWO WEEKS AHEAD

Week 51 is the third trading week for December and the penultimate trading week of the year. Week 52 is the last trading week for 2017 and has only four sessions as Monday is Christmas Day.

Monday 18 December to 29 December (Week 51 and 52)

The fifty-first week of 2017 (wk51) is very bullish across all time-frames on the SPY and DIA.

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The fifty-second week of 2017 (wk52) is unreliably bullish over the 15 year average, volatile over 10 years and very bearish in the last 5 years 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 51;

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The 2017 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 52;

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Key Economic Dates

In the coming week, the most important US releases will be the final GDP growth for Q3, personal spending, housing data and durable goods. Investors will also be waiting for: UK final GDP growth and CBI factory orders; Japan interest rate decision and trade balance; Eurozone inflation and Germany business and consumer morale. There is no significant economic data in the final week of the year.

Mon 18 December

Tue 19 December

Wed 20 December

Thu 21 December

Fri 22 December

Mon 25 December

Tue 26 December

Wed 27 December

Thu 28 December

Fri 29 December

SUMMARY

Yields are continuing to hint at 2018 weakness as the curve continued to flatten by pivoting on the belly go the curve.

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Even though the yields are under-par, one must consider the Central Bank’s role is the bond trade having an effect on the overall yields along the 2, 5, 10 and 30 year maturities. It would seem that given the trillions that poured into the bond market, the “new norm” on rates would be lower than in the past when the average high on yields were 4% to 5% on the 30 year.  Thus, this flattening can be construed as a pivot on the longer maturities, as was the case in December 2007/January 2008. When looking at a three-year timeframe, the pivot on the longer maturities is even more obvious.

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January is going to be a critical month seeing how most Inverted Yield Curves in the past have historically favoured January or Q1.

Bitcoin made a Rising Wedge with a record high 17,985 this week.

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This has propelled Bitcoin into the #1 biggest bubble in history.

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*UPDATE at 22:00 on 17 Dec: Bitcoin makes record high 19,844.

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Bring on 2018!

That’s it! Just like that, a whole trading year is gone and we start a whole new cycle again in two weeks’ time. It has been a heck of a year.

My first year in independence has really opened my eyes to opportunities I never saw before and opened doors I never knew I could open. It has made me realise a bigger potential that I could not have imagined in the ten years before. It has given me a direction and purpose that didn’t exist before. I am grateful for the opportunities that have opened up for me and the promise of brighter things to come in 2018 and 2019.

With one week to go till Christmas, I’d like to take this opportunity to wish everyone a great Christmas week ahead and thank all my readers for the support and contributions that make 2017 a truly memorable year for me!

Happy Hunting!

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