Weekly Market Update – 18 January 2018 BMO

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Week in Review: Rally Keeps on Rolling

Equities kept the new year rally rolling this week with the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500 adding between 1.6% and 2.0%. All three major U.S. indices finished Friday at record highs and now hold year-to-date gains between 4.2% and 5.2%.

The fourth quarter earnings season unofficially began on Friday with reports from financial heavyweights JPMorgan Chase (JPM) and Wells Fargo (WFC). Both companies beat earnings expectations, but came up short on revenues. PNC (PNC) and BlackRock (BLK) also reported, beating both earnings and revenue estimates.

The financial sector rallied 0.9% on Friday following the earnings releases, settling the week with a gain of 2.9%. A curve-steepening sell off in the Treasury market, which increased the 2yr-10yr spread by three basis points to 55 basis points, was a boon to the financial group.

Treasuries sold off due to several factors, including the Bank of Japan’s decision to trim its daily purchases of Japanese government bonds, minutes from the European Central Bank’s last policy meeting that revealed the ECB could begin preparing investors for the end of its bond-buying program early this year, and a Bloomberg report that China may slow or halt its purchases of U.S. Treasuries–however, Chinese officials later denied the report.

In addition, the core Consumer Price Index increased more than expected in December (+0.3% actual vs +0.2% Briefing.com consensus), which also contributed to the Treasury sell off.

The yield on the benchmark 10-yr Treasury note settled the week higher by seven basis points at 2.55%, but traded as high as 2.60%–its best level since March 2017. The 2-yr yield, meanwhile, advanced four basis points to 2.00%.

Outside of financials, the consumer discretionary (+3.1%), industrials (+3.2%), and energy (+3.2%) sectors had strong performances this week. Energy benefited from another increase in the price of crude oil, which climbed 4.5% to $64.21 per barrel, touching its highest level since December 2014.

In the industrial sector, transports showed particular strength, pushing the Dow Jones Transportation Average higher by 4.2%. The DJTA finished Friday at a record high.

On the downside, the lightly-weighted utilities (-2.1%), telecom services (-2.1%), and real estate (-3.5%) sectors struggled, extending their year-to-date losses; the three groups have lost between 3.4% and 5.3% since the start of 2018.

The top-weighted technology sector (+0.9%) underperformed with chipmakers showing relative weakness following a solid start to the year; the PHLX Semiconductor Index lost 0.3%. Facebook(FB) tumbled 4.5% on Friday amid concerns that changes to its news feed will cause users to spend less time on the site.

(Excerpts from Briefing.com)

Dollar: Index Nears 2017 Low

The US Dollar Index was down 0.8% at 91.08, dropping into the neighborhood of last year’s low that was notched in September. The Index is on track to register its third consecutive decline after retreating throughout the session. The Index spiked off its low in response to a hotter than expected core CPI for December (actual 0.3%; consensus 0.2%), but that bounce was retraced in short order, followed by an afternoon slide to a fresh session low. The Index, which is down 0.9% for the week, has recorded four consecutive weekly losses, having surrendered 3.0% during that span.

Bonds: 2-yr Yield Hits 2.00%

U.S. Treasuries ended the week on a mostly lower note with shorter durations showing relative weakness. Treasuries slumped to session lows shortly after the cash open, responding to a hotter than expected core CPI for December (actual 0.3%; consensus 0.2%) and in-line December Retail Sales (actual 0.4%). However, the morning dive was followed by a swift rebound in the long bond, which reclaimed its loss over the next two hours and climbed to a fresh session high in afternoon action. The 10-yr note recovered a large portion of its loss after morning selling drove its yield to 2.594%, just shy of Wednesday’s high at 2.595%. Up front, the 2-yr note underperformed throughout the day with its yield climbing above the 2.00% mark for the first time since late 2008. Yield curve steepening from the early portion of the week was mostly undone as the 2s10s spread finished the week at 55 bps, up three basis points since last Friday while the 2s30s spread ended the week unchanged at 85 bps.

For the week, the yield curve steepened. However, the  10s30s spread closed to 30bps from 33bps the previous week. The 5s10s spread stays unchanged at 20bps.

Crude: WTI surges higher for the week

Crude

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased on Wednesday by 4.9 mln barrels from the previous week. At 419.5 mln barrels, U.S. crude oil inventories are in the middle of the average range for this time of year. Total motor gasoline inventories increased by 4.1 mln barrels last week, and are near the top of the average range. Blending components inventories increased last week while finished gasoline inventories were down slightly. Distillate fuel inventories increased by 4.3 mln barrels last week and are in the middle of the average range for this time of year. Propane/propylene inventories decreased by 6.3 mln barrels last week, but are in the middle of the average range. Total commercial petroleum inventories decreased by 5.5 mln barrels last week.

Baker Hughes total U.S. rig count increased by 15 to 939 following last week’s decline of 5

Metals: Gold continues seasonal rally, Silver corrects, Copper consolidates

World Agricultural Supply and Demand Estimates Report (WASDE)

Agriculture: Grains correct for the week

THE WEEK AHEAD

The coming shortened week is second week of Q4 Earnings Season and January Expiration week.

Tuesday 16 to 19 January (Week 03)

The third week of 2018 (wk03) is very bullish over the last five years and moderately bearish across the 10 and 15 year time-frames on the SPY and DIA according to our seasonal models.

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The 2018 Stock Trader’s Almanac’s averages for the benchmark indices (based on 21 years) for week 03;

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Key Economic Dates

In the US, the most important releases will be the preliminary reading of Michigan consumer sentiment, industrial production and housing data. Investors will also be waiting for: China Q4 GDP growth, retail trade, industrial output and fixed asset investment; UK consumer prices; Australia employment; the Eurozone inflation; and Japan machinery orders.

Mon 15 January

Tue 16 January

Wed 17 January

Thu 18 January

Fri 19 January

Earnings Calendar for Week of January 16

Monday (January 15)

Tuesday (January 16)

Wednesday (January 17)

Thursday (January 18)

Friday (January 19)

SUMMARY

The first five days of January have finished up, implying that 2018 is likely to look promising for the bulls. If early indications of earnings are anything to go by, we could be looking at more upside in the weeks to come.

JPMorgan Chase (JPM), Wells Fargo (WFC), PNC (PNC), and BlackRock (BLK) kicked off the fourth quarter earnings season on a mostly positive note as all four reported better-than-expected earnings. However, their revenue results were mixed; JPMorgan and Wells Fargo missed estimates, while PNC and BlackRock beat expectations. The financial sector stayed in line with the broader market for most of the day and then rallied in the final minutes to settle higher by 0.9%;

Another week and another round of questions about how much higher this market can climb before it falls apart. The US economy is well capable of more growth and expansion but its market is brimming with bubbles. Something’s got to give.

Happy Hunting!

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