Weekly Market Update – 29 January 2018 BMO

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Dexes

Week in Review: Politics, Earnings, and New Records

Wall Street continued its strong start to 2018, posting gains for the fourth consecutive week. The Nasdaq jumped 2.3% this week, while the S&P 500 climbed 2.2%, and the Dow Jones Industrial Average advanced 2.1%. The three major indices finished Friday at new all-time highs and now hold year-to-date gains between 7.5% and 8.7%.

The first government shutdown since 2013 lasted just three days, coming to an end on Monday evening when Congress passed a short-term funding bill that will keep the government running until February 8. Republicans, who control the Senate 51 to 49, needed help from Democrats to pass the funding measure, as it requires 60 votes. Democrats resisted at first, forcing the shutdown, but eventually gave in after Republicans promised to soon address the fate of the so-called “Dreamers”–undocumented immigrants who were brought to the U.S. as children.

Meanwhile, President Trump made his way to Davos, Switzerland for the World Economic Forum, where he pitched to international companies and investors in a speech on Friday, saying “America is open for business.” He also did an interview with CNBC in Davos, during which he clarified his administration’s stance on the U.S. dollar, saying that he ultimately wants to see a stronger dollar. Earlier in the week, Treasury Secretary Steven Mnuchin said he welcomes a weakening of the dollar as it’s “good for trade.”

The U.S. Dollar Index made sharp moves in reaction to the aforementioned comments, ultimately ending the week lower by 1.6% at 88.92–its lowest level in three years.

Currency traders also chewed on the latest policy decisions from the Bank of Japan and the European Central Bank, which crossed the wires on Tuesday and Thursday, respectively. The two central banks voted to leave their policy rates unchanged, as expected, and the ECB reiterated that it intends to leave net asset purchases at the new pace of EUR30 billion per month until the end of September, or beyond, if necessary.

In U.S. corporate news, the fourth quarter earnings season continued this week with around 80 S&P 500 companies delivering their results. Netflix (NFLX) spiked 10.0% on Tuesday after wowing investors with its subscriber growth and first quarter guidance, while Intel (INTC) jumped 10.6% on Friday after reporting better-than-expected earnings and revenues and saying it believes there will be no material impact from the Meltdown and Spectre security concerns first reported at the beginning of the month.

On the downside, Texas Instruments (TXN) tumbled 8.5% on Wednesday after its latest earnings report came in as expected, but didn’t impress investors enough to justify the chipmaker’s 25.0% gain over the prior seven weeks. Airlines also struggled–evidenced the U.S. Global Jets ETF (JETS), which lost 4.7% for the week–following mixed results from Southwest Air (LUV), American Airlines (AAL), United Continental (UAL), Alaska Air (ALK), and JetBlue Airways (JBLU).

The advance estimate of fourth quarter GDP crossed the wires on Friday, showing a lower-than-expected expansion of 2.6% (Briefing.com consensus +2.9%). The key takeaway from the report is that consumer spending, which accounts for roughly 70.0% of GDP, was alive and well in the fourth quarter, increasing 3.8%–the fastest growth rate since the first quarter of 2015. Moreover, business spending also increased, with spending on equipment increasing 11.4%–the strongest since the third quarter of 2014.

The Federal Open Market Committee is set to release its latest policy decision this upcoming Wednesday, but the market doesn’t expect the FOMC to make any changes; the CME FedWatch Tool places the chances of a rate hike at 3.6%. The market projects the next hike will occur at the March FOMC meeting with an implied probability of 79.7%.

(Excerpts from Briefing.com)

Consumer Spending Drives Up Q4 GDP Growth

Real GDP increased at an annual rate of 2.6% in the fourth quarter, according to the advance estimate (consensus +2.9%) while the GDP Price Deflator increased 2.4%, as expected.

Durable Orders Rise Again in December

New orders for durable goods increased 2.9% in December (consensus +0.9%) on top of an upwardly revised 1.7% increase for November (from +1.3%). Excluding transportation, orders increased 0.6% (consensus +0.7%) following an upwardly revised 0.3% increase for November (from -0.1%).

The deficit for international trade in goods widened to $71.6 billion for December (consensus -$68.5 bln) from $70.0 billion in November. That widening fit with the drag from net exports that was seen in the advance Q4 GDP report.

Dollar: Dollar Remains Weak

The U.S. Dollar Index stayed down 0.5% at 88.91 after recovering a portion of Friday’s losses. The slight uptick off Friday morning’s low doesn’t change the fact that the index has been battered this week, having given up 1.9% since last Friday. The index hit a session low as the euro and pound showed continued strength. That was followed by a partial rebound, which accelerated after the release of the advance reading of Q4 GDP (actual 2.6%; consensus 2.9%), but could not stick, returning the index to levels from the morning.

Bonds: Week Ends on Lower Note

U.S. Treasuries ended the week in negative territory with the 5-yr note pacing Friday’s retreat. Treasuries slipped out of the gate, continuing their slide through the first three hours of the cash session. However, the selling abated shortly after the 10-yr note and the 30-yr bond dipped to yesterday’s intraday lows, where support was found. 10s and 30s inched up off those lows during afternoon action while the 5-yr note slipped, and remained, beneath yesterday’s session low. The long bond outperformed this week, which caused the yield curve to return to its flattest level in a decade. The 2s10s spread compressed to 54 bps from 59 bps one week ago while the 2s30s spread compressed to 79 bps from last week’s 86 bps.

While the 2yr, 5yr and 10yr yields rose during the week, the 30 year remained rooted to flatten the curve. The  10s30s spread tightened to 25bps from 27bps the previous week. The 5s10s spread tighten by 2bps to 19bps from 21bps the previous week.

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Crude: WTI closes above $66.00 for the first time since May 2015

Crude

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.1 million barrels from the previous week. At 411.6 million 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 3.1 million barrels last week, and are in the middle of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 0.6 million barrels last week but are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 4.0 million barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories decreased by 2.9 million barrels last week.

Baker Hughes total U.S. rig count increased by 11 to 947 following last week’s decrease of 3.

Metals: Gold, Silver and Copper bounce 

Agriculture: Grains gain strength

Commodities, as measured by the Bloomberg Commodity Index, are currently up 0.04% at 90.4989.

FEBRUARY PREVIEW

February is the shortest trading month with 19 trading sessions and one public holiday. February is the worst of the three months in quarter one and tends to be flat-to-bearish in most years past. The month is also known as “the weakest link” in the best six months on the DOW and S&P between November and April, with the exception of January between 2014 and 2016.

FEBRUARY TRIVIA

THE WEEK AHEAD

The coming week05 is the fourth and busiest week of Q4 Earnings Season. It is also the start of the Month of February, the most uneventful month of the first quarter.

Tuesday 29 January to 02 February (Week 05)

The fifth week of 2018 (wk05) is bullish over the 10 and 15 year averages while bearish over the last five years 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 05;

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Key Economic Dates

Next week, the most important event will be the Fed monetary policy decision. Other key data include: the US nonfarm payrolls, ISM Manufacturing PMI, personal spending and factory orders; the UK Gfk consumer confidence; the Eurozone GDP growth, inflation and unemployment; Japan unemployment; China manufacturing PMIs; and Australia inflation.

Mon 29 January

Tue 30 January

Wed 31 January

Thu 01 February

Fri 02 February

Earnings Calendar for Week of January 29

The busiest week of earnings season sees a third of all the DOW components announcing their results this week along with some significant big-hitters including FB, LMT, BABA, AMZN, GOOG and MO. It is going to be a volatile week for earnings.

Monday (January 29)

Tuesday (January 30)

Wednesday (January 31)

Thursday (February 01)

Friday (February 02)

SUMMARY

The bullish euphoria just keeps getting better (worse) and better (worse) for the bulls (depending on where you stand in the market). Take a very good look at this;

DOW5YR

Sure looks good for the bulls … but it sure looks better for the pessimists.

The coming week with its massive earnings schedule along with critical macro data such as Non-Farm Payrolls, Eurozone GDP, FOMC and Fed Funds Rate announcements, plus President Trump making his State Of The Union address are all going to make this the most interesting week to date.

Happy Hunting!

We’re having our last Introductory Session to the Pattern Trader™ Tutorial on February 7th. The batch is confirmed to go ahead in March and there are only a few seats remaining. Miss this batch and it will be a long wait till the next one. So book that date early, bring a friend/relative and really do yourself a favour by knowing what you really need in order make it in this business.

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