Weekly Market Update – 19 March 2018 BMO

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Week in Review: Three Steps Forward, Two Steps Back

Equities reversed course this week, undoing about a third of last week’s rally, as investors continued to search for equilibrium following the abrupt sell off in early February. Since that drop, the S&P 500 has had three up weeks and two down weeks, reclaiming around 60% of its nearly 300-point plunge. The S&P 500 lost 1.2% this week, while the Nasdaq Composite and the Dow Jones Industrial Average declined 1.0% and 1.5%, respectively.

Trade war talk continued this week following reports that President Trump is seeking to hit China with steep tariffs and investment restrictions as early as next week. Those tariffs, which are expected to total as much as $60 billion, would initially be targeted towards information technology, telecommunications, and consumer electronic products as punishment for alleged intellectual property theft, but could eventually expand to a broader range of products.

The proposed tariffs were cited as the primary driver of this week’s sell off, as many believe they could lead to a tit-for-tat trade war between the world’s two largest economies. Peter Navarro, Director of the White House National Trade Council, attempted to ease the tariff-induced fears in a CNBC interview on Thursday, assuring viewers that the U.S. can implement tariffs “in a way that is peaceful and will improve and strengthen the trading system.”

In other political developments, the White House made some notable personnel changes this week–CIA Director Mike Pompeo replaced Rex Tillerson as Secretary of State, and longtime CNBCpersonality Larry Kudlow replaced Gary Cohn, who resigned last week, as the president’s top economic advisor–and the New York Times reported on Thursday that Special Counsel Robert Mueller has subpoenaed the Trump Organization for documents, some of which relate to Russia.

Nine of eleven S&P sectors finished the week in negative territory, with materials (-3.2%) being the weakest performer. Materials giant Monsanto (MON) dropped 4.8% on Thursday following news that its pending merger with Bayer will likely face additional hurdles from antitrust officials.

Meanwhile, the consumer staples (-2.1%), industrials (-2.0%), and financials (-2.4%) sectors also showed particular weakness. Financials suffered amid a flattening of the yield curve, which doesn’t bode well for lenders, as they rely on the difference between what they spend on deposits and what they charge for loans. The yield on the 2-yr note climbed three basis points to 2.29%, while the benchmark 10-yr yield dropped six basis points to 2.84%, cutting the 10-2 spread to 55 bps–its lowest level since late January.

On a positive note, the rate-sensitive utilities (+2.6%) and real estate (+1.3%) sectors finished the week in the green.

Investors received several influential economic reports this week, including the February readings for the Consumer Price Index, the Producer Price Index, Retail Sales, Housing Starts, and Building Permits. In short, the data didn’t really give investors a reason to adjust their rate-hike expectations; it’s all but certain that the Fed will hike rates at its meeting next week, and the Fed funds futures market is still pointing towards a total of three rate hikes this year–although the chances for a fourth hike are sitting at 34.3%.

(Excerpts from Briefing.com)

Friday Update: Upbeat Finish to Disappointing Week

Wall Street wrapped up a disappointing week on a positive note on Friday, in what was a quiet and fairly range-bound session. The S&P 500 advanced 0.2%, breaking a four-session losing streak, while the Dow and the small-cap Russell 2000 added 0.3% and 0.6%, respectively. The tech-heavy Nasdaq underperformed, closing a tick higher.

Gains were modest, but broad, with nine of eleven S&P sectors closing in the green. The energy group (+1.0%) was the top performer, benefiting from a jump in the price of crude oil; WTI crude futures rallied 2.0% to $62.35 per barrel. Conversely, the top-weighted technology sector (-0.1%) finished at the bottom of the leaderboard.

The technology group struggled for much of the session, keeping the broader market’s gain in check, with Broadcom (AVGO 254.87, -12.89) showing particular weakness; the chipmaker dropped 4.8% even though it beat quarterly profit estimates. Tech-giant Alphabet (GOOGL 1134.42, -16.19) also struggled, losing 1.4%, but Adobe Systems (ADBE 225.55, +6.68) bucked the trend, rallying 3.1% after beating both earnings and revenue estimates for its fiscal first quarter.

Overseas, equity indices in the Asia-Pacific region ended Friday broadly lower, with Japan’s Nikkei losing 0.6%, while the major bourses in Europe finished with gains of around 0.3% apiece. The U.S. dollar climbed 0.2% against the euro to 1.2287, but dropped 0.2% against the yen to 106.08.

In the bond market, U.S. Treasuries closed the week on a lower note, sending yields higher across the curve. The benchmark 10-yr yield climbed two basis points to 2.84%, while the 2-yr yield ticked up one basis point to 2.29%, which is its highest level since September 2008.

The relative weakness in the 10-yr note steepened the yield curve a bit, pushing the 10-2 spread to 55 basis points. This steepening helped underpin the financial sector (+0.2%) on Friday, but a decline in shares of Wells Fargo (WFC 55.90, -0.93) weighed on the group, leaving it roughly in line with the broader market. WFC shares lost 1.6% following a Wall Street Journal report that a federal investigation into the bank’s sales practices now includes its wealth-management unit.

Investors received several pieces of economic data on Friday, including February Housing Starts and Building Permits, February Industrial Production and Capacity Utilization, the preliminary reading of the University of Michigan Consumer Sentiment Index for March, and the Job Openings and Labor Turnover Survey for January:

Market Internals – Friday 16 March – AMC

Dollar: Small Gains

The U.S. Dollar Index had a weaker skew in overnight action, but it bounced back during regular trading following Friday’s economic releases, a few of which contributed to the inflation expectations narrative.  In particular, industrial capacity utilization hit its highest level since January 2015 and the University of Michigan Consumer Sentiment Report indicated near-term inflation expectations had increased to their highest level in several years.  Notably, the U.S. Dollar Index (90.23) and long-term rates moved up in tandem following the data.

Bonds: 

The Treasury market closed the week on a soft note, with yields up across the curve.  In most cases, there was little change in overnight trade, yet longer-dated securities succumbed to selling interest during U.S. trading in the wake of some economic releases that stirred the pot of inflation expectations.  As yields moved up, there was a simultaneous rebound in the U.S. Dollar Index, which had been a bit weak in overnight action.  The 10-2 spread ended the week at 55 basis points, down from 61 basis points at the end of the prior week.  Market participants also had an anxious eye on next week’s FOMC meeting (March 20-21).  The Federal Reserve is expected to raise the target range for the fed funds rate by 25 basis points, yet everyone is interested to see if the accompanying interest rate projections show a median estimate of four rate hikes this year versus three currently.

The entire yield flattened over the week with the longer maturities’ yields falling more than the shorter maturities while the 2-year yield rose. The spread between the 5s10s tightened to 19bps from 24bps the previous week as did the 10s30s at 24bps from 27bps the previous week.

Crude: Falls, Recovers, Closes Above 62.00 For Second Week

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.0 mln barrels from the previous week. At 430.9 mln barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories decreased by 6.3 mln barrels last week, and are in the upper half of the average range. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories decreased by 4.4 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 2.3 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories decreased last week.

Baker Hughes total U.S. rig count increased by 6 to 990 following last week’s increase of 3.

Metals: Downtrend Continues

Agriculture: Corn and Wheat Fall, Soy Bounces

Commodities measured by the Bloomberg Commodity Index closed at 87.3633, lower than 87.9546 the previous week.

THE WEEK AHEAD

Monday 19 to 23 March (Week 12)

The twelfth week of 2018 (wk12) usually swings up and down wildly on the SPY and DIA over all three time averages. Monday starts off bearish, turns bullish on Tuesday and bearish again on Wednesday with higher than 70% averages. Thursday and Friday ends the week in divergent fashion and both index ETFs.

 

Key Economic Dates

The coming week 12, the most important events will be the Fed and the BoE monetary policy decisions. Key economic data include: US durable goods orders; existing and new home sales; UK inflation, retail trade and unemployment; Japan trade and inflation; Australia employment; and flash PMIs for the US, the Eurozone and Japan.

Mon 19 March

Tue 20 March

Wed 21 March

Thu 22 March

Fri 23 March

SUMMARY

After breaking above its 50DSMA the previous week, the DOW found itself trading below the 50DSMA for the whole past week and even closed below its 20DSMA again. 

The economic front showed a little softness creeping into the US economy with retail sales in the red for the third straight month while housing data also slowed down. Capacity Utilisation also gave cause for concern with regard to the edgy inflation watch.

For the coming week, my focus will be on Japan as I suspect they will be providing some market moving news. With “trade wars” being the watchword these days, Japan’s Trade Balance Report for February could sway things starting on Monday. 

From Briefing.com;

Japan’s Trade Balance Report for February is due for release on Sunday, March 18, at 7:50 p.m. (ET) (Mon 19/3 @ 7:50am SG)

Happy Hunting!

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