Weekly Market Update – 26 March 2018 BMO

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Week in Review: Another Negative (and Noisy) Week

Equities dropped sharply this week, giving up ground for the second week in a row, as investors took in the latest policy directive from the Fed, a new round of tariffs from the White House, and cries for greater data regulation following a scandal involving Facebook (FB). The S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average finished with losses between 5.7% and 6.5%, which marks their worst week since the big sell off in early February.

Facebook kicked off the week by declining nearly 7.0% on Monday following reports that research firm Cambridge Analytica mined the data of 50 million Facebook users without their consent, and then used that data to deliver targeted pro-Trump ads during the 2016 presidential campaign. The incident has given new life to proponents of data regulation and, in turn, been a headwind for shares of social media companies, which would likely see a decline in profits due to said regulations.

Investors turned their attention to monetary policy on Wednesday when the Federal Reserve increased the fed funds target range by 25 basis points to 1.50%-1.75%, as widely expected, and left its forecast for a total of three rate hikes this year intact. The latter was a relief for investors, who thought that the central bank might raise its 2018 forecast to include a fourth rate increase. However, the Fed does anticipate that it will need to be somewhat more aggressive in tightening policy over the next two years (2019-2020).

Trade war fears came back into the mix on Thursday after President Trump signed a presidential memorandum that allows for tariffs on up to $60 billion worth of Chinese goods. The tariffs, which the president says are punishment for China’s alleged intellectual property theft against U.S. tech companies, prompted a retaliation response from China, which said it plans to levy duties of up to $3 billion on U.S. imports — a drop in the bucket considering the overall value of imported goods to China.

11 of 11 S&P sectors finished the week in negative territory, with the top-weighted technology (-7.9%), financials (-7.2%), and health care (-6.8%) groups leading the retreat. The energy sector (-0.9%) was the top performer, benefiting from an increase in the price of crude oil; West Texas Intermediate crude futures jumped 5.7% to $65.87 per barrel — their best level since late January. The crude rally was helped by the EIA’s weekly inventory report, which showed that U.S. crude stockpiles declined for the first time in three weeks.

A breakdown of technical support played into this week’s selling after the S&P 500 dropped comfortably below its 50-day simple moving average (2743) at Monday’s opening bell. The benchmark index finished Friday just a tick above its 200-day simple moving average (2585).

(Excerpts from Briefing.com)

Friday Update: Piling on the Losses

Stocks dropped again on Friday, piling on losses for the week; the S&P 500 tumbled 2.1% to 2588.26, the Nasdaq Composite declined 2.4% to 6992.67, and the Dow Jones Industrial Average slid 1.8% to 23533.20 – its worst close since November 2017. The three major indices finished the week with losses between 5.7% and 6.5%.

Tariff talk carried over into Friday’s session after China urged the U.S. to “pull back from the brink” following President Trump’s Thursday decision to implement tariffs of up to $60 billion on Chinese imports — which he says are a response to China’s alleged intellectual property theft against U.S. tech companies. Beijing threatened to retaliate with tariffs on 128 U.S. products – including wine, pork, fresh fruit, ethanol, and steel – but investors took solace in the fact that those products represent a mere $3 billion of total value – barely a drop in the bucket.

While fear of a trade war likely played a role in Friday’s sell off, several other factors also persuaded buyers to stay on the sidelines, including the understanding that the Fed is operating with a tightening bias, the underperformance of the top-weighted technology and financials sectors, and the continued lack of technical support – the S&P 500 has been beneath its 50-day simple moving average (2742) since Monday. It’s worth noting that the benchmark index finished Friday just a tick above its 200-day simple moving average (2585).

All 11 S&P sectors finished in negative territory, with the financials (-3.0%), technology (-2.7%), and health care (-2.1%) sectors leading the retreat. The energy sector was the top performer, benefiting from a 2.4% increase in WTI crude ($65.87/bbl), but still finished with a loss of 0.6%.

In earnings news, Micron (MU 54.21, -4.71) tumbled 8.0% on Friday despite beating profit estimates for its fiscal second quarter and raising its earnings guidance for Q3, while Dow component Nike (NKE 64.63, +0.21) finished with a gain of 0.3% after reporting better-than-expected earnings and revenues for its fiscal third quarter.

Overseas, equity markets in Asia sold off sharply on Friday, with China’s Shanghai Composite and Japan’s Nikkei losing 3.4% and 4.5%, respectively. Meanwhile, the major bourses in Europe also finished the week on a broadly lower note, losing between 0.4% and 1.8%. The Euro Stoxx 50 (-1.3%) closed at its lowest level in more than a year.

Dollar: Dollar Index Nears Thursday Low

The U.S. Dollar Index was down 0.5% at 89.42, approaching Thursday’s overnight low. The Dollar Index had a decent start to the week, overtaking its 50-day moving average (89.83) on Tuesday. That rally was reversed on Wednesday, and while the Index tried to reclaim its 50-day average yesterday, it failed to do so, settling just below that mark. Friday’s session had seen a steady decline that had the Index trading just a touch above Thursday’s low, on course to lose 0.9% for the week.

Bonds: Short End Outperforms

U.S. Treasuries ended the week on a mostly higher note after spending Friday’s session inside a narrow range. The Treasury market followed Thursday’s spike with a mixed open as the long bond displayed relative weakness while shorter tenors flashed early strength. The 2-yr note and the 5-yr note outperformed into the close while the 30-yr bond erased the bulk of its opening loss, but could not make a sustained move into the green. The 2s30s spread expanded three basis points to 82 bps while the 2s10s spread expanded two basis points to 57 bps.

The entire yield steepened over the week with the shorter maturities’ yields falling more than the longer maturities while the 30-year yield remained unchanged. The spread between the 5s10s widened to 22bps from 19bps the previous week as did the 10s30s at 25bps from 24bps the previous week.

Crude: Closes Above 65.00

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.6 mln barrels from the previous week. At 428.3 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 1.7 mln barrels last week, but are near the upper limit of the average range. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased by 2.0 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 2.1 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories decreased by 6.9 mln barrels last week.

Baker Hughes total U.S. rig count increased by 5 to 995 following last week’s increase of 6.

Metals: Gold Bounces

Agriculture: Grains Weakness Persists

Commodities measured by the Bloomberg Commodity Index closed at 87.4415, higher than 87.3633 the previous week.

THE WEEK AHEAD

Monday 26 to 30 March (Week 13)

The thirteenth week of 2018 (wk13) is rather conflicting when comparing the 5, 10 and 15 years averages against the 21-year average. The 21-year average usually begins very bearish on Monday, becomes mildly bullish on Tuesday, turns unpredictable or flat on Wednesday and goes bear again on Thursday. (Friday is a public holiday.)

The weekly averages for the 5, 10 and 15 years are bullish with an above average 65% bullish bias. One contributing factor to this divergence in data could be the Good Friday holiday that tends to fall in different weeks depending on how February began (start of the week or end of the week).

Regardless, March is known to end badly.

Key Economic Dates

The coming week 13, the US will be publishing the third estimate for GDP growth, alongside PCE prices, personal spending and income, pending home sales and the final reading of Michigan consumer sentiment. Elsewhere, important data include: UK final Q4 GDP growth and monetary indicators; Eurozone business survey; Japan unemployment, retail trade and industrial output; and China official PMIs.

Mon 26 March

Tue 27 March

Wed 28 March

Thu 29 March

Fri 30 March

TECHNICALS

With four trading sessions remaining, the benchmarks will be fighting hard to stay above and close out the quarter above the low of December 2017. 

In recent decades, when the direction of the January Barometer conflicted with the close of the March (relative to the low of December), the markets became either extremely volatile or very flat, either of which made it a very troublesome year. Thus, if 2018’s January Barometer was bullish but the benchmarks close out the first quarter below December 2017’s low, the rest of the year is likely to be very troublesome. 

The drop on Friday has brought the 200DSMA into play on the DOW and S&P500, with the latter sitting barely 3 points above that critical indicator after testing it in the final hour of trading on Friday.

With the coming week expected to be flat-to-bearish, I will be watching for a DFDM (Down Friday, Down Monday) that could either mark a bottom to this correction or break below the 200DSMA which could tank this market further. Economic conditions have been looking like they’ve seen better days. The absence of any economic data in the coming week will play on the minds of the market players. They will be looking at the language of the Fed Members featured this week along with the all-important GDP report. Any tiny hint of hawkishness will likely make the market react violently.

SUMMARY

Over the last weeks, I have been mentioning that a little softness had crept back into the US economy. This week, the reality of higher rates and the threat of trade wars took a severe toll on the broader market. 

The coming week will reveal exactly how the major economies of the world are projecting these weaknesses as the US and UK announce their GDPs toward the end of the week/month/quarter. We will also get a “feel” of how the fund managers will react to all these conditions in the way the market moves as they Window Dress their portfolios for the coming quarter.

Window Dressing often rallies the market at the close of the first quarter. Failure to rally implies that minimal adjustments have been made. This usually translates into a conservative outlook on the part of the big players. And that is never a bullish sign.

With the Dow Industrials, S&P500, Russell2000, Russell1000 and Dow Transports in negative territory YTD, the benchmarks have only four sessions to fight back up into the black again. FYI, the market has never done well then Q1 closed in the red. Going back to 1997 (for all the years that closed Q1 in the red);

So unless the market pulls some stimulus out of the bag or goes on a major stock buy-back spree, it looks like this might just be the start of a troublesome year (as far as the bulls are concerned).

I am going from Cautiously Bullish to Conservatively Bearish starting next week if Q1 closes in the red.

Happy Hunting!

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