Weekly Market Update – 09 April 2018 BMO

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WEEK IN REVIEW – 2 to 6 April 2018: Trade Concerns Drive Friday Fallout

The stock market closed the week on a decidedly lower note, falling victim to fears about potential trade wars, the Federal Reserve’s tightening bias, and the specter of earnings growth not living up to this year’s high expectations.  The Dow, Nasdaq, S&P 500, and Russell 2000 declined between 1.9% and 2.3% in Friday’s trade.

Things got off to a bad start following the news that President Trump ordered the Office of the U.S. Trade Representative to consider whether it would be appropriate to impose an additional $100 billion of tariffs on Chinese imports on top of the proposed $50 billion of tariffs announced on Wednesday.

China quickly responded, saying it would do what is necessary to protect its interests at any cost if the U.S. ultimately pressed ahead with such a tariff plan.

What rattled the stock market, though, was the feistier-sounding nature of administration officials today discussing the new proposal, as well as their seeming lack of concern about the difficulties the stock market has been having on account of the heated trade rhetoric between the U.S. and China.

President Trump noted that the stock market might have to have a little pain as he works to protect the trade interests of the U.S.; meanwhile, Treasury Secretary Mnuchin said in a CNBC interview that he is not focused on short-term market swings and that there is potential of a trade war with China even though that is not the objective.

The major indices rolled over after Mr. Mnuchin’s comments and then cascaded even lower after Fed Chair Powell said he thinks inflation will pick up this Spring and that he sees further gradual rate hikes.

In essence, the stock market didn’t get the verbal support it has been accustomed to receiving from leading officials in periods of uncertainty.  Ironically, that fed a heightened sense of uncertainty about the outlook for the economy and earnings that kept many buyers on the sidelines and Friday’s sellers focusing their efforts on the economically-sensitive sectors.

Every sector ended with a loss.  The industrials sector (-2.7%) suffered the largest decline, but it had ample company.

The information technology (-2.5%), financial (-2.4%), materials (-2.4%), and health care (-2.4%) sectors all underperformed while losses in the consumer discretionary (-2.1%) and energy (-1.8%) sectors also weighed heavily.

The Dow Jones Industrial Average fell as many as 767 points on Friday before paring its losses in late action.  That recovery effort coincided with a bounce in the S&P 500 after it breached its 200-day moving average (2594).  Once again, though, the violation of that key technical level brought out the buyers who succeeded in pushing the S&P 500 back above the 200-day moving average by the closing bell.

The trade issues dominated the market narrative on Friday, but there was more to the story.  The March employment report provided its own twist for the market.

It showed a surprisingly weak 103,000 gain in nonfarm payrolls and a sturdy 0.3% increase in average hourly earnings.  All in all, it was a mixed report, yet it didn’t alter the market’s thinking about monetary policy other than making it think there was a diminished probability of a fourth rate hike in December.

The CME FedWatch Tool now pegs the probability of a fourth rate hike in December at 24.4% versus 32.7% on Thursday.

Reviewing Friday’s economic data, which was limited to the Employment Situation Report for March and the Consumer Credit Report for February:


Last week, I wrote that “The fourteenth week of 2018 (wk14) tends to be very bullish on Monday and Tuesday, then moderately bullish on Wednesday and Thursday. Friday becomes quite bearish.

Obviously, Monday was out of sorts but the rest of the week still panned out as it has historically, albeit in a most volatile fashion. On Monday, DOW flirted with its 200DSMA but managed to close above it. For the rest of the week, the DOW steered clear of the critical moving average.

The S&P500, however, had a more eventful week by closing below its 200DSMA on Monday, turning back above it on Tuesday and then making intraday dips below the 200DSMA for the rest of the week, save Thursday. On Friday, it barely closed above it thanks to the last hour that saw an uptick in short-covering.

Amongst all the major indices, NASDAQ is the only one that it still bullish YTD but only by 0.2%.

Friday’s Market Internals looked like a joyride for the Bears:

(Excerpts from Briefing.com)

Dollar: Dollar Index Nears Thursday Low

The U.S. Dollar Index was down 0.4% at 90.14, narrowing the week’s gain to 0.2%. The greenback held its ground through overnight trade, edging to a fresh one-month high in early Friday morning action. However, the dollar backed off that high in European trade, and slid to a fresh session low after the March Employment Situation report missed headline expectations (actual 103K; consensus 175K). The Dollar Index drifted near its low into the afternoon, threatening a run at Thursday’s session low. Friday’s decline in the Index masked underlying dollar strength against minor and exotic currencies.

Bonds: Down Week Ends on Higher Note

U.S. Treasuries ended the week on a higher note, erasing their losses from Thursday. The Treasury market crept higher in overnight action, after President Trump ordered trade officials to consider imposing tariffs on another $100 billion worth of imports from China. The opening advance was extended after the release of a mixed Employment Situation report for March, which missed headline expectations (actual 103K; Briefing.com consensus 175K), but showed a 0.3% increase in average hourly earnings (Briefing.com consensus 0.2%) that lifted the year-over-year growth rate to 2.7%. Fed Chairman Jay Powell spoke at the Economic Club of Chicago in the early afternoon, noting that the still moderate wage gains show that the job market is not excessively tight. Chairman Powell said that gradual rate hikes are warranted to best promote the Fed’s goals and that inflation is expected to accelerate in the spring. Treasuries backed off their session highs in late-morning action, but returned to their best levels of the day during the final hour. The late bid coincided with aggressive selling in the stock market that pressured the S&P 500 back to its 200-day moving average (2594).

The entire yield curve steepened over the week with the 2-year yield staying rooted for another week while the longer maturities’ yields rose. The spread between the 5s10s barely widened to 19bps from 18bps the previous week as did the 10s30s at 24bps from 23bps the previous week. 

Crude: Brent & WTI continue downtrend for another week

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.6 mln barrels from the previous week. At 425.3 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 1.1 mln barrels last week, but are in the upper limit of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories increased by 0.5 mln barrels last week but are in the lower half of the average range for this time of year. Propane/propylene inventories increased by 0.6 mln barrels last week, but are in the lower half of the average range. Total commercial petroleum inventories decreased by 3.9 mln barrels last week.

Baker Hughes total U.S. rig count increased by 10 to 1003 following last week’s decline of 2.

Metals: Precious bounce back, Copper continues gains

Agriculture: Corn, Wheat gain, Soy drops

Commodities measured by the Bloomberg Commodity Index closed at 86.9381, lower than 87.4729 the previous week.


The fifteenth week of 2018 (wk15) tends to be bullish all week except on Thursday which can be mildly bearish. Friday is the most bullish day of the week.

Key Economic Dates

In the coming week, the Fed will publish the FOMC minutes. Other important releases include: US inflation rate, the first estimate for Michigan consumer sentiment and JOLTs job openings; UK industrial production and trade balance; China inflation, producer prices and external trade; Japan consumer sentiment; and Australia business and consumer morale.

Mon 09 April

Tue 10 April

Wed 11 April

Thu 12 April

Fri 13 April



That 200DSMA is going to be closely watched this coming week. The S&P 500 index has gone 49 trading sessions without notching a new high. With earnings season for Q1 results starting this week (JPM on Fri 13 BMO), the volatility factor is going to go through the roof in the coming weeks.

With all the geopolitical instability rocking the markets these past weeks, earnings, the real market-mover, is going to put some real colour on the US economy. If initial numbers are anything to go by, it looks like it will be a solid season for the bulls.

Next week begins what is expected to be the strongest earnings season in nearly eight years, with potential growth of 18 percent. Early reports are off-the-charts good. A small group of companies – 23 of them, mostly those with quarters that end in February -have already reported including Monsanto, McCormick, FedEx and Oracle. Of the 23, earnings were up 27 percent and revenues were up 11.5 percent.

The scary side of the earnings story is that analysts are keeping estimates sky high for the rest of the year. They are expecting 20% growth every quarter for 2018. With such high expectations, it will only take a few downside surprises and downside guidance to send the market into a tailspin and drag the economy down with it.

Buckle up and hold on tight. If you thought that last two months were wild, I suspect seat-belts won’t suffice for the coming months – we’re going to need air-bags.

Happy Hunting!


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