Weekly Market Update – 14 May 2018 BMO

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WEEK IN REVIEW – 07 to 11 May 2018: Buyers Re-emerge Following Q1 Earnings Season

Buyers returned to the market this week following a three-week absence during the thick of the first quarter earnings season. The S&P 500, the Dow, and the Nasdaq finished with sizable weekly gains, adding between 2.3% and 2.7% apiece – enough to put the S&P 500 and the Dow back into positive territory for the year (+2.0%, +0.5% YTD). The Nasdaq is now up 7.2% year-to-date.

The stock market got off to a slow start this week as investors digested President Trump’s decision to pull the U.S. out of the Iran nuclear agreement and restore the “highest level of economic sanctions” against Iran. The president was scolded by European allies, which wanted the U.S. to remain in the agreement, while Iran’s response was more violent with lawmakers burning the American flag in parliament.

Tensions in Middle East were further escalated later in the week when Israel struck nearly all of Iran’s military infrastructure in Syria in response to an Iranian missile attack on Israeli-held territory.

Outside of a brief pause, stocks had a mostly muted reaction to the headlines, but crude oil futures took off, with WTI crude establishing a new three-and-a-half year high ($71.26/bbl), as the restoration of U.S. sanctions on Iran – which is OPEC’s third-largest oil exporter – and the looming threat of conflict within the oil-rich region prompted investors to bet on a disruption to crude supply on the global market.

The S&P’s energy sector benefited from the rise in oil prices, adding 3.8% this week, but the industrials, technology, and financials sectors finished with similar weekly gains, adding between 3.4% and 3.6%. In total, nine sectors finished the week in the green, while two – consumer staples (-0.5%) and utilities (-2.3%) – finished in the red.

Stocks started taking off on Wednesday and carried that momentum into Thursday’s session; the S&P 500 added 1.9% in those two days alone, catapulting above its 50-day moving average to a nearly two-month high. Technology shares rallied over that two-day stretch, reminiscing last year’s tech-charged surge, with Apple (AAPL) extending its streak of record closes to five in a row on Thursday (the streak was then broken with a small loss on Friday).

Investors received some important inflation data on Thursday – namely, the Consumer Price Index for April – which helped further fuel the bullish bias, coming in slightly below estimates (+0.2% actual vs +0.3% consensus), and thereby tempering concerns that the Fed might have to be more aggressive in its path to normalization.

Overseas, the Bank of England voted 7-2 in favor of keeping its official bank rate and its asset purchase program unchanged on Thursday, but BoE Governor Mike Carney added that interest rates will likely go up by the end of the year. Separately, President Trump announced that his summit with North Korean Leader Kim Jong Un will be held on June 12 in Singapore, a positive stride in the quest for global peace.

The stock market ended the week with a flat performance on Friday. Volatility picked up temporarily in the afternoon when President Trump released a blueprint for lowering drug prices, but order was restored after it became clear that the blueprint still lacked many specific details.

(Excerpts from Briefing.com)

Friday Update: Wall Street Locks In Big Weekly Gains

Equities ticked higher on Friday, locking in big gains for the week, as a positive performance from the health care sector narrowly outweighed a modest pullback from the information technology group. The S&P 500 and the Dow added 0.2% and 0.4%, respectively, while the tech-heavy Nasdaq underperformed, closing a tick below its flat line. All three indices finished with weekly gains of more than 2.0%.

The market drifted flat to slightly higher for the bulk of Friday’s session, but volatility picked up briefly in the afternoon when President Trump unveiled a blueprint for lowering drug prices. The president plans to increase competition within the drug space and to change rules that have allowed some drugmakers to game the system. The blueprint lacked many details, however, prompting a sigh of relief from investors, who were worried about the possibility of imminent regulation. Health-related names rallied into the close, leaving the S&P 500’s health care sector with a gain of 1.5%.

Telecom services was the only group to outperform health care on Friday, largely thanks to Verizon (VZ), which rallied after JPMorgan upgraded shares to ‘Overweight’ from ‘Neutral’; the telecom services group finished with a gain of 2.1%, while Verizon shares ended higher by 3.0%.

The only other sectors to finish in the green were industrials, consumer discretionary, and utilities, but their gains were modest at 0.2% apiece. On the downside, six sectors finished in the red, but no group lost more than 0.5%. The technology group was among the worst performers, closing lower by 0.3%, which posed a problem for the broader market given the group’s huge influence; technology is the top-weighted S&P 500 sector, representing around a quarter of the broader market alone.

Shares of chipmaker NVIDIA (NVDA) declined 2.2%, retreating from an all-time high, amid a “sell the news” response to the company’s first quarter results, which came in better-than-expected. Separately, Apple (AAPL) shares broke their nine-session winning streak, slipping 0.4%, and shares of Symantec (SYMC) plunged 33.1% after the company announced that it has relayed concerns from an ex-employee to the SEC.

Outside of equities, U.S. Treasuries finished Friday on a flattish note, with the benchmark 10-yr yield holding steady at 2.97%. Meanwhile, WTI crude futures declined 0.9% to $70.70 per barrel, slipping from a three-and-a-half year high, and the U.S. Dollar Index dropped for the third day in a row, slipping 0.2% to 92.41.

Reviewing Friday’s economic data, which was limited to April Import/Export Prices and the preliminary reading of the University of Michigan Consumer Sentiment Index for May:

Investors will not receive any economic data on Monday.

Market Internals – Friday 11 May

Dollar: Rally On Hold

The U.S. Dollar Index was down 0.2% at 92.55, looking to avoid its first weekly decline in a month. The greenback extended its recent rally during the first half of the week, but some selling pressure has come through over the past two days. A weaker than expected CPI report and continued flattening of the Treasury yield curve have contributed to dollar’s backtracking, but the Index remains above its 200-day moving average (91.95), and well above its April low (89.23). Friday’s downtick in the Dollar Index has masked the dollar’s strong showing against emerging market currencies. On a side note, the Argentine peso (23.10) is on track to surrender 5.8% for the week after being down as much as 9.8% at today’s low (23.96). The peso has given up more than 12.0% over the past two weeks, as the country’s monetary and fiscal authorities struggle to prop up the currency.

Bonds: Week Ends in Subdued Fashion

U.S. Treasuries ended the week on a mostly flat note. The Treasury complex spent the Friday session inside a very narrow range, but the bias from the earlier portion of the week remained in place, as the long bond outperformed into the close, settling above its flat line. Intraday weakness in the 2-yr note drove the 2-yr yield to a session high of 2.55% before some afternoon buying lifted 2s into the green. The trading week saw the 2s30s spread compress four basis points to a new cycle low of 58 bps while the 2s10s spread ended the week unchanged at 44 bps after tightening to 42 bps on Thursday.

The yield curve flattened for a third consecutive week with the 5-year maturity rising against the 10-year while the 30-year yield dropped 1 basis point. The spread between the 5s10s tightened to 13bps from 16bps the previous week. The 10s30s tightened to 14bps from 18bps the previous week. 

 Commodities 

Baker Hughes reported that the active number of oil rigs in the U.S. rose for a sixth week in a row, climbing by 13 to 1045. Crude oil futures pulled back from a three-and-a-half year high, while natural gas futures also settled in the red. Outside of energy, metals and agriculture finished mostly lower, but copper futures did settle flat.

The Bloomberg Commodity Index closed at 90.04, higher than 89.67 the previous week in spite of falling from a more than three-month high on Friday, dropping 0.6% to 90.04.

Crude: WTI closes above $71, Brent is resisted at $77.90  

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.2 million barrels from the previous week. At 433.8 million 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 2.2 million barrels last week, and are in the upper half of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories decreased by 3.8 million barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories increased by 2.3 million barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories decreased by 1.5 million barrels last week.

Natural gas inventory showed a build of 89 bcf vs a build of 62 bcf in the prior week : Working gas in storage was 1,432 Bcf as of Friday, May 4, 2018, according to EIA estimates. This represents a net increase of 89 Bcf from the previous week. Stocks were 863 Bcf less than last year at this time and 520 Bcf below the five-year average of 1,952 Bcf. At 1,432 Bcf, total working gas is within the five-year historical range.

Baker Hughes total U.S. rig count increased by 13 to 1045 following last week’s increase of 11.

Metals: Gold bounces, Silver and Copper continue to strengthen

Agriculture: Corn, Wheat correct, Soy continues to weaken

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THE FORTNIGHT AHEAD

As I will be away next weekend, I am covering the next two weeks in this update. Thus, don’t expect an update next weekend.

The twentieth week of 2018 (wk20 – 14 to 18 May):

The twenty-first week of 2018 (wk21 – 21 to 25 May):

Key Economic Dates

Week 20

Next week the US will publish retail trade, industrial production, building permits and housing starts. Elsewhere, important releases include: UK wages and unemployment rate; Germany GDP growth; Japan GDP growth and inflation; China retail trade, industrial production and fixed asset investment; and Australia employment.

Mon 14 May

Tue 15 May

Wed 16 May

Thu 17 May

Fri 18 May

Week 21

The following week the US will publish its FOMC minutes, home sales, consumer sentiment and durable goods orders. Elsewhere, important releases include: OPEC meetings, ECB’s Monetary Policy Meeting, UK’s CPI, PPI and RPI, Flash manufacturing and services PMIs from the Eurozone, France and Germany.

Mon 21 May

Tue 22 May

Wed 23 May

Thu 24 May

Fri 25 May

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SUMMARY

The benchmarks have all turned positive YTD with the DOW and S&P swinging upward and away from their respective 200DSMAs this past week. It can be argued that the benchmarks have broken to higher-highs but I wouldn’t be too quick to assume that May is done and dusted yet. The most statistically volatile part of May is coming up these two weeks with Week20 expected to swing up and down and Week21 tending to be the month’s most bearish week.

I’m hedged and have tightened my stops given that I will be away and not likely to have regular access to my trading station. The tightening yield curve with the 10-year hovering just below 3% are going to be keenly watched if May presents a severe correction in its last two weeks.

Much to be nervous about but silly to deny if the break to higher highs happen.

Happy Hunting! See you in two weeks!

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Date: 26th May 2018, Saturday

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