Weekly Market Update – 04 June 2018 BMO

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WEEK IN REVIEW – 28 May to 01 June 2018 : Divergent Week

The stock market finished the week on a mostly higher note as investors digested an easing of the political crisis in Italy, fresh tariff-related developments, and the Employment Situation report for May. The S&P 500 (+0.5%), the Nasdaq Composite (+1.6%), and the Russell 2000 (+1.3%) advanced, while the Dow Jones Industrial Average (-0.5%) finished a step lower.

U.S. markets opened the week on Tuesday following a three-day Memorial Day weekend. Sellers dominated that Tuesday session after Italian President Sergio Mattarella blocked the formation of a euro-skeptic government, vetoing the economic minister nominee of an anti-establishment coalition that was aiming to come to power. Italian bond yields surged in reaction as some feared the veto would prompt a snap election that could turn into a de facto referendum on Italy’s membership in the European Union. The Italian political crisis calmed down on Thursday evening, when President Mattarella approved the formation of a ruling coalition between Italy’s anti-establishment Five Star Movement and right-wing League party, effectively silencing the prospect of a snap election later this year.

Elsewhere in Europe, Spain endured some political drama of its own this week as Prime Minister Mariano Rajoy was ousted on Friday in a no-confidence vote following a corruption scandal involving 29 individuals with ties to his People’s Party. Pedro Sanchez, the leader of the Socialist Party, will succeed Mr. Rajoy as prime minister. Separately, German financial giant Deutsche Bank hit a 16-month low on Thursday after The Wall Street Journal reported that it’s on the Federal Reserve’s list of troubled banks.

Back in the U.S., the stock market rebounded from its Tuesday slide on Wednesday with energy shares leading the charge following reports that OPEC and Russia will keep production cuts in place until at least the end of the year. West Texas Intermediate crude futures rallied on Wednesday in reaction, but still finished the week lower by 3.0%.

Stocks stumbled for a second time on Thursday when the Trump administration announced that it will let steel and aluminum tariff exemptions expire for the EU, Canada, and Mexico. The White House’s decision, which elicited retaliatory responses from the EU, Canada, and Mexico as expected, will result in duties of 25% on steel imports and duties of 10% on imports of aluminum, effective June 1.

Wall Street bounced back on Friday, bolstered by an easing of the political tension in Europe, news that the June 12 summit with North Korea is back on, and the release of the Employment Situation report for May, which featured a better-than-expected increase in nonfarm payrolls (+223K actual vs +190K consensus) and a lower-than-expected unemployment rate (3.8% actual vs 3.9% consensus). The average hourly earnings figure came in as expected, showing a month-over-month increase of 0.3%.

The key takeaway from the employment report is that it still had a Goldilocks hue to it, having been accented with strong job growth and only moderate wage inflation.  Furthermore, the strong job growth and low unemployment rate created some good feelings about the potential for a pickup in consumer spending that should aid the second quarter growth outlook.

Six of eleven S&P sectors declined this week, with financials (-1.3%), telecom services (-0.9%), and industrials (-0.7%) being the weakest performers. Conversely, energy (+2.5%), technology (+2.0%), and real estate (+1.7%) were the top-performing groups.

Retailers dominated the earnings front once again, with Costco (COST), Dollar General (DG), Dollar Tree (DLTR), lululemon (LULU), Ulta Beauty (ULTA), Dick’s Sporting Goods (DKS), and others reporting their quarterly results, which came in mixed. The SPDR S&P Retail ETF (XRT) settled roughly flat for the week.

U.S. Treasuries were volatile this week, eventually finishing with modest gains. The benchmark 10-yr yield, which moves inversely to the price of the 10-yr Treasury note, finished the week lower by three basis points at 2.90%. Meanwhile, the U.S. Dollar Index eked out a fractional gain, settling the week at 94.22.

(Excerpts from Briefing.com)

Friday Update: June Starts with a Bang

The month of May might have ended with a whimper, but the month of June started with a bang.  Driven by an easing of the political tension in Europe and another employment report out of the U.S. that produced strong job growth, modest wage growth, and the lowest unemployment rate since April 2000, the major indices put together a winning session that was punctuated by leadership from economically-sensitive sectors.

The gains for the major indices ranged from 0.9% for the Russell 2000 to 1.5% for the Nasdaq Composite.  Sellers were an outnumbered bunch on Friday, evidenced by an advance-decline line at the NYSE and Nasdaq that favored advancing issues by a more than 2-to-1 margin.

Leading the advance, which had a risk-on demeanor before the opening bell, was the information technology sector (+1.9%).  It kept good company, however.

Following in its footsteps were the materials (+1.5%), industrials (+1.2%), and financial (+1.1%) sectors.  The countercyclical health care sector (+1.2%) offered an added measure of support that made it challenging to knock the indices back to any considerable degree during Friday’s trading.

The bulk of today’s gains were logged within the first hour of trading.  They were solidified as the day went on by better than expected construction spending and ISM manufacturing data, as well as the news from the White House that the June 12 summit with North Korea in Singapore is back on in what it is apt to be a multi-step negotiating process for denuclearization of the Korean Peninsula.

Interestingly, the protectionist trade concerns that drove the market lower on Thursday were placed on the back burner on Friday.

Traders instead embraced the report out of Europe that Italy’s president gave a mandate to the anti-establishment 5-Star Movement and right-wing League Party to form a government, thereby avoiding the need for a snap election that some thought could end up being a referendum on Italy’s membership in the European Union.

That news triggered a risk-on tone in European markets that carried over to the U.S.  The reassuring employment report simply accentuated the positive bias that persisted throughout the trading day.

Reflecting the upbeat tone, 27 out of 30 Dow components registered a gain on Friday while only two of the 11 S&P sectors – utilities (-1.5%) and consumer staples (-0.03%) – ended with a loss.

The energy sector (+0.5%) for its part kept its head above water even though oil prices ($65.83, -$1.14, -1.7%) fell sharply in a technically-driven sell-off.

Treasuries were also weak on Friday as some of the safe-haven premium tied to European politics was unwound along with the notion that the Federal Reserve won’t raise the fed funds rate at least three times this year.  The 2-yr note yield increased seven basis points to 2.48% while the 10-yr note yield jumped eight basis points to 2.90%.

Reviewing Friday’s economic data:

Market Internals – Friday 01 JUNE

Dollar: Dollar Index Ticks Higher

The U.S. Dollar Index was up 0.3% at 94.23, turning slightly positive for the week. The greenback started the week on a higher note, looking to extend its recent rally, but a midweek slump returned action to levels from last Friday. The Index dipped in Thursday’s overnight action, but rallied back on Friday to unchanged in the early morning, rallying to a fresh session high after the release of a stronger than expected Employment Situation report for May (actual 223K; consensus 190K). Friday’s dollar strength was not widespread, as the British pound and select emerging market currencies advanced against the dollar.

Bonds: 10-Yr Yield Settles Near 50-Day Average

U.S. Treasuries ended the week on a lower note, but intraday action was limited, as Treasuries spent the day near their opening levels. Treasury futures retreated in overnight trade once it became clear that early elections would be avoided in Italy and Spain. Italy’s President Sergio Mattarella approved the formation of a M5S-Lega government while Spain’s Prime Minister Mariano Rajoy was forced out through a no-confidence vote, but acting Prime Minister Pedro Sanchez did not call for a fresh election just yet. Spanish and Italian debt climbed during the European session, and the improvement in risk tolerance weighed on Treasuries.

The Treasury complex dipped to fresh lows in response to a better than expected Employment Situation report for May, but spent the day in a slow climb off the opening lows. The Friday intraday rally pressured the 10-yr yield back below its 50-day moving average (2.908%) while the slope of the yield curve remained near its flattest level of the cycle. The 2s10s spread ended the day at 42 bps, down three basis points for the week, while the 2s30s spread compressed four basis points for the week to 57 bps.

The yield curve flattened last week with the longer maturities falling more while the 2-year remained unchanged. The spread between the 5s10s narrowed to 16bps from 17bps the previous week while the 10s30s narrowed to 15bps from 16bps the previous week. 

 Commodities 

The most significant occurrence this week is the $11 spread between WTI and Brent from $7 less than two weeks ago. The Bloomberg Commodity Index closed at 90.72, lower than 91.51 the previous week as a result of drops in Grains, Precious and Energy.

Crude: WTI crude oil slides lower, settles below $66/barrel  

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.2 mln barrels from the previous week. At 434.5 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 increased by 0.5 mln barrels last week, and are in the upper half of the average range. Finished gasoline inventories increased, but blending components inventories decreased last week. Distillate fuel inventories increased by 0.6 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories increased by 2.0 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories increased by 1.8 mln barrels last week.

Natural gas inventory showed a build of 96 bcf vs a build of 91 bcf in the prior week: Working gas in storage was 1,725 Bcf as of Friday, May 25, 2018, according to EIA estimates. This represents a net increase of 96 Bcf from the previous week. Stocks were 788 Bcf less than last year at this time and 500 Bcf below the five-year average of 2,225 Bcf. At 1,725 Bcf, total working gas is within the five-year historical range.

Baker Hughes total U.S. rig count increased by 1 to 1060 following last week’s increase of 13.

Metals: Precious Falls, Copper Gains

Agriculture: Grains All Lower

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THE WEEK AHEAD

Historically, over the last 5 to 15 years, the second week (wk23 – 04 to 08 June 2018) has been mildly bullish. However, over the last 21 years, the twenty-third week has been divergent and volatile.

Benchmarks (21 year average) for wk23:

Key Economic Dates

Week 23

The US will publish trade balance, ISM non-manufacturing PMI, factory orders and JOLTs job openings. Elsewhere, the RBA and the RBI will decide on monetary policy. Other important economic releases include: China trade balance, inflation and Caixin Services PMI; UK Markit construction and services PMIs; and Australia Q1 GDP growth.

Mon 04 June

Tue 05 June

Wed 06 June

Thu 07 June

Fri 08 June

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SUMMARY

2018 has so far proven to be a troublesome year, as predicted (by not selling off in May 2017). We already had a heads-up when the statistic for the Second Presidential Year showed up a bearish stat more often than not. Since February this year, the market has not been its usual self and once again, May did not sell off, triggering the possibility that 2019 will be more troublesome than 2018.

Now we face the unpredictability of June with the 50 and 200DSMA still looming ever closer to the benchmarks. The economic numbers still suggest that the US economy is still chugging along well, albeit with some softening that could become worrisome in the coming months of July, August and September.

Till then, I remain cautiously bullish and hedged, keeping my positions quick and sticking to tight stops.

Happy Hunting!

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