Weekly Market Update – 11 June 2018 BMO

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WEEK IN REVIEW – 04 to 08 June 2018 : Third Straight Weekly Advance

The U.S. equity market advanced for the third week in a row, with the benchmark S&P 500 index adding 1.6%. The Dow Jones Industrial Average was particularly strong, adding 2.8%, while the Nasdaq Composite and the Russell 2000 touched new record highs, finishing the week with respective gains of 1.2% and 1.5%.

There were several notable corporate headlines this week, starting on Monday when the executive chairman and former CEO of Starbucks (SBUX), Howard Schultz, announced that he will be stepping down. In talking about his future plans, Mr. Schultz failed to rule out a run for the White House, prompting speculation that he’ll challenge President Trump in 2020.

Elsewhere in the consumer discretionary space, Tesla (TSLA) shares spiked on Wednesday after CEO Elon Musk said it’s “quite likely” that Tesla will hit its target for producing 5,000 Model 3 electric vehicles per week by the end of June. Retailers soared this week, sending the SPDR S&P Retail ETF (XRT) higher by 6.3%, following comments from Evercore ISI Research, which suggested that fears about Amazon’s (AMZN) ever-growing footprint may be overblown. Some short-covering activity also likely helped push retail shares higher.

Meanwhile, in the tech space, Facebook (FB) came under scrutiny once again following news that the social media company has data-sharing partnerships with at least four Chinese electronics companies, including one flagged as a national security threat by American intelligence officials. Separately, Apple (AAPL) shares dropped on Friday following reports that the company has asked its supply chain to prepare around 20% fewer components for iPhones debuting in the second half of 2018.

In Washington, Commerce Secretary Wilbur Ross said the U.S. has struck a deal to end crippling sanctions against Chinese telecom giant ZTE that includes a $1 billion penalty and the implementation of a U.S.-chosen compliance team to monitor the company going forward. ZTE will also be required to change its board of directors and its executive team. On a related note, China is reportedly ready to approve Qualcomm’s (QCOM) proposed acquisition of NXP Semi (NXPI).

Leaders from the Group of Seven (G7) kicked off their annual summit on Friday in the small Canadian resort town of La Malbaie. This year’s meeting is expected to be more contentious than usual due to President Trump’s decision to impose tariffs on imports of steel and aluminium. French President Emmanuel Macron has threatened to exclude the U.S. from the annual joint statement, symbolizing the strained relationship between the U.S. and its allies.

In Europe, the ECB’s Chief Economist, Peter Praet, said the European Central Bank will discuss how to wind down its asset purchase program at next week’s policy meeting after officials agreed that inflation is moving towards the central bank’s target of 2.0%. The euro responded by rallying against the U.S. dollar, adding nearly 1.0% for the week.

The Fed will also be meeting next week, and it’s all but certain that officials will hike interest rates for the second time this year. The question is whether the updated interest-rate projections, which will be released alongside the rate-hike decision on Wednesday, will call for one or two more hikes this year.

(Excerpts from Briefing.com)

Friday Update: Stocks Tick Higher, Extend Weekly Gains

The major averages ticked up between 0.1% and 0.3% on Friday, extending their weekly gains to 1.2%-2.8%. Stocks opened modestly lower as technology shares weighed, but the consumer staples and health care sectors helped turn things around later in the session. The day was pretty quiet in terms of headlines, although the Group of Seven (G7) did kick of its annual summit in Quebec.

President Trump is expected to be on the outside looking in at this year’s G7 summit after his decision to impose tariffs on steel and aluminum imports was met with resistance from U.S. allies. The president further stirred the pot on Friday by saying the G7 — which used to be the G8 before Russia got thrown out in 2014 for its annexation of Crimea — should let Russia back into the group. Investors weren’t spooked by the tension though, nor were they fazed by reports that Chinese government hackers stole massive amounts of highly sensitive data from a U.S. Navy contractor.

Nearly all S&P 500 sectors advanced on Friday, but gains were modest for the most part. The consumer staples sector was an exception though, adding 1.3%. Monster Beverage (MNST) was the top-performing consumer staples component, rallying 5.0%, following its annual shareholder meeting. The health care sector also showed relative strength, climbing 0.7% in a broad-based rally.

The energy (-0.2%) and utilities (unch) sectors were the only groups to finish Friday in the red, but the top-weighted information technology group also lagged, closing just a tick above its unchanged mark. Within the tech space, Apple (AAPL) lost 0.9% following reports that it has asked its supply chain to prepare around 20% fewer components for iPhones debuting in the second half of 2018, and Broadcom (AVGO) dropped 2.5% despite reporting better-than-expected quarterly results on Thursday evening.

Elsewhere, U.S. Treasuries finished Friday on a flattish note, with the yield on the benchmark 10-yr note ticking up one basis point to 2.94%. Meanwhile, West Texas Intermediate crude futures slid 0.3% to $65.76 per barrel, and the U.S. Dollar Index climbed 0.1% to 93.56 to end a four-session losing streak.

Market Internals – Friday 08 June

Dollar: Skid Snapped

The U.S. Dollar Index remains higher by 0.2% at 93.55 after being up 0.4% at its best level on Friday. The Dollar Index is looked to snap a four-day skid, but maintaining Friday’s gain was been a struggle. Overnight dollar strength helped the Index climb to its opening level from Tuesday, but selling pressure appeared as the focus turned to the Wall Street session. The Index spent Friday morning action in a steady retreat, pausing near the middle of today’s range. The dollar has had a mixed showing against emerging market currencies, but the market has heard from yet another central banker. The Brazilian real surged by nearly 5.0% against the greenback after Central Bank of Brazil President Ilan Goldfajn pledged to defend the real through currency swaps and other instruments, if needed.

Bonds: Treasuries Pause Ahead of Fed Week

U.S. Treasuries ended the week on a flat note after spending the Friday session inside a very narrow range. Treasury futures advanced in overnight action, but returned to little changed by the start of the cash session. Intraday action saw very limited movement in longer tenors, as 10s and 30s hovered near their flat lines until the close while the 2-yr note outperformed. The slope of the yield curve steepened a touch this week, as the 2s10s spread expanded to 46 bps from 42 bps while the 2s30s spread widened to 60 bps from 57 bps. Next week will be busy on the central bank front, considering the Federal Reserve is expected to announce a 25-bps rate hike on Wednesday while the European Central Bank could provide some guidance about the end of its asset purchases on Thursday morning.

The yield curve steepened last week with the belly of the curve rising 4bps while the 2-year remained unchanged for a third week. The spread between the 5s10s remained unchanged at 16bps from the previous week while the 10s30s narrowed to 14bps from 15bps the previous week. 

 Commodities 

The Bloomberg Commodity Index closed at 89.98, lower than 90.72 the previous week as Energy and Grains continue losses.

Crude: WTI finds support at $65

The spread between WTI and Brent remained wide at $10.70 from $11.00 the previous week.

EIA petroleum data for the week ended June 1:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.1 mln barrels from the previous week. At 436.6 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 4.6 mln barrels last week, and are in the upper half of the average range. Both Finished gasoline and blending components inventories increased last week. Distillate fuel inventories increased by 2.2 mln barrels last week and are in the lower half of the average range for this time of year. Propane/propylene inventories increased by 4.0 mln barrels last week, and are in the lower half of the average range. Total commercial petroleum inventories increased by 15.8 mln barrels last week.

Natural gas inventory showed a build of 92 bcf vs a build of 96 bcf in the prior week. Working gas in storage was 1,817 Bcf as of Friday, June 1, 2018, according to EIA estimates. This represents a net increase of 92 Bcf from the previous week. Stocks were 799 Bcf less than last year at this time and 512 Bcf below the five-year average of 2,329 Bcf. At 1,817 Bcf, total working gas is within the five-year historical range.

Baker Hughes total U.S. rig count increased by 2 to 1062 following last week’s increase of 1.

Metals: Precious Bounce, Copper Strenghtens

Agriculture: Grains All Lower

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THE WEEK AHEAD

Week 24 is June Triple Witching Week (wk24 – 11 to 15 June 2018). In Singapore, Malaysia and Indonesia, Friday 15 June is a public holiday in observance of Hari Raya Puasa – Markets will be closed.

Benchmarks (21 year average) for wk24:

Key Economic Dates

Week 24

Next week the Fed, the ECB and the BoJ will decide on monetary policy. Key economic releases include: US inflation, retail trade, industrial output and Michigan consumer sentiment; UK inflation, wages, unemployment, industrial production, retail sales and trade balance; Japan machinery orders; and China industrial production, retail sales and fixed asset investment.

Mon 11 June

Tue 12 June

Wed 13 June

Thu 14 June

Fri 15 June

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SUMMARY

Seems like the  markets want to get out of this four month funk. But every time it does, something or other pulls it back into its sideways range. This week, monetary policy from the U.S., Eurozone and Japan could be the reason we continue this consolidation. The bulls seems reluctant to back any bull-run as seen by the drop in volumes every time the market makes a run.

I’m sticking to caution. I like the run, no doubt … but I am not going to get complacent now.

Happy Hunting!

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