Weekly Market Update – 16 July 2018 BMO

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WEEK IN REVIEW – 09 to 13 July 2018 :
Entering Earnings Season on a Positive Note

Wall Street advanced for the second week in a row, with the Nasdaq (+1.8%) touching a new record and the S&P 500 (+1.5%) hitting its best level since the big drop in early February. The Dow Jones Industrial Average (+2.3%) outperformed its peers, returning to positive territory for the year, but the small-cap Russell 2000 (-0.4%) struggled.

Stocks started the week on a positive note, rallying on Monday and Tuesday, but sold off on Wednesday after the White House escalated its ongoing trade dispute with Beijing, publishing a new list of tariffs. This round of duties is the largest yet, calling for a 10% tariff on $200 billion worth of Chinese goods, but it won’t be official for at least two months. As it did with earlier tariffs, China promised to retaliate.

Meanwhile, NATO leaders held a two-day summit in Brussels this week. President Trump dominated the headlines, criticizing Germany for approving a major gas deal with Russia and taking a hard stance on increased military spending. Member states recommitted to a military spending target of 2% of GDP by 2024, prompting Mr. Trump to verbally confirm his commitment to the alliance.

The U.S. president then jetted to the UK for a meeting with Prime Minister Theresa May. Before the meeting, Mr. Trump suggested that Ms. May’s Brexit plan may prevent the U.S. from entering a bilateral trade deal with the UK, but he walked back those comments in a latter press conference, reaffirming the leaders’ “special relationship.”

Back on the home front, West Texas Intermediate crude futures tumbled from a three-and-a-half year high on Wednesday, plunging 5.0% in their worst daily performance in over a year. Investors shrugged off a bullish inventory report – which showed a huge drop of 12.6 million barrels for the week ended July 6 – and instead focused on resurgent Libyan supply and increased June output for Saudi Arabia.

The energy sector, which is sensitive to crude prices, finished behind the broader market, but still added 0.8%. Eight of eleven spaces finished the week in the green, with information technology (+2.3%), consumer discretionary (+2.1%), and industrials (+2.2%) being the top performers. Utilities (-1.2%), telecom services (-1.6%), and real estate (-0.8%) were the three decliners.

In corporate news, big banks JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) unofficially kicked off the second quarter earnings season on Friday with mixed results; JPMorgan and Citigroup beat earnings estimates, but Wells Fargo missed. The financial sector lost 0.5% on Friday, but still finished the week with a gain of 1.1%.

Elsewhere, 21st Century Fox (FOXA) lost 4.0% on Wednesday following reports that Comcast (CMCSA) may forego countering Disney’s (DIS) offer for Fox’s entertainment assets and focus on upping its bid for British media company Sky instead; Broadcom (AVGO) tumbled 13.7% on Thursday after agreeing to acquire software company CA Tech (CA) for approximately $18.9 billion in cash; and AT&T (T) lost 1.7% on Friday after the Department of Justice appealed the company’s acquisition of Time Warner.

In the bond market, U.S. Treasuries moved lower in another curve-flattening trade this week, bringing the 2-10 spread down two basis points to 26 bps – its lowest level in more than a decade. The yield on the benchmark 10-yr note ticked up one basis point to 2.83%, while the yield on the 2-yr note climbed three basis points to 2.57%.

(Excerpts from Briefing.com)

Friday: Stocks Tick Higher Despite Bank Underperformance

Stocks eked out a slim victory on Friday following a range-bound day of trading on lighter-than-usual volume. The S&P 500 (+0.1%) hit some technical resistance at the 2800 level, which it hasn’t been able to conquer since early February. The Dow Jones Industrial Average (+0.4%) did modestly better, and the Nasdaq Composite finished flat.

Big banks, including JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC), unofficially kicked off the Q2 earnings season Friday morning. The results were mixed; JPMorgan and Citi beat profit estimates, but Well Fargo came up short. The three lenders slid between 0.5% and 2.2% in the aftermath, and the influential financial sector declined 0.5%.

The top-weighted technology space also lagged, finishing a tick below its unchanged mark. Within the space, Dow component Cisco Systems (CSCO) dropped 4.1% following news that Amazon (AMZN) is mulling entry into the data switches market; AMZN rallied 0.9%, hitting a new record high.

Meanwhile, telecom services (-0.8%) was the worst performer, led lower by AT&T (T), which lost 1.7% following news that the DOJ has appealed the company’s acquisition of Time Warner.

On the flip side, industrials (+0.6%), energy (+0.6%), and consumer staples (+0.6%) finished at the top of the sector standings. The energy space was helped by a rebound in the price of crude oil, which plunged 5.0% on Wednesday. WTI crude futures advanced 1.1% on Friday to $71.03 per barrel.

President Trump was in the UK on Friday, fielding questions from reports in a joint press conference with Prime Minister Theresa May and stopping for tea with Queen Elizabeth II. Mr. Trump reaffirmed the United States’ “special relationship” with the UK and said the U.S. will pursue a free trade deal with the UK once it leaves the EU.

U.S. Treasuries rallied on Friday, pushing yields lower across the curve; the yield on the benchmark 10-yr Treasury note slipped two basis points to 2.83%. Meanwhile, the U.S. Dollar Index finished slightly lower (-0.1%) at 94.47, and the CBOE Volatility Index declined 2.9% to 12.22.

Reviewing Friday’s economic data, which included June Import/Export Prices and the preliminary reading of the University of Michigan Consumer Sentiment Index for July:

Looking ahead, investors will receive on Monday the Retail Sales report for June, the Empire State Manufacturing Index for July, and the Business Inventories report for May. Bank of America(BAC) and BlackRock (BLK) will report earnings before the open, and Netflix (NFLX) will report after the close.

Market Internals – Friday 13 June

Dollar: Dollar Index Little Changed

The U.S. Dollar Index closed at 94.68, after looking like it was going to finish the week unchanged from last week’s close of 94.83. The greenback saw a continuation of this week’s strength in overnight action, but the Dollar Index could not push above its closing high from late June (95.53). The Index peaked during the European session, spending the past several hours in a steady retreat. 

Bonds: 30-yr Yield Nears Six-Month Low

U.S. Treasuries ended the week on a higher note with the 2-yr note rebounding from its recent show of relative weakness. The Friday affair was not particularly active, as Treasuries spent the day in a range that narrowed as the day progressed. The market saw some volatility in morning trade as opening gains were briefly surrendered, but Treasuries crept back to their morning highs and remained near those levels into the afternoon, when another wave of buying interest lifted all tenors to fresh session highs. The 30-yr yield finished at its lowest level since late January, reflecting relentless outperformance in the long bond. The yield curve ended the day at a slightly steeper level, but flattened when compared to last Friday. The 2s10s spread ended the week four basis points tighter at 26 bps while the 2s30s spread compressed by five basis points to 36 bps.

The yield curve tightened yet again as the 30-year yield fell while the shorter maturities’ yields rose. The spread between the 5s10s tightened to 10bps from 11bps the previous week while the 10s30s tightened to 10bps from 11bps the previous week. 

The Federal Reserve released its semiannual Monetary Policy Report, which showed little concern over recent strength in the U.S. dollar and did not point to discomfort among policymakers about staying on the tightening path. Fed Chairman Jay Powell will appear before the Senate Committee on banking, Housing, and Urban Affairs on Tuesday to deliver the semiannual report and answer questions from lawmakers.

 Commodities 

The Bloomberg Commodity Index settled at 83.83, lower than 86.21 the previous week as energy and metals continue their seasonal weakness. 

WTI oil falls to $71/barrelThe spread between WTI and Brent widened, breaking a seven-week narrowing streak to $4.30 from $3.31 the previous week.

EIA petroleum data for the week ended June 06

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 12.6 million barrels from the previous week. At 405.2 million barrels, U.S. crude oil inventories are about 4% below the five year average for this time of year. Total motor gasoline inventories decreased by 0.7 million barrels last week and are about 6% above the five year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories increased by 4.1 million barrels last week and are about 12% below the five year average for this time of year. Propane/propylene inventories increased by 2.4 million barrels last week and are about 10% below the five year average for this time of year. Total commercial petroleum inventories decreased by 7.2 million barrels last week.

Natural gas inventory showed a build of 51 bcf vs a build of 78 bcf in the prior week. Working gas in storage was 2,203 Bcf as of Friday, July 6, 2018, according to EIA estimates. This represents a net increase of 51 Bcf from the previous week. Stocks were 725 Bcf less than last year at this time and 519 Bcf below the five-year average of 2,722 Bcf. At 2,203 Bcf, total working gas is within the five-year historical range.

Baker Hughes total U.S. rig count increased by 2 to 1054 following last week’s increase of 5.

Metals: Gold resumes falling, Silver and Copper continue to seasonal weakness

Agriculture: Wheat bucks the trend

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THE WEEK AHEAD

Week 29 (July 16 to 20) tends to be bullish across our 5, 10 and 15 year seasonal models.

Benchmarks (21 year average) for wk29:

Key Economic Dates

Week 29

In the coming week, the US will publish retail trade, industrial production, building permits and housing starts. Elsewhere, important releases include: China Q2 GDP growth, industrial output, retail sales and fixed asset investment; Japan inflation and foreign trade; UK inflation, wages and unemployment; and Australia employment.

Sun 15 July

Mon 16 July

Tue 17 July

Wed 18 July

Thu 19 July

Fri 20 July

Sat 21 July

Earnings – July 16 to 20

Week 2 of earnings season gets into full swing with at least seven DOW components on the line. Former recent DOW components AA, GE, BAC and HON are also calling out their numbers.

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OBSERVATION

Having dug itself out from beneath the 200DSMA six sessions ago, the DOW closed the week at the critical 25,000 retracement that has been dogging it since February. It has managed five consecutive closes above its 50DSMA. The coming week will be a stern test for the benchmark to break above and close firmly above all its average and that 25,000 retracement with a third candle reversal imminent on Monday.

SUMMARY

The coming week suggests that we’re in for some volatility as earnings season kicks into full gear. Although there is still no economic weakness that could threaten the US economy, some early signs of an economic top appear to be manifesting like a 6-year high on inflation, 9-year high on employment, 18-year low on unemployment, 11-year low on bond yield spreads and then there’s this …

I am going to continue on the safe side of bullish and stay hedged with quick timeframes and tight stops for all my trades.

Happy Hunting!

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