Weekly Market Update – 23 July 2018 BMO

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WEEK IN REVIEW – 16 to 20 July 2018 :
Investors Shrug Off Headline-Heavy Week

There were a heap of headlines out of Washington this week, but Wall Street kept its cool, finishing little changed. The S&P 500 finished flat, while the Dow Jones Industrial Average finished a tick higher (+0.2%), and the Nasdaq Composite finished a tick lower (-0.1%). The small-cap Russell 2000 outperformed, rallying 0.6%.

President Trump capped a week-long trip to Europe on Monday by meeting with Russian president Vladimir Putin in Helsinki, Finland. The leaders met for roughly four hours, discussing a wide range of topics, including arms control, the future of Syria, and, of course, Russian interference in the 2016 U.S. election, which Mr. Putin again denied.

Mr. Trump faced criticism for appearing to reject his own intelligence agencies’ conclusion that Russia meddled in the election in favor of Mr. Putin’s plea of innocence. President Trump later clarified his remarks, replacing the word would with wouldn’t in the following statement referring to Russian interference: “I don’t see any reason why it would be [Russia].”

On to U.S.-China trade relations, NEC Director Larry Kudlow said on Wednesday that he believes some lower-ranking Chinese officials would like to reach a trade deal, but Chinese President Xi is refusing to compromise. China’s foreign ministry responded to Mr. Kudlow’s comment, calling it “shocking” and “bogus.”

Back to Mr. Trump, the president did an exclusive interview with CNBC on Thursday in which he criticized the Fed, saying he’s “not thrilled” about interest rate hikes, and said he is willing to slap tariffs on $500 billion worth of Chinese goods – virtually every Chinese product coming into the U.S. – if necessary. Mr. Trump also commented on the strengthening dollar, saying it puts the U.S. at a disadvantage.

The president followed up that interview with a tweet on Friday, saying “China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge…Tightening now hurts all that we have done.”

Mr. Trump’s comments on the Fed were particularly controversial as presidents typically refrain from speaking on monetary policy in an effort to protect the Fed’s independence. The White House issued a follow-up statement after the CNBC clip aired on Thursday, clarifying that Mr. Trump respects the Fed’s independence.

On a separate – but related – note, Fed Chair Jerome Powell gave Congress his semiannual update on the economy and monetary policy, speaking before both the Senate Banking Committee and the House Financial Services Committee. Mr. Powell’s testimony provided no new information; he simply reinforced the view that improving economic conditions should allow the Fed to continue hiking rates gradually.

Whew. With all of that in mind, let’s turn away from Washington and towards this week’s trading on Wall Street.

The second quarter earnings season heated up this week with several influential names reporting their latest results. Netflix (NFLX) dropped sharply on Tuesday – although shares did rebound notably intraday- after the streaming media company missed subscriber growth estimates. Ahead of earnings, Netflix was up more than 100% on the year.

Fellow tech names Microsoft (MSFT), IBM (IBM), and eBay (EBAY) also reported their quarterly results this week. Microsoft and IBM rallied after beating earnings estimates, but eBay tumbled after reporting below-consensus results. The top-weighted technology sector finished the week with a gain of 0.1%, extending its yearly advance to 15.4%.

Several financial giants also reported earnings this week, including Bank of America (BAC), Goldman Sachs (GS), and Morgan Stanley (MS), all of which topped estimates. The positive results helped the heavily-weighted financial sector climb 2.2% and finish atop the week’s sector standings.

In other corporate news, Comcast (CMSA) said it will not counter Disney’s (DIS) offer for 21st Century Fox’s (FOXA) entertainment assets, and Amazon (AMZN) held its annual Prime Day, saying the 36-hour special was its biggest shopping event ever – even despite having to deal with some technical glitches.

Energy was the worst-performing sector this week, losing 1.9%, as crude oil extended last week’s tumble; WTI crude futures dropped 3.9% to $68.23/bbl and are now 8.0% below the nearly three-and-a-half year high they’ve touched several times this month. Fears that the U.S. may give some countries waivers to continue buying oil from Iran was one of several factors weighing on the commodity.

(Excerpts from Briefing.com)

Friday: Flat Week Ends With Flat Friday Session

Stocks finished a range-bound Friday session little changed, shrugging off potentially rattling comments from President Trump. The S&P 500 and the Nasdaq Composite both lost 0.1%, while the Dow Jones Industrial Average finished unchanged. Friday’s stumble left the S&P 500 flat for the week.

In a CNBC interview aired on Friday morning, President Trump said he is ready to put tariffs on $500 billion worth of Chinese goods — approximately the entire amount of goods shipped to the U.S. from China in 2017. Later, in a tweet, the president doubled down on his criticism of the Fed, saying rate hikes hurt what his administration has accomplished, and reiterated his concern over a strengthening dollar.

The U.S. Dollar Index tumbled 0.8% to 94.20 in response to the president’s comments, retreating from a 12-month high.

Microsoft (MSFT) headlined the earnings front, climbing 1.8% on the back of a better-than-expected quarterly report. Its outperformance helped the top-weighted technology sector get off to a good start – the group was up as much as 0.7% – but the bullish momentum faded as the day wore on. The tech group finished higher by 0.1%.

Elsewhere on the earnings front, Honeywell (HON) and Capital One (COF) also rallied on better-than-expected results, adding 3.8% and 2.0%, respectively. However, General Electric (GE) declined 4.4% despite beating estimates, and Skechers (SKX) plunged 21.0% after missing estimates and issuing disappointing guidance.

The consumer staples sector (+0.6%) was the top-performing group on Friday, and financials (+0.2%) eked out a slim victory. Meanwhile, eight of the eleven sectors finished in the red, with utilities (-0.8%) and real estate (-0.9%) being the weakest performers. No other space lost more than 0.5%.

In the bond market, Treasuries sold off in a curve-steepening trade, with the 2-yr yield climbing one basis point to 2.60% and the 10-yr yield climbing five basis points to 2.90%. Some analysts saw the increased 2-10 spread as a sign that investors believe President Trump’s criticism of the Fed could slow down the pace of rate hikes.

The S&P 500 tested the 2800 level several times on Friday, but it held through each attempt, with the low of the day coming in at 2800.01.

Investors did not receive any economic data on Friday. Looking ahead, Existing Home Sales for June is the lone release on Monday.

Market Internals – Friday 20 June

Dollar: Dollar Index Nears 50-Day Average

The U.S. Dollar Index was down 0.7% at 94.52, turning negative for the week. The Dollar Index edged higher at the start of the Thursday’s overnight session, but the slight strength faded by the start of European trade. The Index faced another downdraft in Friday morning’s trade, shortly after President Trump criticized rising rates once again, and voiced his displeasure with recent dollar strength. The Dollar Index, which now hovers just above its 50-day moving average (94.27), has lost 0.2% for the week after being up 1.0% for the week on Thursday morning.

Bonds: Longer Tenors Pull Back

U.S. Treasuries ended the week on a lower note with longer tenors showing relative weakness after a prolonged stretch of outperformance. Longer-dated Treasuries started the day with modest losses and continued sliding in steady fashion into the afternoon while shorter tenors climbed in the early going, but could not avoid a lower finish. This morning featured the airing of a CNBC interview, in which President Trump voiced his displeasure with rising rates and threatened to impose tariffs on all imports from China. Mr. Trump later took to Twitter, calling out China, the European Union, and “others” for “manipulating their currencies and interest rates lower while the U.S. is raising rates.” St. Louis Fed President James Bullard, who expressed concern with the pace of rate hikes three weeks ago, said President Trump is just one more voice in the interest-rate debate and that the Fed will not be swayed by public criticism from the president. Today’s selling pressure on the long end lifted the 30-yr yield to a three-week high while the slope of the yield curve saw some steepening after more than a month of near-daily flattening. The 2s10s spread widened by four basis points to 30 bps while the 2s30s spread expanded by five basis points to 43 bps.

The yield curve steepened as the longer maturities gained against the shorter maturities’ yields. The spread between the 5s10s widened to 13bps from 10bps the previous week while the 10s30s widened to 13bps from 10bps the previous week. 

 Commodities 

The Bloomberg Commodity Index settled at 83.68, lower than 83.83 the previous week as energy and metals continue their seasonal weakness.  

WTI oil fell below $67/barrel but closes above $68.00 for the week. The spread between WTI and Brent widened for a second week to $4.81 from $4.30 the previous week.

EIA petroleum data for the week ended June 13

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.8 mln barrels from the previous week. At 411.1 mln barrels, U.S. crude oil inventories are about 2% below the five year average for this time of year. Total motor gasoline inventories decreased by 3.2 mln barrels last week and are about 5% above the five year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories decreased by 0.4 mln barrels last week and are about 13% below the five year average for this time of year. Propane/propylene inventories increased by 1.7 mln barrels last week and are about 10% below the five year average for this time of year. Total commercial petroleum inventories increased by 6.0 mln barrels last week.

Natural gas inventory showed a build of 46 bcf vs a build of 51 bcf in the prior week- nat gas pops higher. Working gas in storage was 2,249 Bcf as of Friday, July 13, 2018, according to EIA estimates. This represents a net increase of 46 Bcf from the previous week. Stocks were 710 Bcf less than last year at this time and 535 Bcf below the five-year average of 2,784 Bcf. At 2,249 Bcf, total working gas is within the five-year historical range.

Baker Hughes total U.S. rig count decreased by 8 to 1046 following last week’s increase of 2.

Metals: Seasonal weakness persists

Agriculture: Wheat strengthens for a second week

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THE WEEK AHEAD

Week 30 (July 23 to 27) on the DIA tends to start out bullish (with some divergence) on Monday,  very bearish on Tuesday and becomes bullish on Wednesday, Thursday and Friday across our 5, 10 and 15 year averages on our seasonal model

The SPY tends to start out bullish (with some divergence) on Monday,  bearish on Tuesday, bullish on Wednesday and Thursday then becomes very bearish on Friday across our 5, 10 and 15 year averages on our seasonal model.

Benchmarks (21 year average) for wk30:

Key Economic Dates

Week 30

The week ahead sees the US publishing the advance estimate of second-quarter GDP growth, existing and new home sales, durable goods orders and flash Markit PMIs. Elsewhere, the ECB will be deciding on monetary policy. Other important releases include: UK CBI factory orders; Eurozone flash Markit PMIs and consumer confidence; France and South Korea Q2 GDP growth rates; Japan Nikkei Manufacturing PMI; and Australia inflation.

Sun 22 July

Mon 23 July

Tue 24 July

Wed 25 July

Thu 26 July

Fri 27 July

Earnings – July 23 to 27

The coming week is the first of three very heavy weeks of earnings reports with about a third of the S&P500 and 11 of the DOW components reporting their quarterly results.

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SUMMARY

The range-bound trend continues into its fifth month in this rather troubled market ahead of this week’s massive earnings schedule and next week’s FOMC Meeting. Expect volatility to go through the roof with wild swings amidst this jittery and nervous market. 

Happy Hunting!

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