Weekly Market Analysis – 20 August 2018 BMO

WEEK IN REVIEW – 13 July to 17 August 2018 :
Hodgepodge of Headlines Helps Fuel Rebound

The S&P 500 advanced 0.6% this week – recouping last week’s modest decline – amid a host of retail earnings, more volatility in the Turkish lira, and another (minor) chapter in the U.S.-China trade war saga. The blue-chip Dow outperformed the S&P 500, rallying 1.4%, but the tech-heavy Nasdaq lagged, losing 0.3%.

Retailers stepped up to the earnings plate this week, with Walmart (WMT), Home Depot (HD), Macy’s (M), Nordstrom (JWN), Advance Auto (AAP), and J.C. Penney (JCP) all reporting their quarterly results. The market’s reaction to the reports was mixed.

In the session immediately following their respective earnings releases, Walmart spiked 9.3%, Home Depot lost 0.5%, Macy’s plunged 16.0%, Nordstrom spiked 13.2%, Advance Auto climbed 7.8%, and J.C. Penney plunged 27.0%. On a related note, the July Retail Sales report came in better-than-expected, showing a month-over-month increase of 0.5% (Briefing.com consensus +0.1%).

Non-retail names reporting earnings this week included Cisco Systems (CSCO), NVIDIA (NVDA), and Deere (DE). Cisco Systems and Deere rallied in the session immediately following their releases, adding 3.0% and 2.4%, respectively, but market-darling NVIDIA tumbled, losing 4.6%, after disappointing guidance overshadowed upbeat results.

In other corporate news, Tesla’s (TSLA) chief executive, Elon Musk, attempted to clarify last week’s tweet about taking Tesla private, saying that his claim that funding has been secured is based on repeated conversations with Saudi Arabia’s sovereign wealth fund. Mr. Musk also did a high-profile interview with The New York Times, in which he discussed his personal struggles, calling this past year “the most difficult and painful” of his career. Tesla shares ended the week lower by 14.1%.

In currencies, the Turkish lira followed up last Friday’s 16% plunge with another slide on Monday, touching a new all-time low against the U.S. dollar, but then rebounded for the next three sessions. That streak ended with another tumble on Friday, but the currency still finished with a weekly gain of 6.1%.

On the trade front, reports that the U.S. and China will resume trade talks by the end of the month helped equities rally on Thursday. The talks will mark the first official negotiations since a breakdown two months ago, but it’s worth noting that the talks are expected to be between low-level officials. In addition, The Wall Street Journal reported late on Friday that Chinese and U.S. negotiators are planning talks to try to end their trade disagreement ahead of multilateral meetings between President Trump and President Xi in November.

Elsewhere, West Texas Intermediate crude futures tumbled 2.5% to $65.94 per barrel this week, touching a fresh two-month low on Wednesday after the Energy Information Administration’s weekly inventory report showed an unexpected build of 6.8 million barrels. The drop in oil prices weighed on the energy group, which finished at the bottom of the sector standings with a loss of 3.6%.

Most S&P 500 sectors finished the week in positive territory, with less-risky, countercyclical groups – including consumer staples (+3.2%), utilities (+2.5%), and telecom services (+3.7%) – leading the charge. The top-weighted technology sector underperformed, shedding 0.2%, but remains 2018’s top-performing group with a year-to-date gain of 15.6%.

(Excerpts from Briefing.com)

Wed 15 August – Industrial Production & Capacity Utilisation

Thu 16 August – Initial Claims & Philly Fed

Fri 17 August – Leading Indicators

Fri 17 August – Positive Trade Headlines Fuel Late Uptick

The S&P 500 advanced 0.3% on Friday, securing a weekly gain of 0.6%, helped by a Wall Street Journal report that Chinese and U.S. negotiators are planning talks to try to end their trade disagreement ahead of multilateral meetings between President Trump and President Xi in November. The Dow added 0.4% on Friday, and the Nasdaq ticked up 0.1%.

Friday’s gains were broad-based, with all 11 S&P sectors closing in the green. The industrials (+0.6%), materials (+0.7%), consumer staples (+0.7%), and real estate (+1.0%) sectors were the top performers, while consumer discretionary (+0.1%), financials (+0.2%), and technology (+0.2%) finished at the back of the pack.

Stocks opened roughly flat and stayed largely unchanged until the afternoon when the WSJ report crossed the wires, pushing the market to new highs.

In corporate news, Tesla (TSLA) tumbled 8.9% following a New York Times interview with its CEO, Elon Musk, in which he discussed his personal struggles, calling this past year “the most difficult and painful” of his career. The NYT also reported that some of Tesla’s board members are concerned over Mr. Musk’s use of Ambien and recreational drugs.

On the earnings front, NVIDIA (NVDA) and Applied Materials (AMAT) tumbled 4.9% and 7.7%, respectively, after they reported worse-than-expected guidance, which overshadowed their better-than-expected earnings. The Philadelphia Semiconductor Index lost 0.7%.

Conversely, Nordstrom (JWN) spiked 13.2% after reporting above-consensus earnings and guidance for FY19, and Deere (DE) climbed 2.4% despite missing bottom-line estimates and issuing below-consensus guidance for the current quarter.

Away from stocks, the Turkish lira lost 3.6% against the U.S. dollar, ending its three-session rebound, and U.S. Treasuries spent most of the day in the green, but finished the session little changed. The yield on the benchmark 10-yr Treasury note finished flat at 2.87%.

Market Internals – Friday 17 August

Dollar: Dollar Index Pulls Back

The U.S. Dollar Index was down 0.4% at 96.30, turning negative for the week. Overnight action saw a pullback in the Dollar Index, which coincided with an uptick in the yuan. The yuan is not in the Dollar Index basket, but the overnight uptick was followed a jump in the euro, pound, and Australian dollar, which pressured the Dollar Index. The Index reclaimed the bulk of its loss in Friday’s early-morning trade, but slid to a fresh low a few hours later. Friday’s decline is the Index’s first weekly loss in four weeks, though the Index was only down 0.1% since the end of last Friday’s session.

Bonds: Afternoon Pullback Produces Flat Finish

U.S. Treasuries ended the week on a flat note after trade-related news prompted some late selling. The afternoon pullback prevented 10s and 30s from recording their third consecutive week of gains. Early action saw Treasuries oscillate near their opening levels, making for a mostly quiet trading day. However, the complex backed off session highs during the last 90 minutes of action, after The Wall Street Journal reported that officials from the U.S. and China would like to resolve disagreements over trade in time for multilateral meetings in November. The late report gave a boost to offshore yuan (USD/CHN -0.5% to 6.828), helping the Chinese currency secure its first weekly advance in ten weeks and only the third higher finish for the week out of the past 18 weeks. The dollar gave way to other currencies as well, causing the Dollar Index to extend its decline to 0.6% from 0.4% before the news. The yield curve ended the week at a slightly flatter level, as the 2s30s spread compressed to 41 bps from last Friday’s 42 bps while the 2s10s spread tightened by a basis point to 25 bps.

The yield curve flattened slightly as the 2 and 5-yr maturities gained 1bps more than the 10 and 30-yr. The spread between the 5s10s tightened to 12bps from 13bps the previous week while the 10s30s remained unchanged at 16bps from 16bps the previous week.

Commodities 

The Bloomberg Commodity Index settled at 83.35, lower than 84.23 the previous week as Oil and Metals continued their seasonal weakness. Lumber was the strongest commodity, up almost 7% at a three-week high.

WTI oil locks in a seventh straight weekly loss, settling at $65.91, on weaker demand outlook while Brent registered its third straight week down. The spread between WTI and Brent continued to widen for a second week to $5.92 from $5.18 the previous week.

EIA petroleum data for the week ended August 10

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 6.8 mln barrels from the previous week. At 414.2 mln barrels, U.S. crude oil inventories are about 1% above the five year average for this time of year. Total motor gasoline inventories decreased by 0.7 mln barrels last week and are about 5% above the five year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 3.6 mln barrels last week and are about 8% below the five year average for this time of year. Propane/propylene inventories increased by 3.4 mln barrels last week and are about 10% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 17.4 mln barrels last week.

Natural gas inventory showed a build of 33 bcf vs a build of 465 bcf in the prior week. Working gas in storage was 2,387 Bcf as of Friday, August 10, 2018, according to EIA estimates. This represents a net increase of 33 Bcf from the previous week. Stocks were 687 Bcf less than last year at this time and 595 Bcf below the five-year average of 2,982 Bcf. At 2,387 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count remained unchanged at 1057 following last week’s increase of of 13.

Metals: All lower

Agriculture: Grains Bounce

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THE WEEK AHEAD – Week 34 (August 20 to 24)

According to our seasonal model, the SPY and DIA will be expecting a divergent week ahead:

Trivia:

Benchmarks (21 year average) for wk34:

Key Economic Dates

Week 34

This week the Fed, the ECB and the RBA will publish the minutes of their last monetary policy meetings. Key economic data include: US existing and new home sales, durable goods orders and flash Markit PMIs; UK CBI factory orders; Eurozone flash Markit PMIs; and Japan inflation rate and flash Manufacturing PMI.

Mon 20 August

Tue 21 August

Wed 22 August

Thu 23 August

Fri 24 August

Sat 25 August

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SUMMARY

With two weeks remaining in August, the month has yet to rear its bearish nature. The benchmarks, for now, remain range-bound  with the exception of NASDAQ that seems to have come up against a formidable resistance at 7,900 while S&P is stuck below 2,850 and the DOW at 25,650.

U.S. economy is still lofty and showing no signs of failing anytime soon. By most measures, the economy is as strong now as it has been in decades. Hiring is strong, unemployment is low, households and business are confident and stocks are rising again. Any headwinds are likely to come from off-shore threats such as the tariff-tango and trade wars. Crisis in emerging markets like Turkey rarely hurt the U.S. economy but there have been a few events such as the “Asian contagion” in 1997 and a Russian default in 1998 when the danger become global.

Then you have the Federal Reserve. The central bank has been raising the cost of borrowing in the U.S. by lifting interest rates. Europe and Japan may also tighten monetary policy. Minutes of the August-ending meeting are due for release this Wednesday. If the Fed moves either too fast or too slow, the results could be painful for the economy. Already, higher rates appear to have dampened home sales and construction. The Fed Chair, Jerome Powell’s speech on Friday 24 August will be keenly watched for hints as to what the Fed is likely to do in the coming September FOMC Monetary Policy meeting.

Happy Hunting!

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