Weekly Market Analysis – 27 August 2018 BMO

WEEK IN REVIEW – 20 to 24 August 2018 :
Back to Record Territory

The S&P 500 advanced 0.6% this week, closing Friday at a new record high for the first time since January 26. Political uncertainty, trade ambiguity, and strengthened expectations for two more rate hikes this year all failed to dissuade motivated buyers, who pushed stocks higher in three of the week’s five sessions.

As for the other major averages, the Nasdaq and the Russell 2000 also notched new records, adding 1.7% and 1.9%, respectively, while the Dow climbed 0.5%.

The week started on a mildly positive note, with stocks ticking higher on Monday and Tuesday, but investors were cautious over the next two sessions, largely due to the legal woes of President Trump’s former campaign manager, Paul Manafort, and longtime personal lawyer, Michael Cohen.

Mr. Manafort was convicted of tax and bank fraud on Tuesday afternoon, while Mr. Cohen pleaded guilty to a range of charges, including tax fraud and excessive campaign contributions, and implicated the president directly by saying that Mr. Trump directed him to pay two women hush money “for the principal purpose of influencing the election.”

It’s too early to say what these developments will mean for President Trump’s political future, but it’s worth noting that the president chose to say, in regards to the situation, that the market would crash “if I ever got impeached” and that “I don’t know how you can impeach somebody who has done a great job.”

Moving on to the trade front, two days of trade talks between the U.S. and China wrapped up on Thursday without any visible sign of progress. President Trump said beforehand that he wasn’t expecting much to come out of the talks, which marked the first official negotiations since a breakdown nearly three months ago.

In monetary policy, President Trump reiterated his displeasure with the Fed on Monday, saying he was “not thrilled” with Fed Chair Jerome Powell for raising rates.

Two days later, the Fed released the minutes from the July/August FOMC meeting, which only strengthened the expectation that the U.S. central bank will hike rates at its September meeting, with officials saying in the minutes that it would likely “soon” be appropriate to raise rates.

Then, on Friday, Fed Chairman Powell gave a speech at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, saying that gradual rate hikes remain appropriate. Mr. Powell also expressed confidence in the economy and said he doesn’t see any signs of inflation getting out of hand.

Seven of eleven sectors advanced this week, with cyclical groups showing relative strength. The energy sector (+2.6%) was the top performer — rebounding from last week’s 3.6% tumble — helped by an increase in crude prices; West Texas Intermediate crude futures climbed 4.2% this week to $68.66 per barrel.

Meanwhile, the consumer discretionary sector (+2.0%) also outperformed amid a steady flow of retail earnings. TJX (TJX) jumped 4.7% on Tuesday after reporting better-than-expected results, while Lowe’s (LOW) and Target (TGT) added 5.8% and 3.2%, respectively, on Wednesday after also beating estimates.

On the downside, the four declining sectors were consumer staples (-1.8%), utilities (-1.4%), telecom services (-0.7%), and real estate (-1.1%).

(Excerpts from Briefing.com)

Wed 22 August – Fed releases minutes from July 31/August 1 FOMC policy meeting

Thu 23 August – Initial Claims Remain Near Recent Levels (210K vs 217K consensus)

Fri 24 August – S&P Notches First Record Close Since January

Friday was a record-setting day for the stock market, with the S&P 500 (+0.6%) notching its first record close (2874.69) since January 26. The Nasdaq (+0.9%) also registered a fresh record finish, as did the small-cap Russell 2000 (+0.5%). The Dow (+0.5%) advanced, but finished about 3.0% below its January record high.

The market extended opening gains after Fed Chairman Jerome Powell didn’t say anything upsetting in his speech at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming. Mr. Powell reiterated that gradual rate hikes remain appropriate, adding that he doesn’t see any signs that inflation is getting out of hand.

On the international front, investors brushed off news that two days of trade talks between the U.S. and China ended on Thursday without any visible sign of progress. That result was expected as President Trump said beforehand that he didn’t believe much would come from the negotiations.

Separately, President Trump tweeted on Friday afternoon that he’s asked Secretary of State Mike Pompeo not to go to North Korea because there has not been sufficient progress with respect to the decentralization of the Korean Peninsula. The stock market had a muted reaction to the tweet.

Wall Street’s gains were broad-based on Friday with 10 of 11 sectors advancing.

The lightly-weighted materials sector (+1.2%) was the top-performing group, followed closely by the top-weighted technology sector (+1.1%). Within the tech space, software company Autodesk (ADSK) spiked 15.3% after reporting better-than-expected earnings and revenues on Thursday evening.

In other earnings news, retailers dominated the headlines once again with Gap (GPS) and Foot Locker (FL) tumbling 8.6% and 9.2%, respectively, and Buckle (BKE) dropping 4.5% in reaction to their quarterly results. Conversely, Ross Stores (ROST) ticked up 0.1%.

The consumer staples sector (-0.2%) was the lone decliner, but financials (+0.3%), industrials (+0.4%), and utilities (+0.4%) also underperformed.

Looking at other markets, U.S. Treasuries finished slightly lower, pushing the benchmark 10-yr yield up one basis point to 2.83%. Meanwhile, the U.S. Dollar Index gave back nearly all of Thursday’s rebound, dropping 0.5% to 95.05, and West Texas Intermediate crude futures jumped 1.2% to $68.66/bbl.

Market Internals – Friday 24 August

Dollar: Dollar Index Revisits 50-Day Average

The U.S. Dollar Index was down 0.6% at 95.13, hovering just above its 50-day moving average (95.02) once again. The greenback surrendered a portion of Thursday’s gain in overnight trade, dropping to a fresh session low after the release of Fed Chairman Jay Powell’s speech from the Jackson Hole Symposium. The speech was largely in-line with expectations, as Chairman Powell acknowledged that continued rate hikes are warranted as long as economic growth remains on track. Mr. Powell did not discuss currencies in his remarks. The Dollar Index is on track to surrender 1.0% for the week.

Bonds: Treasuries Yawn at Comments from Jackson Hole

U.S. Treasuries ended Friday on a slightly lower note after reclaiming the bulk of their opening losses. Treasuries ticked lower in overnight trade, widening their losses ahead of the release of Fed Chairman Jay Powell’s speech from the Jackson Hole Symposium. However, those losses were mostly reclaimed after Mr. Powell’s speech fit largely in-line with the market’s view of monetary policy. The Fed Chairman said he believes that increasing rates in gradual fashion will remain appropriate if growth stays on its current path. Mr. Powell did not discuss trade and did not talk about the expected impact of Fed policy on emerging markets. Pressure on the yield curve persisted, briefly compressing the 2s10s spread to a new cycle low of 19 bps. However, the 2s10s spread returned to unchanged by the end of the session, ending the week at 22 bps, three basis points tighter when compared to last Friday.

The yield curve flattened more as the longer maturities’ yields fell more than the shorter maturities’ yields. The spread between the 5s10s tightened to 11bps from 12bps the previous week while the 10s30s tightened to 15bps from 16bps the previous week.

Commodities 

The Bloomberg Commodity Index settled at 83.69, higher than 83.35 the previous week as ABCDE

WTI oil snapped a seven week losing streak, settling at $68.72. The spread between WTI and Brent continued to widen for a third week to $7.10 from $5.92 the previous week.

EIA petroleum data for the week ended August 17

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 5.8 mln barrels from the previous week. At 408.4 mln barrels, U.S. crude oil inventories are at the five year average for this time of year. Total motor gasoline inventories increased by 1.2 mln barrels last week and are about 6% above the five year average for this time of year. Finished gasoline and blending components inventories both increased last week. Distillate fuel inventories increased by 1.8 mln barrels last week and are about 7% below the five year average for this time of year. Propane/propylene inventories decreased by 0.9 mln barrels last week and are about 13% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 2.5 mln barrels last week.

Natural gas inventory showed a build of 48 bcf vs a build of 33 bcf in the prior week. Working gas in storage was 2,435 Bcf as of Friday, August 17, 2018, according to EIA estimates. This represents a net increase of 48 Bcf from the previous week. Stocks were 684 Bcf less than last year at this time and 599 Bcf below the five-year average of 3,034 Bcf. At 2,435 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased by 13 to 1044 following last week’s status quo.

Metals: All recover

Agriculture: Grains Resume Seasonal Weakness

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THE WEEK AHEAD – Week 35 (August 27 to 31)

According to our 5, 10 and 15 year seasonal models, the SPY and DIA will be expecting a divergent and volatile week ahead:

Trivia:

Benchmarks (21 year average) for wk35:

Key Economic Dates

Week 35

Next week the US will publish the second estimate of GDP growth, personal income and spending, PCE prices, and pending home sales. Elsewhere: UK monetary indicators; Eurozone inflation; Japan retail sales and industrial output; China official PMIs; and Canada, India and Brazil GDP growth rates.

Mon 27 August

Tue 28 August

Wed 29 August

Thu 30 August

Fri 31 August

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SUMMARY

So the market breaks higher highs in a month that’s not supposed to be bullish and is about to go into a month that’s supposed to be the year’s most bearish. There is nothing ordinary about what’s going on and I shouldn’t be surprised either as the macros still favour a bull market.

The yield curve, on the other hand is still a cause for concern and I will be watching it closer than ever as we get into September, especially if September shows its usual signs of declining.

Happy Hunting!

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