Weekly Market Update – 06 August 2018 BMO

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WEEK IN REVIEW – 30 July to 03 August 2018 :
Apple Becomes First $1 Trillion Company

Stocks climbed this week as investors digested the Fed’s latest policy directive and Apple’s (AAPL) quarterly earnings report, which helped boost the company’s market cap above the unprecedented $1 trillion mark. The S&P 500 advanced 0.8%, and the tech-heavy Nasdaq rose 1.0%. The Dow lagged though, adding just 0.1%.

The Fed left interest rates unchanged as expected on Wednesday, keeping its target range at 1.75% to 2.00%, and characterized the economy as strong, signaling that the central bank is still on track to raise rates two more times this year. The next rate hike will likely come in September, with the CME FedWatch Tool placing the chances at 93.6%.

Overseas, the Bank of Japan and the Bank of England also held policy meetings this week. The BoJ decided to leave its ultra-loose monetary policy intact, but the BoE voted to raise rates for just the second time in a decade and surprised some by saying it anticipates raising rates further despite the looming uncertainty over Brexit.

In Washington, President Trump ordered his top trade representative to consider increasing proposed tariffs on $200 billion worth of Chinese goods to 25% from 10%. Beijing threatened to retaliate with tariffs on about $60 billion worth of American goods. The news didn’t have much impact on U.S. markets, but China’s Shanghai Composite lost 4.6% for the week, retesting a nearly two-and-a-half year low.

On the earnings front, Apple gobbled up all the attention after releasing its fiscal Q3 results on Tuesday evening. The world’s largest tech company beat earnings and revenue estimates and issued positive guidance for Q4, helping to restore faith in FAANG names after a disappointing report from Facebook (FB) last week.

In response, Apple shares rallied 5.9% on Wednesday and then another 2.9% on Thursday, making Apple the first ever company with a market cap of $1 trillion.

Tesla (TSLA) shares also soared, spiking 16.2% on Thursday, after above-consensus revenues, reaffirmed guidance, and an apology from CEO Elon Musk for last quarter’s abrasive earnings call helped the electric automaker overcome a larger-than-expected earnings per share loss of $3.06.

As for economic data, the July Employment Situation report was released on Friday, showing a below-consensus increase in nonfarm payrolls (157K actual vs 190K consensus). However, the June increase was upwardly revised to 248K from 213K, helping to offset the disappointing headline figure. Average hourly earnings increased 0.3%, as expected, and the unemployment rate ticked down to 3.9%.

The key takeaway from the report is, when accounting for the revisions and the fact that the year-over-year increase in average hourly earnings held steady at 2.7%, it’s essentially the same ‘Goldilocks’ report that the market cheered last month.

(Excerpts from Briefing.com)

Thu 02 August – Initial Claims 218K vs 220K consensus; Prior 217K

The weekly initial jobless claims count totaled 218,000, while the consensus expected a reading of 220,000. Thursday’s tally was above the unrevised prior week count of 217,000. This is the 178th straight week they have been below 300,000. As for continuing claims, they declined to 1.724 million from a revised count of 1.747 million (from 1.745 million).

Wed 01 August – FOMC reiterates economic activity has been rising at a strong rate

The Fed left interest rates unchanged as expected, keeping its target range at 1.75% to 2.00%, and characterized the economy as strong, signaling that the central bank is still on track to raise rates two more times this year. The next rate hike will likely come in September, with the CME FedWatch Tool placing the chances at 91.2%.

Fri 03 August – Stocks Climb on Jobs Report Friday, Extending Weekly Gains

Stocks added to their weekly gains on Friday as investors took the July Employment Situation report in stride, pushing the S&P 500 higher by 0.5%. The Dow Jones Industrial Average advanced 0.5% as well, and the tech-heavy Nasdaq ticked up 0.1%. Small caps struggled though, sending the Russell 2000 lower by 0.5%.

The monthly jobs report showed the economy added 157K nonfarm payrolls last month, less than the 190K that the consensus was expecting. However, the June increase was upwardly revised to 248K from 213K, helping to offset the disappointing headline number for July. Meanwhile, average hourly earnings increase 0.3% as expected, and the unemployment rate ticked down to 3.9%.

In short, the July Employment Situation report was essentially the same ‘Goldilocks’ report that the market cheered in June when accounting for the revisions and the fact that the year-over-year increase in average hourly earnings held steady at 2.7%. Equity futures slipped following the release, but the reaction was pretty mild overall.

The S&P 500 opened the session a tick higher and trended sideways for much of the morning before climbing to new highs in the afternoon. Countercyclical sectors, which are generally seen as less risky, led the charge, with consumer staples (+1.2%) closing near the top of the sector standings, helped by Kraft Heinz (KHC), which rallied after beating both top and bottom line estimates.

In other earnings news, CBS (CBS), Take-Two (TTWO), DISH Network (DISH), and GoPro (GPRO) rallied after their releases, while Activision Blizzard (ATVI) and Shake Shack (SHAK) sold off.

The top-weighted technology sector held the broader market back in early action but eventually picked up the pace, closing higher by 0.3%. Energy was the only sector to finish Friday in negative territory, losing 0.5% and extending its weekly loss to 1.8% — the worst among the 11 sectors.

Looking at other markets, U.S. Treasuries climbed on Friday, sending yields lower across the curve; the benchmark 10-yr yield dropped three basis points to 2.95%. Meanwhile, West Texas Intermediate crude futures slid 0.8% to $68.48 per barrel, and the U.S. Dollar Index finished flat at 95.00, just below a 13-month high.

Reviewing Friday’s economic data, which included the Employment Situation report for July, the June Trade Balance, and the July ISM Services Index:

Market Internals – Friday 03 August

Dollar: Dollar Index Remains Buoyant

The U.S. Dollar Index was down 0.1% at 95.10 after surrendering a slim gain. Overnight dollar strength put the Dollar Index on track for its fourth consecutive advance, but the euro, pound, and other major currencies rebounded in morning trade, putting the greenback’s streak in jeopardy. Still, the Index closed for its second consecutive weekly advance, having added 0.4% since last Friday. The most notable activity took place outside the Dollar Index basket, as the People’s Bank of China fixed the yuan at an eleven-year low, but later announced that the foreign exchange risk reserve requirement ratio will be increased to 20.0% from 0.0%. The announcement accelerated a rebound in the yuan, which began a few hours after the lower fix. On a side note, Chinese officials have identified $60 billion worth of imports from the U.S. that could become subject to new tariffs.

Bonds: 5-yr Note Leads Treasuries Higher

U.S. Treasuries ended Friday on a higher note, which helped all tenors register modest gains for the week. The trading day started on a mixed note as shorter tenors opened in negative territory while the 10-yr note and the 30-yr bond started modestly higher. However, the entire complex climbed after the release of a July Employment Situation report, which missed headline estimates, but stayed true to trend, especially when factoring in upward revisions to readings from the previous two months. In addition, morning trade was highlighted by news indicating Chinese officials have prepared a list of $60 billion worth of U.S. goods that may become subject to new tariffs. Treasuries marked session highs in mid-morning trade and revisited those levels just ahead of the cash close. Afternoon action saw some flattening in the yield curve, but the 2s10s spread still ended the week three basis points wider, at 32 bps. For its part, the 2s30s spread expanded to 46 bps from last week’s 42 bps.

The yield curve steepened for the week as the shorter maturities’ yields fell against the longer maturities’ yields. The spread between the 5s10s widened to 13bps from 11bps the previous week while the 10s30s also widened to 14bps from 13bps the previous week. 

 Commodities 

The Bloomberg Commodity Index settled at 84.90, higher than 84.84 the previous week as grains made great gains while energy and metals consolidated to the downside. 

WTI oil closes above $68/barrel for a second week. The spread between WTI and Brent narrowed to $4,72 from $5.60 the previous week to break a three-week widening streak.

EIA petroleum data for the week ended June 27

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.8 mln barrels from the previous week. At 408.7 mln barrels, U.S. crude oil inventories are about 1% below the five year average for this time of year. Total motor gasoline inventories decreased by 2.5 mln barrels last week and are about 3% 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 3.0 mln barrels last week and are about 11% below the five year average for this time of year. Propane/propylene inventories increased by 1.8 mln barrels last week and are about 12% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 10.6 mln barrels last week.

Natural gas inventory showed a build of 35 bcf vs a build of 24 bcf in the prior week- nat gas spikes. Working gas in storage was 2,308 Bcf as of Friday, July 27, 2018, according to EIA estimates. This represents a net increase of 35 Bcf from the previous week. Stocks were 688 Bcf less than last year at this time and 565 Bcf below the five-year average of 2,873 Bcf. At 2,308 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased by 4 to 1044 following last week’s increase of 2.

Metals: Precious weakness persists, Copper falls

Agriculture: Wheat strengthens for a fourth week

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THE WEEK AHEAD

Week 32 (August 06 to 10) on the DIA tends to start the week bearish then turns very bullish on Wednesday before turning bearish again on Thursday and closing the week out very bearishly on Friday.

The SPY tends to start the week bearish on Monday, more bearish on Tuesday then turns very bullish on Wednesday before turning bearish again on Thursday and closing the week out very bearishly on Friday.

Benchmarks (21 year average) for wk32:

Key Economic Dates

Week 32

In the coming week the US will be publishing inflation rate, producer prices and JOLTs job openings. Elsewhere, important releases include: UK Q2 GDP growth, business investment, industrial production and trade balance; Germany factory orders, industrial output and foreign trade; Japan Q2 GDP growth, household spending and machinery orders; China trade balance, inflation and producer prices; and interest rate decisions from Australia, New Zealand and the Philippines.

Mon 06 August

Tue 07 August

Wed 08 August

Thu 09 August

Fri 10 August

US – CPI and Core CPI m/m

Earnings – August 06 to 10

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SUMMARY

On 22 July, I wrote; “The coming week is the first of three very heavy weeks of earnings reports … Expect volatility to go through the roof with wild swings amidst this jittery and nervous market.

The coming week is the last of the three most busiest weeks of the most volatile earnings season in the trading calendar. While most of the big name players have already called their numbers, we still have some significant names remaining on the earnings call-sheet.

This will be a week that is light on global macro news and the US is devoid of any market moving data. Wall Street is likely to renew its concerns over the U.S.’s trade spats with China while being optimistic over economic and corporate earnings that have been outstanding by most measures.

If the last two weeks have been divergent and wild, then the coming week should see some normalcy return. The market should finish lower for the week as investors would have digested the jobs reports thoroughly over the weekend to realise that “not-as-bad-as-expected” is still bad by any measure.

Happy Hunting!

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