Weekly Market Analysis – 04 September 2018 BMO

WEEK IN REVIEW – 27 to 31 August 2018 :
Going Deeper Into Record Territory

After returning to record territory last Friday, the S&P 500 trekked even higher this week, adding 0.9% in total. The tech-heavy Nasdaq outperformed, adding 2.1%, and the Dow also advanced, tacking on 0.7%. Investors dealt with a flurry of trade-related headlines this week, especially in regards to NAFTA negotiations.

The U.S. and Mexico reached a bilateral trade deal on Monday, a headline that sent Wall Street to new all-time highs. Canada then entered the discussions to try to work out a deal with the United States, but the two sides weren’t able to reach an agreement by President Trump’s Friday deadline. However, the White House said late on Friday that talks will resume next week.

In other trade-related news, Wall Street registered its only loss of the week on Thursday following reports that President Trump wants to move forward with tariffs on $200 billion worth of Chinese goods as early as next week. In addition, the president said in a Bloomberg interview that the EU’s offer to eliminate auto tariffs does not go far enough and compared the EU’s trade policies to those of China.

Meanwhile, on the earnings front, investors once again received quarterly results from a number of retailers this week, including results from well-known companies like Dollar General (DG), Best Buy (BBY), lululemon athletica (LULU), Dollar Tree (DLTR), Ulta Beauty (ULTA), Tiffany & Co (TIF), and Burlington Stores (BURL).

The results came in mostly better-than-expected, but guidance was more mixed, leaving the SPDR S&P Retail ETF (XRT) with a modest weekly gain of 0.3%.

Away from earnings, Amazon (AMZN) climbed to new records and crossed the $2000 mark for the first time ever after Morgan Stanley raised its target price for the online retail giant to $2500 — a new Street high. Meanwhile, Apple (AAPL) also hit new records, helped by investing legend Warren Buffett, who said he’s recently bought more shares of the world’s largest tech company.

Tesla (TSLA) also made headlines, moving lower after its CEO, Elon Musk, announced that he’s abandoned plans to take the electric automaker private.

As for the sector standings, seven groups finished the week in the green and four groups finished in the red. The top-performing sectors were technology (+2.0%), consumer discretionary (+1.8%), and health care (+1.0%). Conversely, telecoms (-1.7%), consumer staples (-0.5%), and utilities (-0.6%) finished at the back of the pack.

Also of note, there were some important pieces of economic data released this week, including the second estimate of Q2 GDP (+4.2% actual vs +4.0% consensus) and the July reading of the core PCE Price Index (+0.2% actual vs +0.2% consensus), which is the Fed’s preferred measure of inflation. Neither report elicited much of response from the stock market though.

With August now in the books, it still appears very likely that the Fed will raise rates at its September meeting, with the CME FedWatch Tool placing the chances at 98.4%.

U.S. markets will be closed on Monday in celebration of Labor Day.

(Economic Excerpts from Briefing.com)

Wednesday 29 August – Q2 GDP Revised Up with Second Estimate

The second estimate for Q2 GDP checked in at 4.2% (consensus 4.0%) versus the advance estimate of 4.1%. The Q2 GDP Deflator also pushed up to 3.2% (consensus 3.0%) from the advance estimate of 3.0%.

The key takeaway from the report is that it included a downward revision to personal spending growth (from 4.0% to 3.8%) that was offset by a higher estimate for nonresidential investment growth, government spending, and a downward revision to imports, which are a subtraction in the calculation of GDP.

Thursday 30 August – Initial Claims Rolling Along at Low Levels

Initial claims for the week ending August 25 increased by 3,000 to 213,000 (consensus 214,000) while continuing claims for the week ending August 18 decreased by 20,000 to 1.708 million. The key takeaway from the report is the recognition that the four-week moving average of 212,250 for initial claims is the lowest since December 13, 1969, underscoring the strength in the labor market.

Thursday 30 August – Personal Income and Spending for July Keep Economy on Solid Growth Track

Personal income for July increased 0.3% (consensus +0.4%), personal spending jumped 0.4% (consensus +0.4%), the PCE Price Index increased 0.1% for the second straight month, and the core PCE Price Index, which excludes food and energy, rose 0.2% (Briefing.com consensus +0.2%).

The key takeaway from the report is twofold: (1) the spending increase puts Q3 GDP on a solid growth track and (2) the year-over-year increase in the PCE Price Index (+2.3% vs. +2.2% prior) and the core PCE Price Index (+2.0% vs. +1.9% prior) will keep the Federal Reserve on its tightening track in September.

Friday 31 August – August Chicago PMI 63.6 vs 63.0 consensus, July 65.5

The MNI Chicago Business Barometer, otherwise known as the Chicago PMI, dipped to 63.6 in August (consensus 63.0) from a six-month high of 65.5 in July.  The dividing line between expansion and contraction is 50.0.

Despite the dip, the key takeaway from the August report is that manufacturing activity in the Chicago Fed region remains robust.

Friday 31 August
Stocks Hold Steady Despite No U.S.-Canada Trade Deal

Friday’s trading session – the last session ahead of an extended Labor Day weekend – was an eventful one in terms of trade-related headlines, but a largely uneventful one for the major averages, which finished roughly flat. The S&P 500 (unch) added less than a point, the Nasdaq Composite (+0.3%) advanced modestly, and the Dow Jones Industrial Average (-0.1%) finished slightly lower.

All eyes were on Washington, where U.S. and Canadian officials were scrambling to get a trade deal done by President Trump’s end of Friday deadline. The two sides weren’t able to reach an agreement, but the White House then said talks will extend into next week. The extension was unexpected, as President Trump has said he’d be willing to move on without Canada if a deal wasn’t in place by Friday.

Nonetheless, the news helped the market recover modest losses from earlier in the day, which were extended after The Toronto Star released “off the record” remarks that President Trump made during a Bloomberg interview on Thursday, including an acknowledgement that he’s not making any compromises in the trade talks with Canada.

U.S. Trade Representative Robert Lighthizer announced late in the afternoon that President Trump has officially notified Congress that he wants to sign a trade agreement with Mexico, which agreed to a bilateral deal with the U.S. on Monday, and potentially Canada, in 90 days. The deals are aimed at replacing the North American Free Trade Agreement, which has been in place since 1994.

As for the 11 S&P 500 sectors, almost all of them finished within 0.5% of their unchanged marks. The energy sector (-0.7%) was the lone exception, falling in tandem with the price of crude oil; WTI crude futures slid 0.5% to $69.84/bbl. Energy finished August at the bottom of the sector standings with a monthly loss of 3.8%; for comparison, the S&P 500 added 3.0%.

In earnings news, lululemon athletica (LULU) and Ulta Beauty (ULTA) advanced 13.1% and 6.4%, respectively, after releasing their quarterly results, but Big Lots (BIG) dropped 10.1% after reporting lower-than-expected profits and guidance for FY19.

Looking at other markets, U.S. Treasuries advanced, pushing yields lower across the curve, with the benchmark 10-yr yield slipping one basis point to 2.85%; the U.S. Dollar Index climbed 0.4% to 95.05, its best level in a week; and the CBOE Volatility Index, often referred to as the “investor fear gauge”, slid 3.2% to 13.10.

Market Internals – Friday 31 August

Dollar: Dollar Index Reclaims 50-Day Average

The U.S. Dollar Index was up 0.4% at 95.12, to end a volatile month on a modestly higher note. The dollar held its ground in overnight trade on Friday, but began rallying during the latter portion of the European session, accelerating its advance after weakness in Italian debt lifted the country’s 10-yr yield (3.24%) to a level not seen since Italy’s 10-yr yield spiked to 3.39% in late May. In addition to rallying against the euro, the greenback has had a strong showing against commodity currencies, pressuring the Aussie to a fresh 2018 low. The Dollar Index has reclaimed its 50-day moving average (95.01) to add 0.6% for August after being up 2.6% for the month at its highest point on August 15.

Bonds: Long Bond Surrenders Intraday Gain Ahead of NAFTA Update

Shorter-dated U.S. Treasuries ended the week on a higher note while longer tenors surrender their gains in afternoon action. The trading day started with modest gains after an overnight rally in Treasury futures amid renewed focus on trade. Recall that a report released on Thursday afternoon reminded investors that the next tranche of tariffs on $200 billion worth of imports from China is likely to go into effect next week. In addition, there was some speculation about the longevity of the agreement President Trump made with European Commission President Jean-Claude Juncker to suspend tariffs while negotiations take place, after President Trump said that it would be insufficient for Europe to remove tariffs on auto imports if other barriers remained in place. The comments were made during an interview with Bloomberg.

Treasuries extended their gains during the first hour of trade, moving higher alongside the U.S. dollar. That advance took place as weakness in Italian debt lifted Italy’s 10-yr yield (3.24%) to a level not seen since the country’s 10-yr yield spiked to 3.39% in late May. The morning rally was followed by a small intraday pullback, but the 10-yr note surrendered the bulk of its gain while the long bond turned negative during the final minutes of the action, in a move coinciding with an announcement that Canada’s Foreign Minister Chrystia Freeland will hold a press conference at 16:30 ET (Friday) to discuss the results of NAFTA negotiations. The late selling returned 10s and 30s to little changed while 2s and 5s finished the session near their highs.

The yield curve rose across the board, steepening slightly at the long end. The spread between the 5s10s remained unchanged at 11bps from 11bps the previous week while the 10s30s widened to 16bps from 15bps the previous week.


The Bloomberg Commodity Index settled at 83.74, higher than 83.69 the previous week as Energy,  Corn and Wheat make gains.

WTI oil rose for a second, settling at $69.80. The spread between WTI and Brent continued to widen for a fourth week to $7.62 from $7.10 the previous week.

EIA petroleum data for the week ended August 24

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.6 mln barrels from the previous week. At 405.8 mln barrels, U.S. crude oil inventories are at the five year average for this time of year. Total motor gasoline inventories decreased by 1.6 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 remained virtually unchanged last week. Distillate fuel inventories decreased by 0.8 mln barrels last week and are about 8% below the five year average for this time of year. Propane/propylene inventories increased by 2.6 mln barrels last week and are about 12% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 1.7 mln barrels last week.

Natural gas inventory showed a build of 70 bcf vs a build of 48 bcf in the prior week. Working gas in storage was 2,505 Bcf as of Friday, August 24, 2018, according to EIA estimates. This represents a net increase of 70 Bcf from the previous week. Stocks were 646 Bcf less than last year at this time and 588 Bcf below the five-year average of 3,093 Bcf. At 2,505 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count increased by 4 to 1048 following last week’s decrease by 13.

Metals: Fall back

Agriculture: Corn and Wheat bounce, Soy falls some more



September is the last month of Quarter Three, the “worst” quarter of the financial year. September has the reputation of being the most bearish month of the trading year. 

September 2018 is the shortest trading month of the year with only nineteen (19) trading sessions and one public holiday. September tends to start bullish in the first two weeks, becomes bearish and volatile in the third week and ends the month in typical unpredictable fashion, often selling down in the final week.

September Trivia


THE WEEK AHEAD – Week 36 (September 03 to 07)

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

Benchmarks (21 year average) for wk36:

Key Economic Dates

Week 36

In the coming week, the US will release the jobs report, trade balance, ISM PMIs, ADP employment and factory orders. Elsewhere, important data include: UK Markit PMIs; Japan household spending; China foreign trade and Caixin PMIs; and Australia interest rate decision, GDP growth, trade balance and retail sales.

Sun 02 September

Mon 03 September

Tue 04 September

Wed 05 September

Thu 06 September

Fri 07 September



August has been a reliably bearish month over the last 30 years but this year’s August Bear was driven away by very good Q2 earnings and a still-lofty US economy. It closed the last week in rather volatile fashion.

Asian and European markets closed out the week to the downside in the light of increasing trade war pressure following Thursday’s reports that President Trump intends to move ahead with tariffs on $200 billion worth of Chinese goods as early as next week. In addition, separate reports said that Mr. Trump has rejected an offer from the EU to eliminate tariffs on automobiles.

President Trump criticized the EU on Thursday, leading to speculation that his agreement with European Commission President Jean-Claude Juncker to suspend tariffs while negotiations take place will be short-lived. Yesterday’s reminder about the likelihood of another round of tariffs going into effect next week was followed by comments from President Trump, who said the United States could leave the World Trade Organization if the WTO doesn’t “shape up.

With regard to the U.S.-Canada trade talks, Thursday’s selling carried over into Friday’s session as investors awaited news from Washington, where U.S. and Canadian trade officials were scrambling to reach a deal by President Trump’s end of day deadline. U.S.-Canada trade discussions appeared promising earlier in the week, but seem to have soured a bit as of late, especially following a Toronto Star report, which accused President Trump of making inflammatory “off the record” remarks in a Bloomberg interview on Thursday.

According to The Star, Mr. Trump said that he is not making any compromises in the trade talks with Canada, but he doesn’t want to say that publicly because “it’s going to be so insulting they’re not going to be able to make a deal.” Traders are still waiting to see how the drama will play out, although some have likely already left to get a jump start on the Labor Day weekend.


It is a shortened week in the month that has a reputation for being bearish. It is also going to be a very short month in which we will be having loads of significant macroeconomic events that will lead up to the final Earnings Season in October.

Expect increased volatility with lower volumes as September has regularly offered in the past. I remain cautiously bullish and will still keenly be watching for the first signs of a correction that the month so famously presents almost every year.

Happy Hunting!


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