Weekly Market Analysis – 10 September 2018 BMO

WEEK IN REVIEW – 03 to 07 September 2018 :
Three-Week Rally Comes to an End as Tech Shares Slide

Investors returned from the extended Labor Day weekend in a selling mood, pulling stocks away from last week’s record highs. The S&P 500 ended the week with a loss of 1.0%, while the tech-heavy Nasdaq Composite dropped 2.6%. The Dow Jones Industrial Average showed relative strength, but still finished lower by 0.2%.

The week kicked off with Amazon (AMZN) becoming the second U.S. company, after Apple (AAPL), to reach a market cap of $1 trillion and with Nike (NKE) unveiling a controversial ad for the 30th anniversary of its “Just Do It” campaign that features Colin Kaepernick, the former San Francisco 49ers quarterback credited with starting the national anthem protests. Amazon soon fell back after touching the $1 trillion milestone on Tuesday though, ending the week with a market cap of $952 billion.

On the Gulf Coast, residents braced for Tropical Storm Gordon to make landfall, which it did on Tuesday evening. Oil prices rallied in anticipation of the storm disrupting crude production, but gave back all of those gains after the storm turned out to be less damaging than feared. Oil prices then fell further on Thursday when the EIA’s weekly inventory report showed a 4.3 million barrel drop in crude stockpiles, but a 1.8 million barrel jump in inventories of gasoline. In total, WTI crude futures lost 2.9% this week, settling Friday at $67.76/bbl, and the oil-sensitive energy sector lost 2.3%.

The top-weighted information technology sector also underperformed this week, dropping 2.9%. Within the group, social media names were in focus after Facebook’s (FB) COO, Sheryl Sandberg, and Twitter’s (TWTR) CEO, Jack Dorsey, testified before the Senate Intelligence Committee on Wednesday morning, defending their efforts to prevent election meddling. Mr. Dorsey also appeared before the House Energy and Commerce Committee in the afternoon, rebuking allegations that Twitter promotes certain political ideologies. The hearings didn’t produce any new information of note, but that didn’t prevent Facebook and Twitter shares from tumbling 2.3% and 6.1% on Wednesday, respectively.

On the trade front, U.S.-China trade tensions resurfaced at the tail end of the week, as many thought the White House would impose tariffs on $200 billion worth of Chinese goods on Thursday at midnight following the end of a public comment period. That didn’t happen, but President Trump did raise the stakes on Friday, saying that he’s got another tranche of tariffs on $267 billion of Chinese goods “ready to go” if Beijing retaliates to the $200 billion tranche.

On a related note, trade talks between the U.S. and Canada resumed this week after the two sides failed to reach an agreement last Friday, but investors were skeptical that a deal would get done after President Trump tweeted on Saturday that there’s “no political necessity to keep Canada in the new NAFTA deal.” As of Friday’s closing bell, officials still had not reached an agreement.

In economic data, the Employment Situation report for August crossed the wires on Friday morning, causing some knee-jerk selling due to a higher-than-expected increase in average hourly earnings (+0.4% actual vs +0.2% consensus), which ignited some fears that inflation might be picking up. However, the realization that the economy is still strong, evidenced by a larger-than-expected increase in nonfarm payrolls (+201K actual vs +187K consensus) and an unemployment rate of 3.9%, helped keep losses in check.

As for the Fed, Friday’s jobs report virtually locked in a September rate hike and increased the chances of a December rate hike to 79.8% from 72.8% on Thursday.

(Economic Excerpts from Briefing.com)

Tuesday 04 September

ISM Manufacturing Index for August Hits Highest Level Since May 2004

The ISM Manufacturing Index for August checked in at 61.3% (consensus 57.6%), which is the highest level since May 2004. The dividing line between expansion and contraction is 50.0; and August marked the 24th consecutive month of expansion. The key takeaway from the report is that manufacturing activity is robust and consistent with a strong economy.

Wednesday 05 September

Trade Deficit Increases in July, Will Be a Drag on Q3 GDP Growth

The trade deficit widened to $50.1 bln in July (consensus -$50.6 bln) from an upwardly revised $45.7 bln (from -$46.3 bln) in June. That was the largest monthly increase in the deficit reportedly since 2015.

The key takeaway from the report is twofold: (1) the widening deficit will create a drag on Q3 GDP growth and (2) the July report is going to fan the Trump Administration’s flames about trade matters as it showed an increase in the deficit with both the European Union and China.

Thursday 06 September – Initial Claims Just Keep Getting Better

Initial Claims 203K vs 214K consensus; Prior 213K. Initial claims for the week ending September 1 decreased by 10,000 to 203,000 (consensus 214,000), which is the lowest level of initial claims since December 6, 1969.  Continuing claims for the week ending August 25 decreased by 3,000 to 1.707 million. The key takeaway from the report is that it is consistent with a tight labor market, as employers appear reluctant to cut payrolls.

Friday 07 September – Wage Growth Picks Up in August; Highest Since May 2009

The biggest surprise in the August employment report was the 0.4% increase in average hourly earnings. That pushed the year-over-year rate to 2.9%, which is the highest since May 2009. The wage growth should be regarded as good news, yet the key takeaway for the market is that it will keep the Fed in a tightening gear, which most likely includes two more rate hikes before the year is done.

Friday 07 September
Stocks Slip Following Jobs Report, Tariff Talk

Stocks slipped on Friday, giving the bears a clean sweep for the abbreviated week, after the Employment Situation report for August showed a stronger-than-expected increase in average hourly earnings and after President Trump threatened yet another round of tariffs on Chinese goods. The S&P 500 finished lower by 0.2%, while the Dow Jones Industrial Average and the Nasdaq Composite lost 0.3% apiece.

The Employment Situation report for August crossed the wires early Friday morning, showing a 0.4% rise in average hourly earnings (consensus +0.2%), which pushes the year-over-year rate to 2.9% – its highest level since May 2009. That ignited fears that inflation may be picking up more than expected, as that may force the Fed to be more aggressive in raising rates.

Equity futures dipped lower following the release, but the market didn’t stay down for long, with the S&P 500 fully reclaiming its opening loss of 0.4% about an hour into the session. However, President Trump sent stocks back to their opening levels around midday after saying that he’s got another tranche of tariffs on $267 billion of Chinese goods “ready to go” if China retaliates to a U.S. bid to impose a tariff on an additional $200 billion of Chinese goods (which hasn’t happened yet, but is expected by many to come to fruition soon).

In the end, the S&P 500, which traded as high as +0.2% and as low as -0.5%, settled near the middle of its trading range. 10 of 11 S&P sectors finished in negative territory, with health care (+0.2%) being the lone exception. The lightly-weighted utilities (-1.2%) and real estate (-1.2%) spaces were the worst performers, but losses were modest in general, with no other group dropping more than 0.5%.

The top-weighted technology space outperformed for much of the day, but eventually finished in line with the broader market, losing 0.3%. Within the space, Broadcom (AVGO) rallied 7.7% after reporting better-than-expected earnings for its fiscal third quarter. Meanwhile, Apple (AAPL) dropped in the late afternoon, settling lower by 0.8%, following headlines that the Trump administration’s proposed tariff list may cover a wide range of the company’s products.

In other corporate news, electric automaker Tesla (TSLA) tumbled 6.3%, hitting a five-month low, after its Chief Accounting Officer announced his resignation after just a month with the company and following headlines that its Chief People Officer will not be returning from her leave.

Looking at other markets, U.S. Treasuries sold off on Friday after the release of the August jobs report, sending yields higher across the curve. The yield on the Fed-sensitive 2-yr note jumped six basis points to 2.69%, and the yield on the benchmark 10-yr note also rose six basis points, closing at 2.94%. Elsewhere, the U.S. Dollar Index rallied 0.4% to 95.34, and WTI crude futures slipped 0.1% to $67.76/bbl.

Market Internals – Friday 07 September

Dollar: Dollar Index Climbs

The U.S. Dollar Index was up 0.4% at 95.42, before closing at 95.34 on Friday. The Index was on track for its third consecutive decline in overnight action on Friday, but the bulk of the overnight loss was reclaimed in early-morning trade. The Index extended its rebound after the release of a stronger than expected Employment Situation Report for August (actual 201K; consensus 187K), which included faster than expected average hourly earnings growth (actual 0.4%; consensus 0.2%). The Index overtook its morning high in midday trade, receiving another boost after President Trump said that another round of tariffs on $267 billion worth of goods from China is “ready to go.” Thanks to Friday’s advance, the Dollar Index locked in its first weekly gain in a month, having climbed 0.3% since last Friday.

Bonds: Strong August Jobs Report Sends Treasuries Lower

U.S. Treasuries ended the week with losses across the curve after the 2-yr note slid to a fresh decade low while longer tenors also retreated, though they are still above this year’s lows. Treasuries started the day with modest losses and continued sliding after the release of a better than expected Employment Situation Report for August, which not only strengthened expectations for two more hikes in 2018, but also boosted the likelihood of another rate increase in March 2019 to 47.7% from 38.1% yesterday. Treasuries hovered near their lows into the afternoon, and while the market saw some buying after President Trump told reporters gathered aboard Air Force One that another round of tariffs on $267 billion worth of imports from China is “ready to go”, those gains were surrendered in late trade. The threat of fresh tariffs on goods from China boosted the dollar against offshore yuan, leaving the Chinese currency within 1.5% of this year’s low. On a somewhat related note, President Trump also said that trade negotiations with Japan will be opened.

The yield curve rose and steepened as the long end made greater gains. The spread between the 5s10s widened to 12bps from 11bps the previous week while the 10s30s remained unchanged at 16bps from 16bps the previous week.

Commodities 

The Bloomberg Commodity Index settled at 82.59, lower than 83.74 the previous week as Energy, Metals fell.

WTI oil fell after 2 weeks of gains, settling at $67.75. The spread between WTI and Brent widened for a fifth week to $9.08 from $7.62 the previous week.

EIA petroleum data for the week ended August 31

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.3 mln barrels from the previous week. At 401.5 mln barrels, U.S. crude oil inventories are at the five year average for this time of year. Total motor gasoline inventories increased by 1.8 mln barrels last week and are about 7% 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 3.1 mln barrels last week and are about 6% below the five year average for this time of year. Propane/propylene inventories increased by 2.0 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 3.6 mln barrels last week.

Natural gas inventory showed a build of 63 bcf vs a build of 70 bcf in the prior week- nat gas initially pops a little higher following this data. Working gas in storage was 2,568 Bcf as of Friday, August 31, 2018, according to EIA estimates. This represents a net increase of 63 Bcf from the previous week. Stocks were 643 Bcf less than last year at this time and 590 Bcf below the five-year average of 3,158 Bcf. At 2,568 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count remained unchanged at 1048 following last week’s increase by 4.

Metals: Fall back

Agriculture: Corn and Wheat bounce, Soy falls some more

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

THE WEEK AHEAD – Week 37 (September 10 to 14)

According to our 5, 10 and 15 year seasonal models, the SPY and DIA will be very bullish on Monday and Tuesday, divergent on Wednesday and moderately bullish on Thursday.

DIA should finish the week bullish on Friday but SPY is expected to be bearish on Friday.

I don’t know if I can trust the Stock Trader’s Almanac for the coming week because there are obvious errors in the weekly data and trivia for their Benchmarks (21 year average) for week 37. The most glaring error is that it states Friday 14 as Triple Witching Friday.

Key Economic Dates

Week 37

In the coming week, the US will publish inflation rate, retail trade, industrial production and the preliminary reading of Michigan consumer sentiment. Elsewhere: UK monthly GDP and unemployment; Japan final GDP growth; China inflation, industrial production, retail trade and fixed asset investment; and interest rate decisions from the ECB, the BoE and the Central Bank of Turkey.

Sun 09 September

Mon 10 September

Tue 11 September

Wed 12 September

Thu 13 September

Fri 14 September

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

COMMENTARY

Has September begun its bearish nature already? I’m thinking that its early days yet and that it can get more bearish as the month  moves into its second half. The possibility of portfolio dumping is very real given that the market has really underperformed this year. The recent two-month run on the S&P and tech components will give the fund managers a reason to dump as the spectre of a bear market next year looms real. (Stocks are in ‘the danger zone’)

I am bullish for the coming week (hope I don’t regret it) especially after the past week’s drop. I won’t be hanging on to anything for too long and will be watching for signs that the September market sell-down might be imminent.

Happy Hunting!

~~~~~~~~~~~~~~~~~~~~~~~~~~~

For more than 12 years of educating, mentoring and supporting hundreds of participants (annually) in the arts and sciences of Finance and Economics, the Pattern Trader™ Tutorial has evolved to become the most sought-after boutique-styled class that caters to individuals, professionals and families that are serious about their finances and their prospects as we move into the future.

The small class environment and tutorial-styled approach gives the Tutorial a conducive enviroment that allows for close communication and interaction between the mentor and the participants.

The hands-on style makes the Tutorial very practical for anyone who requires a start from the ground up. It is the perfect beginning for anyone who wishes to take that first step in improving their financial and economic literacy.

If you’re looking to make a huge difference in your financial life, consider the Pattern Trader™ Tutorial.

If you want to know more about the Tutorial, come for our three-hour Introductory Session. It will be the most educational preview you will ever attend.

Register here:

Pattern Trader™ Introductory Session

OR  download our promo slides here:
The Pattern Trader™ Tutorial 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

The schedule for the November 2018 batch is here:
Pattern Trader™ Tutorial – November 2018

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Screen Shot 2017-10-01 at 1.38.39 PM

Connect with me at LinkedIn

Share

If you enjoyed this post, please consider to visit Pattern Trader Tools, leave a comment or subscribe to the feed and get future articles delivered to your feed reader.

Comments

No comments yet.

Sorry, the comment form is closed at this time.