Weekly Market Analysis – 24 September 2018 BMO

WEEK IN REVIEW – 17 to 21 September 2018 :
Dow Shrugs Off Tariffs, Returns to Record Territory

Wall Street rallied this week with investors shrugging off another tranche of U.S. tariffs on Chinese goods. The S&P 500 and the Dow touched new records — the first time that’s happened for the Dow since January 26 – and finished the week with respective gains of 0.9% and 2.3%. The Nasdaq lagged though, slipping 0.3%.

President Trump announced on Monday evening that the U.S. will be slapping tariffs on $200 billion worth of Chinese goods starting on September 24. The tariff rate will start at 10%, but will increase to 25% on January 1. The president also said he will impose additional tariffs on $267 billion worth of Chinese goods if Beijing retaliates — which it vowed to do with 5-10% tariffs on $60 billion worth of U.S. goods.

Stocks unexpectedly took off on Tuesday following the tariff announcement, with some analysts pointing to the fact that the initial 10% tariff rate by the U.S. was not as harsh as expected – thereby reflecting a willingness to negotiate. Others said the rally reflected the market’s belief that the U.S.-China trade dispute will eventually die down. Short-covering activity likely helped as well.

The heavily-weighted financial sector was among the top-performing groups this week with a gain of 2.3%, benefiting from a steepening of the yield curve. The yield on the benchmark 10-yr Treasury note climbed seven basis points to end Friday at 3.07%, while the Fed-sensitive 2-yr yield jumped two basis points to 2.81%.

Conversely, the top-weighted information technology sector (-0.1%) underperformed this week, getting surpassed by consumer discretionary (+0.4%) for the top spot in the 2018 sector standings. The two groups hold year-to-date gains of 18.5% and 18.7%, respectively. For comparison, the S&P 500 is up 9.6%.

In total, eight of the eleven S&P sectors finished in the green, with cyclical sectors showing relative strength. A new sector, communication services, will be born after Friday’s close, and it will involve reclassifying several widely-held technology, telecom, and media stocks into the new sector — including Facebook (FB), Alphabet (GOOG), Verizon (VZ), Netflix (NFLX), and Walt Disney (DIS).

In individual stocks, cannabis names were in focus this week, with Tilray (TLRY) going on a wild ride after its CEO suggested that his business would be a “smart hedge” for major pharmaceutical companies. TLRY shares traded as high as $299.46/share – 175% above last Friday’s close – before ending the week at $123.00/share (+13%).

On the oil front, WTI crude climbed 2.6% this week to $70.77/bbl even though President Trump criticized OPEC on Thursday morning, saying the “OPEC monopoly must get [oil] prices down now!” Reuters then reported on Friday that OPEC and non-OPEC countries are discussing the possibility of raising output by 500,000 barrels a day to counter falling supply from Iran due to U.S. sanctions.

Looking ahead, the Federal Reserve will release its latest policy directive on Wednesday. The market is all but certain that the central bank will hike rates – with the CME FedWatch Tool placing the chances at 100% – so investors will be more focused on the Fed’s rate forecast, especially for 2019.

(Economic Excerpts from Briefing.com)

Wednesday 19 September

Housing Starts Up, Building Permits Down in August

Privately-owned housing starts increased 9.2% month-over-month in August to a seasonally adjusted annual rate of 1.282 million (Briefing.com consensus 1.229 mln) while building permits declined 5.7% month-over-month to a seasonally adjusted annual rate of 1.229 million (consensus 1.310 mln).

The key takeaway from the report is that permits (a leading indicator) for single-family homes fell 6.1% month-over-month to 820,000, driven by declines across all four geographic regions.

Thursday 20 September

Initial and Continuing Claims at Multi-Decade Lows

Initial jobless claims for the week ending September 15 decreased by 3,000 to 201,000 (consensus 209,000), the lowest level since November 15, 1969, and continuing claims for the week ending September 8 dropped by 55,000 to 1.645 million, the lowest level since August 4, 1973.

The key takeaway from the report is that it reflects a reluctance on the part of employers to reduce staff, which goes hand-in-hand with a strong economy and tight labor market.

Philadelphia Fed Index Points to Acceleration in September

The Philadelphia Fed Manufacturing Business Outlook Survey for September increased to 22.9 (consensus 15.3) from 11.9 in August, driven by an uptick in the New Orders Index to 21.4 from 9.9.

A number above zero is indicative of growth, so the key takeaway from the report is that it reflects the idea that manufacturing activity in the Philadelphia Fed region accelerated in September.

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Friday 21 September
Mixed Ending to Largely Positive Week

Wall Street had a mixed outing on Friday, with the underperformance of financial and technology shares balancing gains most elsewhere. The Dow Jones Industrial Average climbed 0.3%, closing at a new all-time high for the second day in a row. The S&P 500 finished slightly below its flat line, and the tech-heavy Nasdaq lost 0.5%.

For the week, the S&P 500 and the Dow added 0.9% and 2.3%, respectively, while the Nasdaq lost 0.3%.

The top-weighted information technology sector lost 0.3% on Friday, capping an unimpressive week overall. Within the group, Micron (MU) was among the worst performers, falling 2.9% after its above-consensus earnings report was overshadowed by disappointing guidance for the current quarter — due in part to tariffs.

Meanwhile, the influential financial sector ended a positive week on a disappointing note. The group lost 0.4% on Friday, trimming its weekly gain to 2.3%, as Treasuries ticked higher, pushing yields slightly lower. The benchmark 10-yr yield, for instance, slipped one basis point to 3.07%, but remained near a four-month high.

On a positive note, the lightly-weighted telecom services group finished atop the sector standings with a gain of 1.0%. Within the group, AT&T (T) advanced 1.0% after being upgraded to ‘Buy’ from ‘Neutral’ at UBS. However, shares gave back some gains in the late afternoon following reports that President Trump is pressing the Department of Justice to breakup the wireless giant.

There was some volatility during the final stretch of Friday’s session due to a major sector rebalancing, which will result in a new ‘Communication Services’ sector.

Several widely-held technology, telecom, and media stocks will be reclassified into this group, including Facebook (FB), Alphabet (GOOG), Verizon (VZ), Netflix (NFLX), and Walt Disney (DIS).

Also adding to the volatility, Friday was a quadruple witching day – when futures and options on both indices and individual stocks expire.

In the crude oil market, WTI crude futures finished up 0.8% at $70.77/bbl, but were volatile after Reuters reported that OPEC and non-OPEC producers are discussing the possibility of raising output by 500,000 barrels a day to counter falling supply from Iran due to U.S. sanctions. OPEC and non-OPEC nations are scheduled to meet in Algeria on Sunday.

Dollar: Dollar Index Rebounds

The U.S. Dollar Index closed at 0.4% at 94.22, bouncing off a ten-week low. The greenback followed Thursday’s retreat with a bit more selling during the overnight session, but the Index notched a low at 93.81, finding support just above its low from July 9 (93.71). The dollar began climbing during Friday’s European session, accelerating its advance during U.S. trade. The greenback has had a particularly good showing against the pound after the market received another reminder that EU and British officials have not gotten any closer to securing a Brexit deal. Today’s advance helped the Dollar Index narrow this week’s loss to 0.7%.

Bonds: Down Week Ends on Modestly Higher Note

U.S. Treasuries ended the week on a mostly higher note, but today’s uptick did little to prevent 5s, 10s, and 30s from posting their fourth consecutive week of losses. For its part, the 2-yr note recorded its sixth consecutive weekly decline. Intraday action saw some volatility, but most tenors finished essentially where they started. Morning trade saw Treasuries slip from their opening levels, but the losses were reclaimed in short order. However, the ensuing rebound was short-lived, as Treasuries found resistance near session highs from Thursday. The trading range narrowed into the afternoon, as Treasuries hovered near their opening levels until the close. The slope of the yield curve flattened a touch today, but steepened over the course of the week. Most notably, the 2s30s spread expanded by five basis points to 40 bps while the 2s10s spread ended the week two basis points wider at 27 bps.

The yield curve steepened as the longer maturities’ yields made greater gains. The spread between the 5s10s widened to 12bps from 9bps the previous week while the 10s30s remained unchanged at 14bps from 14bps the previous week.

Commodities 

The Bloomberg Commodity Index settled at 84.40, higher than 82.46 the previous week.

WTI oil broke up above 71.00 and settled the week at $70.78. The spread between WTI and Brent narrowed after six weeks to $8.02 from $9.10 the previous week.

EIA petroleum data for the week ended September 14

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.1 mln barrels from the previous week. At 394.1 mln barrels, U.S. crude oil inventories are about 3% below the five year average for this time of year. Total motor gasoline inventories decreased by 1.7 mln barrels last week and are about 8% 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 0.8 mln barrels last week and are about 2% below the five year average for this time of year. Propane/propylene inventories increased by 0.1 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 0.4 mln barrels last week.

Natural gas inventory showed a build of 86 bcf vs a build of 69 bcf in the prior week- nat gas prices initially drops following this data. Working gas in storage was 2,722 Bcf as of Friday, September 14, 2018, according to EIA estimates. This represents a net increase of 86 Bcf from the previous week. Stocks were 672 Bcf less than last year at this time and 586 Bcf below the five-year average of 3,308 Bcf. At 2,722 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased -2 to 1053 following last week’s increase of 7.

Metals: All gains

Agriculture: Gains across all grains

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THE WEEK AHEAD
Week 39 (September 24 to 28)

According to our 5, 10 and 15 year seasonal models;

Benchmarks (21 year average) for wk39:

Week 39 Key Economic Dates

In the coming week the most important event will be the Fed monetary policy decision. Key economic data include: US final Q2 GDP growth, personal spending and income, PCE prices, durable goods orders and new home sales; UK final Q2 GDP growth; and China NBS PMIs and Caixin Manufacturing PMI.

Sunday 23 September

Mon 24 September

Tue 25 September

Wed 26 September

Thu 27 September

Fri 28 September

Sat 29 Sentiment

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COMMENTARY

Expect a volatile week ahead. If this market is as resilient as I think it is, we should se e moderate gains this time next week. But I won’t count out the start of the September correction closer to expiration Friday.”

One week left for Q3 and the last week of September is known for portfolio dumping. With the way the market has been so resilient, I am almost afraid to assume that it will happen this year. Then again …

Happy Hunting!

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