Weekly Market Analysis – 15 October 2018 BMO

WEEK IN REVIEW – 08 to 12 OCTOBER 2018 :
An Ugly Week on Wall Street

Stocks sold off sharply this week, sending the S&P 500 lower by 4.1%. Fears over potentially weakening economic and earnings growth helped fuel the selling, which left stocks at three-month lows going into the third quarter earnings season. The Dow Jones Industrial Average lost 4.2% this week, and the tech-heavy Nasdaq Composite fell 3.7%.

The International Monetary Fund (IMF) cut its 2018 and 2019 global growth outlook to 3.7% from 3.9% on Tuesday, citing trade uncertainties that include tariffs between the U.S. and China, a pending Brexit deal, and the new trilateral agreement between the U.S., Canada, and Mexico that’s supposed to replace NAFTA.

On a related note, President Trump and Chinese leader Xi Jinping have reportedly agreed to meet at next month’s G-20 summit with hopes of resolving their trade conflict.

A third quarter earnings warning from specialty chemicals company PPG Industries (PPG) weighed on sentiment this week, dampening hopes of another strong quarter. Financial giants JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) kicked off the Q3 earnings season on Friday with mixed results; JPM and C beat bottom-line estimates, but WFC missed. The financial sector initially had a positive reaction to the earnings results on Friday, but later rolled over to close the week with a total loss of 5.6%. A curve-flattening trade in the bond market didn’t bode well for lenders, which depend on the interest-rate differential between what they pay for deposits and what they make on loans.

The yield on the benchmark 10-yr Treasury note, which spiked to a seven-year high last week, hovered between 3.12% and 3.26% before eventually settling Friday at 3.14% – nine basis points below last Friday’s close. Meanwhile, the yield on the more Fed-sensitive 2-yr Treasury note fell four basis points to 2.84%, leaving the 2-10 spread with a five bps point loss for the week.

President Trump blamed this week’s selling on the Federal Reserve, which he says has “gone crazy” with its rate hikes. The Fed has raised rates three times this year with the most recent hike coming in September, and it appears to be on track to raise rates again at its December meeting. The CME FedWatch Tool places the chances of a December rate hike at 79.7%; that’s down slightly from 80.0% last Friday.

The S&P 500 got into technical trouble this week, breaching its 50-day moving average on Wednesday and then its 200-day moving average on Thursday. The benchmark index tried to reclaim its 200-day moving average on Friday, but closed right at the key technical mark. The Dow Jones Industrial Average and the Nasdaq Composite breached their 200-day moving averages as well; the Dow eventually reclaimed the key technical level, but the Nasdaq did not.

Also of note, the CBOE Volatility Index (VIX), often referred to as the “investor fear gauge,” touched its highest level since late March (28.64) before pulling back a bit on Friday. Still, the VIX finished the week roughly 40% higher.

In other news, Hurricane Michael made landfall in the Florida Panhandle on Thursday as a Category 4 storm. The storm has devastated the region, causing billions of dollars in damages and killing at least 13 people. Many oil producers in the Gulf of Mexico halted operations in anticipation of the storm, but WTI crude fell this week nonetheless, dropping 3.9% to $71.41/bbl, and the S&P 500’s energy sector lost 5.4%.

Looking ahead, earnings season will ramp up next week with Bank of America (BAC), Charles Schwab (SCHW), UnitedHealth (UNH), Johnson & Johnson (JNJ), Morgan Stanley (MS), Goldman Sachs (GS), IBM (IBM), Netflix (NFLX), Travelers (TRV), American Express (AXP), PayPal (PYPL), Procter & Gamble (PG), and a host of others scheduled to report their quarterly results.

(Economic Excerpts from Briefing.com)

Wednesday 10 October: PPI in line with expectations; Wholesale inventories above expectations

Producer Price Index Rebounds in September

The Producer Price Index for final demand increased 0.2%, as did the final demand index less food and energy (core PPI). The 0.2% month-over-month increases were in-line with the consensus estimates and followed 0.1% declines in August.

The key takeaway from the report is that producer prices climbed in September without a contribution from prices for final demand energy, which fell 0.8%. Furthermore, there is nothing in the report to suggest the Fed is likely to deviate from another rate hike at its December FOMC meeting.

Wholesale Inventories Up Sharply in August

Wholesale inventories increased 1.0% in August (consensus 0.8%) – the largest monthly increase since October 2013 – on top of a 0.6% increase in July. Wholesale sales were up 0.8% following a 0.2% increase in July.

The key takeaway from the report is that the build in wholesale inventories will be accounted for as a positive input for Q3 GDP forecasts.

Thursday 11 October – Initial Claims Up Slightly, but Still Low

Initial Jobless Claims 214K vs. 205K Consensus; prior 207K :

Initial claims for the week ending October 6 increased by 7,000 to 214,000 (consensus 205,000) while continuing claims for the week ending September 29 increased by 4,000 to 1.66 million.

The key takeaway from that report is that it remains reflective of a tight labor market, which will catch the Fed’s eye as a contributing factor for why it can validate the continuation of gradual rate hikes.

September CPI Pleasing to Headline Eye 

Total CPI and core CPI, which excludes food and energy, increased 0.1%. Both were expected to increase 0.2%, according to the consensus estimate.

Those monthly increases left total CPI up 2.3% year-over-year, versus 2.7% in August, and core CPI up 2.2%, unchanged from August.

The key takeaway from the report is that it helped temper concerns about rising inflation for the time being, yet with total CPI and core CPI running above the Fed’s longer-run inflation target of 2.0%, it still left little reason to think the Fed is going to back away from a rate hike in December.

Friday 12 October

Consumer Sentiment Slips in October, but Still Strong

The preliminary University of Michigan Index of Consumer Sentiment for October checked in at 99.0 (consensus 100.0) versus the final reading of 100.1 for September.  The October reading is higher than the average reading (98.5) for 2018.

The key takeaway from the report is that it revealed some budding concerns about inflation crimping real income expectations, which is something to be watched closely considering spending is driven more by income growth than consumer confidence.

Fuel Prices Drive Up Import Prices in September

Export prices were flat in September after declining 0.2% in August and import prices were up 0.5% after being down 0.4% in August. Excluding agricultural exports, export prices increased 0.2% after declining 0.2% in August. Excluding fuel, import prices were unchanged after declining 0.2% in August.

The key takeaway from the report is rooted in the understanding that nonfuel import prices are being held in check, which is helpful in terms of easing some of the market’s inflation angst.


Friday 12 October
Stocks Rebound, But Still Finish Solidly Lower for the Week

Stocks rebounded on Friday, recouping a good chunk of their weekly losses in a volatile day of trading. The S&P 500 added as much as 1.7% at the start of the session, but nearly wiped it all out intraday before rallying to finish higher by 1.4%.

The Dow Jones Industrial Average advanced 1.2%, and the tech-heavy Nasdaq Composite outperformed, finishing higher by 2.3%. Small caps underperformed, though, leaving the Russell 2000 with a slim gain of 0.1%. For the week, the four indices lost between 3.7% and 5.2%.

This week’s sharp sell-off propagated a belief that the major indices had gotten oversold on a short-term basis and were due for a rebound. Friday’s upward movement also found some technical support from the S&P 500’s 200-day moving average (2766.17), which the index closed just slightly above at 2767.13.

The third quarter earnings season began on a mixed note on Friday morning when big banks JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) reported before the opening bell. JPMorgan and Citigroup both beat earnings estimates, but Wells Fargo came up short. In the company’s conference call, JPMorgan CEO Jamie Dimon expressed optimism in the global economy, although he did note that trade tensions present some risks going forward.

On a related note, PNC (PNC) tumbled 5.6% despite beating bottom-line estimates.

The financials sector added as much as 1.6% following bank earnings, but eventually rolled over, bringing the broader market with it. The group did rebound in the final stretch though, closing higher by 0.1%. 10 of 11 sectors finished in the green, and information technology was the top performer with a gain of 3.2%.

Within the tech sector, giants Apple (AAPL) and Microsoft (MSFT) outperformed, as did chipmakers, evidenced by a 2.0% jump in the Philadelphia Semiconductor Index. Meanwhile, in the communication services sector (+2.1%), Netflix (NFLX) rallied 5.8% after Citigroup said its recent tumble represents a buying opportunity.

Away from equities, U.S. Treasuries finished roughly flat on Friday, with the benchmark 10-yr yield ticking up one basis point to 2.14%. Meanwhile, the U.S. Dollar Index rebounded from a more than two-week low, climbing 0.3% to 94.96, and WTI crude climbed 0.6% to $71.41/bbl. Crude finished solidly lower for the week though, dropping 3.9%.

Also of note, the CBOE Volatility Index (VIX) fell 14.3% on Friday, retreating from its highest level since February.

Market Internals – Friday 12 October 2018

Dollar: Dollar Index Reclaims 50-Day Moving Average

The U.S. Dollar Index closed at 95.23 to finish the week just above its 50-day moving average (95.22). The greenback followed three days of selling with a modest rally on Friday, which began taking shape during the early portion of the European session. The Dollar Index climbed in the Friday morning trade, hitting a session high around 10:00 ET. The Index backed off its high during the early part of the U.S. session, but it has remained above its 50-day moving average. Friday’s gain has helped the Index trim this week’s loss to 0.4%.

Bonds: Longer Tenors Settle Slightly Lower, but Secure Weekly Gains

Longer-dated U.S. Treasuries ended the week on a modestly lower note, but intraday action saw a steady push off opening lows, which brought shorter tenors back to little changed while 10s and 30s stopped a bit short of their flat lines. The trading day started with modest losses, resulting from overnight selling in the futures market. The overnight weakness coincided with a rebound in Asian and European equity markets while U.S. indices also started the day on a firmly higher note. However, stocks succumbed to selling pressure in late-morning trade and surrendered a good chunk of their gains into the afternoon. The pullback in equities took place as Treasuries clawed back the majority of their losses, though longer tenors found resistance just beneath their flat lines. The slope of the yield curve faced flattening pressure this week, as the 2s10s spread compressed to 30 bps from last Friday’s 35 bps. For its part, the 2s30s spread tightened to 48 bps from 52 bps at the end of last week. The 30-yr bond, 10-yr note, and 5-yr note recorded only their second week of gains over the past seven weeks while the 2-yr note saw its first weekly advance in nine weeks.

The yield curve flattened as the longer maturities’ yields fell more than the 2yr yield. The spread between the 5s10s narrowed to 15bps from 16bps the previous week while the 10s30s widened to 18bps from 17bps the previous week. The spread between the 2yr and 30yr yields is not only 48bps. 


The Bloomberg Commodity Index settled at 86.24, lower than 86.90 the previous week.

WTI oil broke above 76.00 on Wednesday and settled the week at $74.34. The spread between WTI and Brent narrowed to $9.09 from $9.82 the previous week.

EIA petroleum data for the week ended October 05

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 6.0 million barrels from the previous week. At 410.0 million barrels, U.S. crude oil inventories are at the five year average for this time of year. Total motor gasoline inventories increased by 1.0 million barrels last week and are about 7% above the five year average for this time of year. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories decreased by 2.7 million barrels last week and are about 4% below the five year average for this time of year. Propane/propylene inventories increased by 1.5 million barrels last week and are about 7% below the five year average for this time of year. Total commercial petroleum inventories increased last week by 11.3 million barrels last week.

Natural gas inventory showed a build of 90 bcf vs a build of 98 bcf in the prior week : Working gas in storage was 2,956 Bcf as of Friday, October 5, 2018, according to EIA estimates. This represents a net increase of 90 Bcf from the previous week. Stocks were 627 Bcf less than last year at this time and 607 Bcf below the five-year average of 3,563 Bcf. At 2,956 Bcf, total working gas is below the five-year historical range.

IEA says that global oil demand and supply are now close to new, historically significant peaks at 100 mb/d

Both global oil demand and supply are now close to new, historically significant peaks at 100 mb/d, and neither show signs of ceasing to grow any time soon. Fifteen years ago, forecasts of peak supply were all the rage, with production from non-OPEC countries supposed to have started declining by now. In fact, production has surged, led by the US shale revolution, and supported by big increases in Brazil, Canada and elsewhere. In future, a lot of potential supply could come to the market from places like Iran, Iraq, Libya, Nigeria and Venezuela, if their various challenges can be overcome.

Full IEA Release

Baker Hughes total U.S. rig count increased by +11 to 1063 following last week’s decrease of 2.




Week 42 (October 15 to 19)

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

Benchmarks Indices (21 year average) for wk42:

Week 42 Key Economic Dates

In the coming week, US will receive September Retail Sales, Industrial Production and Capacity Utilization, Housing Starts and Building Permits, Existing Home Sales, and the minutes from the September FOMC meeting.

In addition, China GDP growth; Japan inflation and trade data; and UK unemployment, earnings, inflation and retail sales will also be in the spotlight.

Mon 15 October

Tue 16 October

Wed 17 October

Thu 18 October

Fri 19 October




The coming week will be the start of Earnings Season with C, WFC and JPM getting the party started on Friday. This is going to add yet another dimension to the volatility of the current market sentiment which always makes October’s Earnings Season an exciting roller coaster ride.

The DOW and S&P500 broke below their 50DSMA on Wednesday and then broke below their 200DSMA on Thursday. The NASDAQ, already below its 50DSMA from the previous week, broke below its 200DSMA on Wednesday. The VIX spiked above 28.84 points on Thursday before closing the week out at 21.31. In the two sessions on Wednesday and Thursday, the DOW lost 1,294 points (-5.15%) while the S&P500 lost 139 (-5.1%).

Looks like things are getting hot and heavy early this October. In a matter of two weeks, the DOW and S&P are down to 2.5% and 3.5% respectively above their 2018 opening price, having wiped off double figure gains from September. Last week, I mentioned that, “Ideally, I’d like to have a healthy correction … buying the high is not something I am comfortable doing in spite of the bullish promise of higher highs with higher rates.” 

Despite the recent drop, I am still not a buyer yet. For now, I prefer to stay heavily hedged on any long position or just stay short (with tight stops) for the possibility of a further drop given October’s reputation.

Happy Hunting!


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