Weekly Market Analysis – 17 December 2018 BMO

WEEK IN REVIEW – 10 to 14 DECEMBER 2018 :
Stocks Extend Losses as Uncertainty Continues to Grip Investors

Wall Street suffered another down week, as continued uncertainty surrounding economic growth, trade, politics, and the path of interest rates kept many buyers on the sidelines.  Heightened trading volatility also proved effective in keeping buyers sidelined, too, as large intraday swings proved exhausting and off-putting for many participants.

The S&P 500 lost 1.3%, the Dow Jones Industrial Average lost 1.2%, and the Nasdaq Composite lost 0.8%.

Tempering hope that last week’s sell-off created a “tradable” bottom was the continued weakness in the Dow Jones Transportation Average (-4.4%), S&P 500 financial sector (-3.5%), and small-cap Russell 2000 (-2.6%) — all of which play a key role in driving sentiment on the domestic economic outlook. For the month, these groups are down 12.1%, 10.4%, and 8.0%, respectively.

Additionally, some cautious-sounding commentary on the economic outlook from European Central Bank President Draghi, weaker-than-expected industrial production and retail sales data from China, and weaker-than-expected preliminary manufacturing PMI readings out of the eurozone fueled the negative perspective on growth prospects and the specter of downward revisions to earnings estimates.

There were some conciliatory headline developments this week on the trade dispute between the U.S. and China.  In particular, high-ranking U.S. and Chinese officials resumed trade discussions over the phone; and China is reportedly looking to tweak its “Made in China 2025” policy to allow more access and fairer competition for foreign companies.

Separately, China confirmed it will temporarily reduce its U.S auto import tariffs by 25% (to 15% from 40%) between January 1 and March 31, as both sides continue to work on a deal,  and President Trump told Reuters he would get involved in the Department of Justice case against Huawei CFO Meng Wanzhou, who was granted bail Tuesday, if it would serve national security interests and help advance trade negotiations with China.

These positive-sounding trade headlines offered some hope of a deal being struck, but ultimately, the talk wasn’t enough to overcome the fundamental concerns about a slowdown in economic growth.

The S&P 500 energy (-3.3%), health care (-1.9%), and real estate (-1.8%) sectors were some of the hardest-hit groups this week. 

Johnson & Johnson (JNJ), meanwhile, was one of the hardest-hit stocks.  The Dow component plunged 10% on Friday after a Reuters report alleged that JNJ “knew for decades that asbestos lurked in its baby Powder.” The company’s litigation counsel rejected the Reuters report as “false and misleading,” yet the stock nonetheless traded as if investors felt there was some veracity to it.

Energy stocks struggled as oil prices pulled back. WTI crude fell 2.5% this week to $51.27/bbl.

Not all was bad, though.  The S&P 500 information technology (-0.02%) ended the week roughly flat while the communication services (+0.5%) and utility (+0.6%) sectors were able to finish in the green this week.

Recent demand for Treasuries cooled off, giving yields a slight bump. The Fed-sensitive 2-yr yield rose three basis points to 2.73%, and the benchmark 10-yr yield rose four basis points to 2.89%. Meanwhile, the U.S. Dollar Index rose 1.0% to 97.45.

Overseas, UK Prime Minister Theresa May survived a “no-confidence” vote from her own Conservative Party with respect to her leadership. The vote came after she delayed a vote in the House of Commons on the UK-EU Brexit plan.  She subsequently attempted to renegotiate the plan in Brussels, yet EU officials said the plan was not open for change.

(Economic Excerpts from Briefing.com)

Tuesday 11 December:

Producer Price Index Edges Higher in November

The Producer Price Index for final demand increased 0.1% month-over-month in November (consensus 0.0%) while the index for final demand, excluding food and energy, increased 0.3% (consensus +0.1%).

The monthly reading left the index for final demand up 2.5% year-over-year, versus 2.9% in October, and the index for final demand, excluding food and energy, up 2.7%, versus 2.6% in October.

The key takeaway from the report is that it didn’t inflame inflation concerns to an alarming degree, like the October report did, so market participants have not been bothered by the idea that it will drive the Federal Reserve to be overly aggressive with future rate hikes.

Wednesday 12 December:

Consumer Price Index Matches November Expectations

Total CPI was unchanged month-over-month in November, as expected, while core CPI, which excludes food and energy, was up 0.2%, also as expected. Total CPI was up 2.2% year-over-year, versus 2.5% in October, and core CPI was up 2.2%, versus 2.1% in October.

The key takeaway is that consumer inflation trends are not running away from the Federal Reserve’s longer-run target, which should feed into the market’s growing belief that the Federal Reserve has some data-based scope to take it easy after a December rate hike.

Thursday 13 December:

Import and Export Prices Drop in November

Import prices declined 1.6% in November after increasing 0.5% in October.  Export prices declined 0.9% in November after increasing an upwardly revised 0.5% (from 0.4%) in October.  Excluding fuel, import prices were down 0.3%. Excluding agricultural products, export prices were down 1.0%.

The key takeaway from the report is that it stirred some thinking that inflation trends could be in a topping phase, which is constructive in terms of the market’s belief that the Federal Reserve is apt to take a more conservative path with future rate hikes.

Initial Claims in Reverse Gear

Initial jobless claims for the week ending December 8 dropped by 27,000 to 206,000 (consensus 228,000). Continuing claims for the week ending December 1 increased by 25,000 to 1.661 million.

The key takeaway from the report is that it helped quell for the time being burgeoning concerns about the rising trend in initial jobless claims.

Treasury Budget Deficit Inflates in November

The Treasury Budget for November showed a deficit of $204.9 billion versus a deficit of $138.5 billion for the same period a year ago. The Treasury Budget data is not seasonally adjusted, so the November deficit cannot be compared to the $100.9 billion deficit for October.

Friday 14 December:

Retail sales rise in November, aiding Q4 GDP outlook

Total retail sales increased 0.2% in November, as expected, while retail sales, excluding autos, jumped 0.2% (consensus +0.3%).

An important item to take into account is that there were sizable revisions to the October data for total retail sales (to 1.1% from 0.8%) and retail sales, excluding autos (to 1.0% from 0.7%).  Those revisions should mitigate any sense of disappointment in the “mixed” report for November.

The key takeaway from the Retail Sales report is that core retail sales, which exclude auto, gasoline station, building materials, and food services and drinking places sales, increased 0.9%. That’s important because core retail sales are used in the computation of the goods component for personal consumption expenditures in the GDP report.

Industrial production rises in November after October decline

Industrial production increased 0.6% in November (consensus 0.3%) after declining a downwardly revised 0.1% (from +0.2%) in October.  The capacity utilization rate was 78.5% (consensus 78.6%) following a downwardly revised 78.1% (from 78.4%) in October.

The key takeaway from the report is that manufacturing output was flat on the heels of a 0.1% decline in October.  That indication runs counter to the solid uptick seen in the November ISM Manufacturing Index.

Business inventories rise again in October

Total business inventories increased 0.6% in October, in-line with the consensus estimate, after increasing an upwardly revised 0.5% (from 0.3%) in September. Total business sales increased 0.3% after increasing a downwardly revised 0.3% (from 0.4%) in September.

The key takeaway from the report is that business sales rose at a slower pace than inventories.  That distinction, if it persists, will diminish pricing power.

December U.S. Markit Manufacturing PMI 53.9, November 55.3
December U.S. Markit Services PMI 53.4, November 54.7

International Key Economic Data


Friday 14 December
Stocks Fall on Continued Global Growth Concerns

The S&P 500 fell 1.9% on Friday to extend its monthly loss to 5.8%. Friday’s sell-off was a function of poor sentiment driven by global growth concerns and a continuation of weak price action. 

The Dow Jones Industrial Average lost 2.0%, the Nasdaq Composite lost 2.3%, and the Russell 2000 lost 1.5%. For the month, the respective indices are down 5.6%, 5.7%, and 8.0%.

The selling started overseas when China, the second-largest economy in the world, reported some weaker-than-expected industrial production and retail sales data. In addition, some weaker-than-expected preliminary manufacturing PMI readings out of the eurozone helped feed into concerns over economic growth and corporate earnings prospects.

A solid November Retail Sales report out of the U.S. didn’t change the selling bias either.  Instead, the good news on that front was drowned out by the concern that weakness abroad will eventually lead to a slower pace of growth in the U.S.

Selling picked up after the close of the European markets (11:30 a.m. ET) and would continue in an orderly manner throughout the day, culminating in the S&P 500 closing just below 2600.

Within the S&P 500, the health care (-3.4%), information technology (-2.5%), and energy (-2.4%) sectors led the broad-based retreat.

The negative bias within the health care and tech groups was driven by some corporate news, while energy fell in tandem with oil prices.

Johnson & Johnson (JNJ) dropped 10.0% after a Reuters report alleged that JNJ “knew for decades that asbestos lurked in its baby Powder.” The company’s litigation counsel rejected the report as “false and misleading.”

Within tech, Apple (AAPL) fell after an influential analyst from TF International Securities cut his first quarter 2019 iPhone shipment estimate by 20%, according to CNBC; Adobe Systems (ADBE) fell after failing to overly impress investors with its fiscal fourth quarter results and outlook; and Cisco (CSCO) fell after being downgraded to ‘Neutral’ from ‘Buy’ at Nomura.

In other corporate news, Costco (COST 207.06, -19.45) fell 8.6% after reporting its fiscal Q1 results, which included revenues that were slightly below consensus. Margin weakness, attributed to higher merchandising costs, also weighed on the stock.

There was little room to hide in the stock market, though the defensive-oriented real estate (-0.2%) and utility (-0.3%) sectors suffered only modest losses.

Investors sought safety in U.S. Treasuries, pushing yields lower across the curve. The 2-yr yield lost three basis points to 2.73%, and the 10-yr yield lost two basis points to 2.89%. Also, the U.S. Dollar Index rose 0.4% to 97.45, nearing a yearly high.

Market Internals – Friday 14 December 2018

Healthcare XLV -3.56% Energy XLE -2.51% Nasdaq 100 QQQ -2.52% Technology XLK -2.40% DJIA DIA -2.12% S&P 500 SPY -1.97% Consumer Discretionary XLY -1.85% Consumer Staples XLP -1.84% Transports IYT-1.71% R2K IWM -1.77% Industrials XLI -1.57% Retail XRT -1.42% Emerging Mkts EEM -1.24% Financials XLF -1.06% Communications Services XLC -0.98% Materials XLB -0.83% Utilities XLU -0.44% Real Estate XLRE-0.42%. Italics indicate 52-week lows

Dollar: Nearing 52 Week High

The U.S. Dollar closed higher for the week at $97.45 from $96.71 the previous week, nearing a yearly high.

Bonds: Growth Concerns Boost Treasuries

US Treasuries ended the week with gains across the curve. The Treasury market spent the entire session in positive territory with the long bond settling near its high while shorter tenors finished a bit below their opening levels. Treasuries jumped out of the gate in response to disappointing economic data from China and the eurozone, but the early gains were trimmed after generally positive economic figures from the U.S. served as a reminder of relative strength in the domestic economy. Treasuries backtracked during the first two hours of trade, but they rallied to fresh highs in midday action while equities struggled. The selling in the stock market continued into the afternoon, contributing to a steady bid in Treasuries. The U.S. Dollar Index marked a fresh 2018 high at 97.71 in early trade, but finished the session a bit shy of that level.

The yield curve flattened as the belly of the curve rose against the 30-year yield. The spread between the 2s5s is flat  after inverting by -1bps the previous weekThe spread between the 5s10s remained unchanged at 17bps from 17bps the previous week while the 10s30s narrowed to 25bps from 29bps the previous week. The 2-30 spread has narrowed to 41bps from 44bps a week ago.


The Bloomberg Commodity Index settled at 81.27, lower than 83.49 the previous week as Precious, Grains and Energy lost out.

WTI oil closed at $51.20 p/b, lower than the week before at $52.61. The spread between WTI and Brent widened to $9.08 from $9.06 the previous week as Brent settled at $60.28 p/b.

EIA petroleum data for the week ended December 07

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.2 mln barrels from the previous week. At 442.0 mln barrels, U.S. crude oil inventories are about 7% above the five year average for this time of year. Total motor gasoline inventories increased by 2.1 mln barrels last week and are about 3% above the five year average for this time of year. Finished gasoline and blending components inventories both increased last week. Distillate fuel inventories decreased by 1.5 mln barrels last week and are about 8% below the five year average for this time of year. Propane/propylene inventories decreased by 3.2 mln barrels last week and are about 5% below the five year average for this time of year. Total commercial petroleum inventories decreased last week by 6.0 mln barrels last week.

Natural gas inventory showed a draw of 77 bcf vs a draw of 63 bcf in the prior week. Working gas in storage was 2,914 Bcf as of Friday, December 7, 2018, according to EIA estimates. This represents a net decrease of 77 Bcf from the previous week. Stocks were 722 Bcf less than last year at this time and 723 Bcf below the five-year average of 3,637 Bcf. At 2,914 Bcf, total working gas is below the five-year historical range.

Baker Hughes total U.S. rig count decreased by -4 to 1071 following last week’s decrease of -1.




Week 51 (December 17 to 21)

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

Benchmarks Indices (21 year average) for wk51:

Week 51 Key Economic Dates

In the coming week, the Fed, the BoE and the BoJ will decide on monetary policy. Other important releases include: US final Q3 GDP growth, durable goods, personal spending and income, PCE prices and housing data; UK final Q3 GDP growth and inflation; Japan inflation and trade balance; and Australia employment data.

Mon 17 December

Tue 18 December

Wed 19 December

Thu 20 December

Fri 21 December



We’re halfway through the final month of the year which is usually one of the more bullish months on the trading calendar. However, December 2018 is proving to be otherwise so far with the Dow Jones Industrial Average down -5.6%, the Nasdaq Composite losing -5.7%, the S&P 500 extending its monthly loss to -5.8% and the Russell 2000 tanking -8.0%.

All three benchmarks are now;

They are accompanied by the other major indices, the Transports ($TRAN/$DJT) and the two Russells ($RUT and $RUI), in similar circumstances.

The coming week is going to be a real test of the Bulls’ last ounces of resilience as the FOMC makes its anticipated rate hike followed by the GDP reports of the U.S. and U.K. along with central banking policies of Japan and U.K. and policy minutes from Australia. 

I reckon there’s going to be fireworks … and it won’t be because Santa is coming. On the contrary, the market seems to be scaring Santa away this Christmas. So remember …

When Santa fails to call, the Bears will roam on Broad and Wall.

Happy Hunting!



Date: 20th Dec 2018, Thursday
Time: 07:00PM to 10:00PM
(Registration starts at 06:30PM)


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