by Eli Wright
Following the Fed rate hike this past Wednesday, the dollar has soared, but equity markets weakened. This week brings the possibility of additional profit-taking.
However, one should also note that the seasonality effect shows that over the past six years markets have outperformed during the week before Christmas relative to December as a whole. Therefore, it's equally possible that we're on the cusp of new all-time highs for some (maybe all?) the major US indices. Indeed, Transports could be leading the Dow higher, possibly to the 20,000 benchmark before year-end.
Traders should also note that leading up to the holidays, market participation and trading volumes are traditionally lower, and may therefore be more susceptible to powerful trends, thus prone to larger fluctuations.
Overnight in Asia, markets were hit by increased USD interest rates, therefore higher borrowing costs, which drove local indices broadly lower. The Nikkei snapped a nine-day winning streak, falling 0.05% from its one-year high, to close at 19,391.60. The Shanghai Composite lost 0.15%, to close at 3,118.39, and the Hang Seng fell 0.88%, to 21,828.
In Europe, markets are mixed: the FTSE is down 0.12% to 7,003.5, the DAX is up 0.08% to 11,413.5; the Euro Stoxx 50 is up 0.17% to 3,258.5.
On Wall Street last week the Dow gained just 0.5% and failed to touch 20K. The NASDAQ and S&P 500 lost 0.1% and 0.03% respectively on the week.
In pre-market trading today, however, everything is up: the Dow is up 0.17%, NASDAQ futures are up 0.1% and the S&P is up 0.13%. Could today be the day the Dow hits 20K?
US bond yields have come down from the highs reached late last week, but are still elevated, continuing the trend they've been on since the second half of 2016. As of this writing, the 2-year yield is 1.241%; the 10-year yield is 2.581%; and the 30-year yield is 3.18%.
Forex
The US Dollar Index soared to a 14-year high after the FOMC rate hike announcement last week, along with its aggressive outlook for 2017. The third estimate for Q3 GDP, out on Thursday, could move the dollar yet more. Fed Chair Yellen speaks on “the State of the Job Market” at 1:30 PM ET today, but because it’s a commencement speech at the University of Baltimore, it’s unlikely anything surprising or new regarding FOMC policy set last week will come up. It's simply not the appropriate forum.
The dollar rose to an 11-month high vs the yen (at 118), before profit-taking knocked the USD/JPY pair back to 117.94. However, ¥120 for the USD/JPY remains in sight. The weaker yen has boosted profits on Japanese exports and the Bank of Japan may soon decide to halt its QE program and raise rates. The BoJ is holding a press conference tomorrow to update markets on its monetary policy.
The euro has been driven down below $1.05, to its lowest point since 2003. With diverging monetary paths between the US and the EU, it’s possible – probably even likely – that the euro will fall still further.
Sterling slipped to its lowest level in a month vs the USD, to $1.24; $1.23 is the next level lower for the cable.
Though the dollar retraced some of its gains on Friday, that doesn’t necessarily signal additional profit-taking before year-end. Over the past four years, during this same pre-Christmas period, profit-taking on the dollar has been a mixed affair at best. At the end of 2015, there was a slight degree of profit taking. However the year before, for this timeframe in 2014, there was actually a move higher. And in 2013 and 2012 if there was some profit-taking, it occurred earlier in December – not during the week leading up to Christmas, nor during the shortened holiday week. And in general, bigger moves often occurred right after the New Year holiday.
Emerging market currencies have been a mixed bag this year – some have been buoyed by higher commodity prices, continued investor demand and risk appetite, as well as—at least in one case—optimism about Trump’s presidency (cough, we're looking at you Russian ruble); others have been hit hard by Trump’s protectionist agenda including the (Chinese yuan and Mexican peso).
Source: Financial Times
Commodities
Gold posted its sixth straight weekly decline last week, falling to a ten-month low. As of this writing, gold is at $1,141.85. A bounce to $1,160 is possible, which might signal the start of a new bull market, but with newly raised interest rates and a stronger dollar in play, a fall to $1,110-$1,085 is much more likely, confirming that the current bear market is still in play.
Silver fell 4.4% overall last week, down to $16.155. After looking like it might start climbing to $18 or $19, it’s now slipped back into its long-term down-trend.
Copper has fallen as well, down to $2.59, its lowest level in nearly a month.
This morning, oil is up. Crude is trading at $53.33, while Brent is at $55.53. For now traders appear to have convinced themselves that the various global oil producers will adhere to their agreement to cut production heading into next year. Markets even seem to be ignoring last Friday's Baker Hughes report showing that the number of operational US oil rigs rose last week by 12, up to 510, the highest total in almost a year.
Stocks
Perhaps due in part to Trump’s meeting last week with leaders in the tech industry, Information Technology, the S&P’s heaviest-weighted sector, outperformed the overall S&P. It gained 0.16% while the overall index fell 0.08% on the week.. Apple (NASDAQ:AAPL), Intel (NASDAQ:INTC), and Cisco (NASDAQ:CSCO) were all up more than 1.5% on the week.
Source: Fidelity
First Solar (NASDAQ:FSLR) gained 4.68%. However, the biggest tech gainer and the strongest S&P performer as well, was NVIDIA (NASDAQ:NVDA), which jumped 12.08% last week, and has increased by an astonishing 205% year-to-date. NVIDIA stock, which closed Friday at an all-time high of $100.41 per share, isn’t cheap, but the stock's fundamentals—including growth in all its business lines as per its most recent quarterly report—are strong. And looking at the technicals, the trajectory remains strongly bullish.
Financials weighed the heaviest on the S&P, with the Financial Index dropping 1.15% on the week. Investment management firm Legg Mason (NYSE:LM) lost almost 10%, insurer MetLife (NYSE:MET) fell 5%. The big banks, including Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM) and Goldman Sachs (NYSE:GS), were down as well. However, since the US election, financials are still the hottest sector, up more than 20%.
Two of the S&P’s smallest sectors, Utilities and Telecommunications, performed very well. Weekly gains in Utilities were led by FirstEnergy (NYSE:FE), up 3.42%, followed by Edison (NYSE:EIX) which saw 2.5% gains, Exelon (NYSE:EXC) up 2.35%, followed by Alliant (+2.12%) and Xcel Energy (NYSE:XEL) (+2.11).
In the aftermath of Yahoo's (NASDAQ:YHOO) billion-user password security breach, Verizon (NYSE:VZ) is considering scrapping—or at least renegotiating—its $4.8 billion deal to purchase the troubled company. Yahoo dropped 4% on last Thursday's news, but Verizon ended the week up 1.51%. AT&T (NYSE:T) also rose, finishing the week 3.19% higher.