by Pinchas Cohen
The Week That Was
- ECB reduces QE as expected, surprises by leaving rates open-ended
- German business sentiment posts record high
- US Q3 beats estimates with 3% annual rate
- Senate US budget approval paves way for tax reform
While global stocks edged lower this past week, with the MSCI All-Country World Equity Index losing 0.13 percent of its value, all three major US indices registered yet another in a series of weekly highs. It was the fifth straight weekly high for the NASDAQ Composite and the seventh straight weekly high for the Dow Jones Industrial Average and the S&P 500. Friday's S&P 500 close was also its 49th record of the year.
The week's biggest advance however occurred in Asia where the Nikkei 225, with a 2.65 percent upleg, reached a 21-year high. Prime Minister Shinzo Abe’s sweeping victory, the result of last Sunday's snap election, increased market stability by providing a green light for Abe to resume his massive economic stimulus plan. Six straight quarters of Japanese growth suggest that whatever Abe is doing must be working. Adding to the success story, a weaker yen ensures continued, even higher, exports, for continued growth.
The winning sector for US stocks this past week were technology shares, with a 2.36 percent advance, followed by Consumer Discretionary with 1.14 percent gains; the biggest decliner was Health Care, at negative 2.07 percent, clearly demonstrating that risk-on sentiment dominated the market once again last week.
ECB Shrinks Bond Buys, Emphasizes Ongoing Low Rates
ECB President Mario Draghi is a veteran of market reactions to his statements that economists consider at best exaggerated, at worst totally irrational. In 2013, when policy makers signaled the time had come to moderate quantitative easing (QE), financial markets around the world, including in Europe and the US, went through what was dubbed a “taper tantrum." Similarly, this past June, the euro surged on the understanding that Draghi had signaled the time had come to start thinking about scaling back the ECB's massive balance sheet.
In the aftermath of the euro's move higher, panicked that it might hurt eurozone exports, Draghi sent one his lieutenants, ECB Vice President Vitor Constancio, to downplay the earlier statement. Constancio said his boss’s remarks with “totally” in line with existing policies and investor response was difficult to understand. Investors may have been slighted by this veiled statement of calling them irrational, but after a very brief dip the euro entered another, longer rally.
Judging by market reactions to last Thursday's ECB press conference, it appears Draghi has finally figured out how to appropriately convey the central bank's guidance. While remaining consistent with consensus, the ECB will buy 30 billion euro worth of European bonds each month, down from 60 billion euro, he made it absolutely clear that the near-zero interest rates are here to stay for as long as needed. In other words, even as the Fed enters a faster path to higher interest rates, widening interest-rate differentials. Perhaps not “even as” but “because of…” Draghi wanted a weaker euro, and he got it. The euro fell 1.72 percent against the dollar on Thursday and Friday. What’s more, it completed a H&S top, suggesting the euro is heading to 1.1300.
German Business Confidence Surges to Record High
The German Ifo Business Climate Index also reached a record high this past week. Considering that Germany is Europe's engine for economic recovery, this data indicates positive sentiment that Europe’s recovery as a whole will resume. This is especially noteworthy considering such recent events as Brexit, along with the ongoing chain reaction throughout the continent of escalating populism, even separatism, is the most actively visible since WWII. Indeed, the latest proof of rising nationalism is Germany’s own far-right AfD becoming the third largest party in the country and Spain's continued standoff with Catalan secessionists.
European Stocks Advance
The combination of a weak common currency boosting exports and making European stocks cheaper for foreign investors, alongside record confidence, helped European stocks advance, while most global stock indices edged lower. Indeed, Europe's Stoxx 600 posted a weekly gain.
US GDP Beats
For the second straight quarter the US economy grew during the third quarter at a faster-than-expected 3 percent, destroying the 2.5 percent consensus. This beat occurred even after many assumed a slowdown was a foregone conclusion after the devastating hurricanes in August and September.
The inflation-adjusted, real consumer spending, which has become the metric developed-world economies most rely on—and which John Maynard Keynes considered to be the most important determinant of short-term demand in the economy—rose 2.4 percent, showing continued strength, beating the 2.2 percent estimated advance. However, core inflation significantly missed the Fed’s 2 percent target, remaining flat at 1.3 percent. After having made the case for the economic growth surprise despite the expected decline on hurricane effects, we wish to remind that we had forewarned that data will be volatile, and intellectual integrity demands we wait a few months before relying completely on this data.
Tax Reform: One Stop Closer
After a year of political soap-opera with little actual legislation to show for it, Republicans have finally made some headway. It looks as though tax reform is actually in sight.
While the initial bill is scheduled to be released this week, there is already resistance over the possible loss of tax deductions at the state and local level and potential changes to 401K retirement plans.
Greenback Gets Its Mojo Back
The US dollar had the strongest week since post US elections when it pushed higher by 2.15 percent. Last week it advanced 1.35 percent. It looks like things are finally going swimmingly for dollar bulls: first, the US GDP estimate beat; second, reports are circulating that President Donald Trump has ruled out reappointing Fed Chair Janet Yellen, seen as the most dovish candidate on his short-list, even after her recent hawkishness since June; third, the single piece of legislation on Trump's agenda, tax reform, seen as an investor favorite, is back on the table, putting the Trump-Trade back in play.
As well, the dollar’s biggest currency trade peer, the euro, has been falling since the German election outcome at the end of September; its slide has been continuing on Spain’s Catalan crisis and most recently with Draghi’s emphasis on the eurozone remaining at near-zero interest rates for the foreseeable future.
The Week Ahead
All times listed are EDT
This coming week, investors will focus on deriving clues to the Fed's path to higher interest rates from the FOMC statement release on Wednesday, while Friday’s Nonfarm Payrolls report could have markets buzzing about how the results may affect the Fed’s already-stated forward guidance. Meanwhile, the UK is forecast to raise rates for the first time in more than a decade, in what could give both the dollar and sterling a clear advantage over the common currency.
Monday
8:30: US – Core PCE Price Index (MoM) (Sep): expected to remain steady at 0.1 percent.
While the dollar completed a H&S bottom, it penetrated less than one percent from the neckline, and is coming up against the downtrend line since the end of the Trump Trade in March, opening up the possibility of at least a return move if not a pattern failure.
19:30: Japan – Unemployment rate (September): expected to remain at 2.8%.
23:00: Japan (Tentative) - BoJ rate decision and quarterly Outlook Report (1:00 Tentative): Interest rates likely to remain on hold. Keep an eye out for changes to the interest rate forecasts.
Tuesday
6:00: Eurozone – inflation (October), GDP (Q3) and Unemployment (September): Inflation expected to rise to 1.6% from 1.5%. Q3 GDP expected to rise to 2.7% from 2.3%. Unemployment rate expected to fall to 9.0% from 9.1%.
While the euro completed a H&S top, its penetration reached only 0.75 percent, leaving a bear-trap in play.
8:30: Canada – GDP (August): expected to tick higher to 0.1%.
US Earnings Reports Pre-Market
- BP (NYSE:BP): Forecast EPS $0.48 vs $0.3 YoY.
Global oil and gas giant BP has formed a pennant, a continuation patternt. An upside breakout would suggest a minimum of a $1.50 move.
- Kellogg Company (NYSE:K): Forecast EPS $$0.93 vs $0.96 YoY
- Pfizer (NYSE:PFE) earnings: Forecast EPS $0.65 vs $0.61 YoY
21:45: China – Caixin Manufacturing PMI (October): Expected to rise to 51.5 from 51.0
Wednesday
5:30: UK – Manufacturing PMI (October): Expected to rise to 56.2 from 55.9.
8:15: US – ADP Employment Change (October): Expected to rise to 210k from 135k.
10:30: US - Crude oil inventories (27 October): Expected to fall to -2.58m from 0.86m.
The price of oil has blown past the former, September high, and even past the April high—on a close, no less. This paves the way for the commodity's uptrend to resume.
14:00: US – Fed Interest Rate Decision: Rates expected to remain unchanged, with the focus on whether we will see a rate rise later in the year.
Gold is the anti-dollar. A strengthening dollar suggests a gold selloff. The price of gold is testing the support since August. A break below $1,260 would suggest a retest of the 1,300 levels.
US Earnings Reports After the Close
- Facebook (NASDAQ:FB): Forecast $1.29 vs $0.88YoY
Facebook's record close on Friday paves the way for another rally, such as the one that boosted shares from $148 to $175.
- Tesla (NASDAQ:TSLA): Forecast $-3.09 vs $0.14 YoY.
While electric automobile developer and manufacturer Tesla is considered a visionary company, investors are not always patient when it comes to lack of earnings, let alone negative earnings. The price has fallen below its uptrend line since May, after completing an H&S top, with a 4 percent drop, filtering out even a conservative bear-trap, suggesting a minimum price target of $270.
Thursday
4:55: Germany – Manufacturing PMI (October): Expected to remain unchanged at 60.5
5:30: UK – Construction PMI (October): Expected to fall to 48.0 from 48.1.
8:00: UK – BoE Interest Rate Decision: Expected to rise to 0.50% from 0.25%, followed by BoE MPC Meeting Minutes. This will follow the Fed’s lead to normalizing interest rates, while leaving the EU behind. The pound should join the dollar in rising versus the euro.
8:30: UK – BoE Gov Carney Speaks
8:30: US – Initial Jobless Claims: Expected to advance to 235K from 233K.
US Earnings Reports After the Close
- Apple (NASDAQ:AAPL): Expected EPS $1.86 vs $1.67 YoY
While the price is clearly in an uptrend, it is coming against its record high resistance just under $165. It would require a clear break of the level to allow investors to feel that they’re past that resistance.
Friday
5:30: UK – Services PMI (October): Expected to rise to 53.7 from 53.6.
8:30: US – Jobs Report (October): non-farm payrolls expected to rise to 250k from -33k. Average earnings expected to fall to 0.3% from 0.5%. Unemployment rate expected to remain at 4.2%.