by Pinchas Cohen
The Week That Was
Wednesday’s 0.55 percent decline for the S&P 500 ended a longer than 50-day streak of no daily declines greater than 0.50 percent—the first time since 1965, according to the Wall Street Journal.
On a weekly basis, however, both the S&P 500 Index, as well as the Dow Jones Industrial Average fell for the second week in a row, though the Russell 2000 advanced while the NASDAQ Composite registered a weekly record.
WTI crude oil fell, its first weekly slip after a 5-week advance, forming a hanging-man, which, with a confirmation of another weekly close beneath the real body of the hanging-man would signal a corrective decline, within the uptrend.
The energy sector was also the biggest loser—significantly—sinking 3.2 percent; the second trailing sector, Industrials, fell 0.79 percent.
Softer than-expected Chinese industrial production data initiated a domino reaction. Fears of a Chinese economic slowdown led to concerns of lower demand for commodities, causing equity investors to sell off commodity shares, which dragged down the averages.
Global industrial heavy weight General Electric (NYSE:GE) had a terrible week. It's shares plunged 7.2 percent on Monday, on news that the company would be restructuring so as to focus on its power, aviation and healthcare businesses while exiting from other segments. As well, the company said it would be cutting its dividend in half. The stock feel another 5.7 percent on Tuesday and could still be heading lower.
Disappointing forecasts for holiday earnings from retailer Target (NYSE:TGT) also pulled US averages lower.
Flat Outlook Despite Stronger US Economic Data
While China's economy, the world's second largest, is still growing, it's at a slower rate than expected. The disappointing industrial output news, along with softer retail sales numbers, sent markets into turmoil, even as the largest global economy, the US, continues to expand. During October retail sales climbed 0.2 percent, housing starts and permits beat expectations, advancing 13.7 percent and 5.9 percent, respectively; the producer price index may have eked out a 0.1 percent gain, but the core rate (subtracting volatile food and energy) beat expectations with a 0.2 percent rise.
Still, we’re seeing the flattest Treasury yield curve in a decade. Moreover, the yield on 10-year Treasuries slipped. This means that institutions – aka the smart money – have little faith that the economy will expand and that interest rates will rise.
But that’s not the worst of it. A lower inflation outlook raises the risk of cracks in the high-yield debt market. Corporate bonds, issued by companies that have a higher risk of default, could more easily become derelict in such an environment. The contagion might then spread, causing broader market selloffs.
Will Tax Reform Endure?
Although the House finally passed its tax bill on Thursday, cutting the top corporate rate to 20% as promised, tax reform is far from a done deal. Action moves to the Senate next, and while the Senate Finance Committee did in fact approve a tax plan, it is different than the House legislation. Though the S&P 500 rebounded 0.82 percent on the news, traders attributed the upleg to short covering as well as what has become a knee-jerk reaction to buy any and all dips, rather than positive sentiment about the future of the long-awaited Trump tax plan.
The Senate's version of tax reform will be debated and brought up for a vote in the weeks ahead, a world of time during which many things can go wrong. Expect plenty of additional bumps ahead.
The US celebrates Thanksgiving this coming week, which means markets will be closed on Thursday but trading volume will taper off in the days ahead of the holiday.
The Week Ahead
All times listed are EST
Monday
9:00: Eurozone – ECB President Mario Draghi Speaks
On Friday, in a speech in Frankfurt, Mario Draghi forecast that eurozone workers will start asking employers for more money in order to keep up with the rising cost of goods. This would raise inflation closer to the ECB target and would relieve pressure on the central bank to continue to provide accommodation. After years of combating low inflation, Draghi’s not so subtle hint to employees to do the work for him may be an act of desperation, or a visionary’s experiment. Only time will tell.
Whatever the effort may have been, traders weren’t enamored with his speech. The euro rose 0.2 percent, well below the resistance of the bearish Shooting Star formed on Wednesday.
19:30: Australia – RBA Meeting Minutes
The Australian central bank has been under mounting pressure to begin raising rates, after 8 years of no hikes. Inflation is dormant, growth is sluggish and a housing market slowdown are all reasons not to raise rates. In the last few years the bank has been befuddled by weaker wages despite falling unemployment. Perhaps the Meeting Minutes will provide investors with some insight as to where the impasse lies.
The AUD/USD pair just completed a weak H&S top as investors had little patience for the pattern to complete. That's bearish for the Australian currency.
Tuesday
10:00 US – Existing Home Sales (October): forecast to fall 1.6% MoM from 0.7% MoM.
18:00 US – Fed Chair Yellen Speaks
After a dollar reversal that drove the currency higher last week changed its mind, the USD may have returned to its prior, falling trend, pushing the euro into a rising trend. Will Yellen consider the dollar weakness a corollary of the flattest Treasury yield in a decade?
While she may not necessarily want a stronger dollar, like Draghi's position on the euro, she does want a rising yield curve, to help buoy inflation. How might she proceed on one without the other?
Wednesday
7:30: UK – Budget Statement: Chancellor Philip Hammond will unveil the British government’s spending plans for the year. Sterling could see some volatility if economic forecasts prove to be different from market expectations.
8:30: US – Initial Jobless Claims (w/e 18 November), Durable Goods Orders (October): durable goods orders forecast to rise 0.8% MoM from 2.2% in September. Jobless claims forecast to fall to 236K from 249K.
10:00: Eurozone – Consumer Confidence (November, flash): forecast to rise to -0.5 from -1.
10:00: US – Michigan Consumer Confidence (November, final): expected to fall to 97.8 from 100.7
A slip in confidence numbers wouldn't bode well for the US's consumer dependent economy. And certainly not when risk-off is the prevailing, global market sentiment. A weak result could spur a downward sentiment spiral, something that leads to market crashes.
10:30: US – EIA Crude Oil Inventories (w/e 17 November): stockpiles rose by 1.8 million barrels in the previous week, posting the first weekly gain after 5 weekly drawdowns.
14:00: US – FOMC Minutes: no changes were made at the last meeting, but commentary on the economy and policy outlook will influence USD pairs.
After a week of positive economic data, including modest inflation growth, failed to impress investors in general and bond buying institutions in particular, will Yellen make an effort to sell US economic growth, as the ECB’s Mario Draghi did on Friday?
Thursday
3:00– 4:00 – French, German Manufacturing PMI; French, German Services PMI (November, flash): a general weakening in manufacturing activity is forecast, while services are forecast to remain robust.
4:30: UK – GDP (Q3, 2nd estimate): QoQ figure expected to be 0.4% from 0.3%, YoY 1.5%, in line with previous figure.
Friday
US markets close early
4:00: Germany – IFO Business Climate Index (November): expected to rise to 116.9 from 116.7.
9:45: US – Manufacturing and Services PMI (November, flash): manufacturing forecast to rise to 54.7 from 54.6, while services to increase to 55.6 from 55.3.