- US stocks see first monthly loss since before 2016 US election
- Stocks driven by shifting narratives on protectionism, effects of higher rates on company growth and stock prices
- Sectors mixed, demonstrating lack of leadership in current move
- Volatility likely the biggest issue in prevailing environment
- Equity traders still disregard political risk, while dollar and Treasury traders have concerns
- Bitcoin on knife's edge over next major move
- For the first time, BoJ mentions outlook for end of easing
The Week That Was
On Friday, traders were holding on as US equities took them on a roller coaster ride. For those with the stomach to stay in, when the ride was over, stocks closed higher, paring a weekly decline. Once again, equity investors demonstrated their ability to shrug off political risk, disregarding President Donald Trump’s aggressive tariff rhetoric as he advocated for his most stringent protectionist policies yet.
On the other hand, the US dollar and Treasuries sold off. These investors have consistently displayed either political acumen or cowardice, depending on one’s perspective.
The S&P 500 Index rebounded from a 1.06 percent opening loss on Friday, to a 0.5 percent gain in the final hour of the session. The rally was led by Healthcare (+1 percent), followed closely by Technology (+0.95 percent). The only three sectors in the red were Real Estate (-0.33 percent), Utilities (-0.26 percent) and Materials (0.1 percent).
The advance trimmed the benchmark index's weekly decline to 2 percent. On a weekly basis, all sectors were in the red, led by Materials (-3.8 percent) and Industrials (-3.28 percent). 'Outperformers' were Technology (-0.89 percent) and Consumer Staples (-1.12 percent). Both leaders and laggards included defensive as well as growth stocks, perhaps demonstrating the lack of leadership in the current market move.
Last week, as February ended, equities were mired in their first monthly loss since October 2016, the final month before the US election, when the so-called Trump trade began.
The Dow Jones Industrial Average rebounded on Friday from an opening 1.55 percent drop, trimming losses in the final hour, though it still closed down 0.3 percent. That put the mega-cap index lower by 3 percent for the week.
The NASDAQ Composite bounced from a 1.3 percent opening slide to a jump in the final hour that helped it end 1.1 percent higher, paring its weekly loss to just 1.05 percent.
The Russell 2000 went through the same lower open and higher final hour. However, as we have been consistently pointing out, the small-cap benchmark continuously bucks the trend, positively and negatively. After opening 1 percent lower, it closed 1.6 percent higher, outperforming the bigger cap indices.
The market narrative that drove the initial drop and final-hour rebound began with fear about the negative aspects of the Trump trade agenda, according to investors. Toward the end of the session, however, the idea that what the president says will not necessarily follow through to action, allowed investors to reinvest into growth assets.
This characterization of the president’s rhetoric would be naturally interpreted differently by critics. It supports his base voters' view that he talks a big game but he’s a negotiator, someone who starts with a strong position but is open to compromise.
We expect that investors will go back and forth on this issue, ranging from whether it will follow through into action to whether it would hurt stock prices, even if it continues to do so, at least in the short term.
We have seen this merry-go-round of market narratives in the last weeks with regard to higher interest rates. After yields initially spiked to 4-year highs, investors dumped stocks more aggressively than they had in two years, gripped by fear of a faster path than anticipated to higher interest rates.
That was followed by the biggest accumulation in 18 months—even as yields remained at 4-year highs—suggesting that investors had overcome their initial fears of rates hurting growth and stock prices and perhaps were now focusing on the positive aspects of an improving economy, such as a nurturing environment for company growth and higher stock prices.
However, stocks tumbled again on Tuesday when Federal Reserve Chair Jerome Powell testified before the House Financial Services Committee that he and the rest of the central bank's policymakers were “going to be taking the developments since the December Meeting into account and writing down our new rate paths.” Nonetheless, both the recent inflation surge, as well as the 4-year high yields already provided the signal. Still, perhaps hearing it straight from the Fed chief unnerved investors enough to sell off, as if they were hearing about this new outlook to higher rates for the first time.
No matter one's chosen narrative, the most important development in the stock market right now—and the current biggest driver—is the return of volatility.
Higher volatility has already unraveled complicated and highly leveraged positions over multiple asset classes which, based on low volatility, made fortunes for financial institutions during the very long calm before the current volatility storm. Without doubt these same institutions are now racing to restructure perhaps even more complicated and highly leveraged positions based on high volatility, spread over multiple asset classes.
This unwinding of current positions would presumably overcome demand; the restructuring of the new strategies would therefore include considerable demand, creating a stock market seesaw.
About 600 computers used for Bitcoin mining were stolen in Iceland, for a loss of an estimated 1.5 million pounds, or more than $2 million. It's one of the country's biggest thefts thus far; 11 people have been arrested though the investigation is ongoing.
Technically, Bitcoin's price still struggles beneath the resistance of the former peak, a shooting star. The $12,000 level may determine the fate of the cryptocurrency for the next major move.
The Week Ahead
All times listed are EST
Sunday
20:45: China – Caixin Services PMI (February): activity in the services sector expected to fall to 53.4 from 54.7.
Monday
4:30: UK – Services PMI (February): forecast to rise to 53.4 from 53.
10:00: US – ISM Non-Manufacturing PMI (February): expected to fall to 59.4 from 59.9.
Gold rallied alongside silver as investors sought out safe haven assets as risk-off sentiment returned.
22:30: Australia – RBA Rate Decision: no change in policy expected, leaving the rate at 1.5 percent.
Tuesday
10:00: Canada – Ivey PMI (February): forecast to rise to 61 from 55.2
19:30: Australia – GDP (Q4): expected to be 0.7% QoQ and 3% YoY, from 0.6% and 2.8%.
Wednesday
5:00: Eurozone – GDP (Q4, 3rd estimate): forecast to be 0.6% QoQ and 2.7% YoY.
8:15: US – ADP Employment Report (February): forecast to show 195K jobs created, from 234K a month earlier.
10:00: Canada – BoC Rate Decision: rates expected to be hold steady at 1.25%.
10:30: US – EIA Crude Inventories (w/e 2 March): forecast to rise by 160,000 barrels.
The price of oil declined amid concerns about increasing U.S. crude production. Technically, a penetration of the $58 level would register a second low trough, completing a reversal.
Thursday
1:15: China – Trade Balance (February): exports forecast to rise 9.6% from 11.1%
7:45: Eurozone – ECB Rate Decision: policy expected to be left unchanged at 0.00 percent, but the 8:30 press conference may provide insight into what policy makers are planning
The euro bounced back from a double top, increasing the probability of retesting its 1.2500 level.
8:30: US – Initial Jobless Claims (w/e 3 March): expected rise to 216K from 210K.
20:30: China – CPI (February): expected to rise to 1.6% from 1.5%.
22:00 (Tentative): Japan – BoJ Rate Decision: no change expected to the -0.10 percent rate.
The yen surged to its strongest point since 2016, after BoJ Governor Haruhiko Kuroda, for the first time, uttered words suggesting a possible time frame for discussing an exit plan from the central bank's exceptional easing program. Kuroda’s comments were seen as further evidence the era of massive stimulus that boosted asset prices and slashed borrowing costs is coming to an end.
Technically, the price is retesting its mid-February low, in an attempt to break below a consolidation since the beginning of 2017. Such a downside breakout would have investors eyeing the 100.00 level.
Friday
4:30: UK – Manufacturing Production (January): Revised down from 0.4 percent to 0.3 percent but still up from a 0.2 percent MoM; revised down to 1.4 percent from 3.5 percent, down from 2.8 percent YoY.
4:30: UK – Trade Balance (January): deficit expected to narrow to £3.8 billion from £4.9 billion.
8:30: US – Nonfarm Payrolls report (February): 190K jobs expected, from 200k last month. Unemployment rate expected to hold at 4.1%, while average hourly earnings should rise by 0.3% MoM, in line with last month.
Federal Reserve Chair Jerome Powell sparked speculation the central bank may quicken the pace of monetary tightening, a move which should support the dollar. However, on Thursday and Friday it fell, perhaps because investors worry a stronger dollar could derail economic expansion.
8:30: Canada – Employment Change (February): 17.5K jobs forecast to have been created, dropping from 88K a month earlier.