by Pinchas Cohen
Last Week
Geopolitics
- Markets cheer centrist Macron’s lead in French elections
- Merkel reaffirms hard stance on UK negotiations for Brexit
Policy
- ECB maintains stimulus
- Trump outlines tax vision
- Trump enacts tariff on Canadian lumber
Economy
- Friday, US Q1 GDP plunged to 0.7%, the weakest reading for this metric in three years, on waning consumer spending.
Equities
Global equities rally on relief of eurozone risk, impending US tax cuts and earnings.
- The MSCI World Index added $700 billion and made an all-time-high this past Wednesday on earnings. This topped off French elections relief which occurred earlier in the week and preceded Trump’s tax announcement later that day.
- The Russell 2000 made an all-time high close, at 1419.431 and all-time intraday high on Wednesday, at 1,419.431. However, the all-time high had a long upper shadow and failed to break out of the trading range it's been in since December. This suggests the same supply that’s been waiting at the range top overtook demand. Demand kicks in at the 1,350 level.
- The NASDAQ Composite had a record close on Thursday of 6,048.937 and opened on Friday with a rising gap, achieving a new all-time-high of 6,074.041 intraday. However, the index appeared to get ahead of itself and closed at 6,047.606 on the week, slightly lower than its Thursday record close. Perhaps more importantly, the index broke the psychological 6,000 price level for the first time. Note, it took the NASDAQ Composite 17 years since crossing the 5,000 level to hit 6,000, whereas it took the index a mere 10-weeks to cut to through a thousand points after it crossed past 4,000 at the height of the tech bubble. Could this mean current levels are not sustainable within the context of multi-year multiples without the corresponding economic growth to support it?
- The STOXX 600 components are halfway through earning season. Earnings are up a surprising 9.5% and an average sales surprise of 2%—the highest in six quarters. The index added $2.4 billion over the past week, the most since December 2015, which helped it achieve the daily closing price of 388.73 on Wednesday – only 15 points below the height of the day - and the highest since August 11 2015. The weekly close was 387.09. This price is an expression of wide participation, with a volume of 16.780 billion, the highest since December.
- The Japan-heavy (39%) MSCI Asia Pacific Index is up .055%, to 149.33, after closing Friday at its highest level since June 2015
- Emerging markets have reached multi-year highs as well. The MSCI Emerging Markets Index reached a high of 986.26 on Wednesday, its highest level since June 2015
Bonds
Yields advance to compensate for anticipated tax cuts
US 10-year Treasury yields reached 2.3485 on Wednesday, their highest level in 15 sessions. However, it was only part of a return move upon crossing below the neckline of a double top on April 12.
Case in point, the 10-Y note failed to hold on to its gains and fell below the neckline again, closing on Friday at 2.2802, slightly above the low of the day of 2.2767, in a sign of weakness. The height of the trading range throughout the formation of the double top of 3000 basis points suggests a target price of 2.000. First though it must contend with the 2000dma lying in wait at 2.0823.
This double top in yields is a mirror-image to the 10-year note price, which just completed a return move, after having completed a double bottom. This suggests price will rise from its current 125-23 to 127+. The technical picture of the supply-demand balance of powers may suggest investors' waning hope of reflation.
Currencies
The Dollar Index closed down .04%.
The euro gained 0.2%, remaining within its trading range of the last five weeks and maintaining its gain on crossing the 200dma, despite the continuous dovish stance of the ECB.
The GBP closed on Friday at 1.2951, only 14 pips below the high of the day, at 1.2965, in a display of strength by pound bulls. They were able to maintain not just Friday's advance but that of the whole week, leaving their positions open over the weekend. Of course, quite a bit can happen before the coming week's trading begins, or be said by politicians, making their bullish actions a true sign of confidence in the pound.
This also marked the eighth trading session since the pound completed a six-month bottom – as it crosses over the 200dman for the first time since the Brexit vote, without batting an eye - when May reasserted leadership by announcing snap elections, sending the pound up 2.20% on April 18.
The JPY has been the loser among the headline currencies; it lost 2.20% to the dollar, but that makes sense during a risk-on week. The reversal formation in US bonds suggests risk-on may be ending.
From a technical standpoint, the USD/JPY’s rise is a correction within a downtrend this year. Once the pair reached the high of 111.78 on Wednesday (which formed a bearish Gravestone Doji) it stalled, which meant it has also been unable to overcome its previous peak on March 31, a strong indication the rally since April 15 has nothing to hold on to.
Fed Decision, NFP, Earnings, French Debate
Summary
- Like other recent central bank decisions, the Fed is expected to keep its benchmark at its current level, after a 25bp hike in March
- Economists anticipate this coming Friday's nonfarm payroll release will recover after the disappointing March release, pointing to a healthy US labor market
- The two remaining French candidates, centrist Emmanuel Macron and far-right stalwart Marine Le Pen confront each other in a televised debate on Wednesday. Expect the euro to fluctuate violently according to who seems to be winning in the moment. Recall how the US dollar reacted during the US election debates.
- US companies reporting earnings this coming week include: Apple (NASDAQ:AAPL) which reports on Tuesday, after the close; Time Warner (Time Warner Inc (NYSE:TWX)) reports on Wednesday, before the bell; Facebook (NASDAQ:FB) and Tesla (NASDAQ:TSLA) (NYSE:TWX) report on Wednesday, after the close.
Monday, May 1
- The US Commerce Department reports personal spending. Economists project an increase since March, as they expect improvement in demand at the end of a disappointing quarter.
- ISM Manufacturing: Economists anticipate a report that US manufacturing growth slowed in April, after doing so during March as well. That's after rapidly advancing to a 2.5 year-high in February. Could equities follow?
- US Treasury Secretary Steven Mnuchin will be interviewed by Fox at the Milken Institute Conference. Note: Mnuchin has been partially responsible for the dollar’s decline this year, as he repeatedly expressed that too strong a dollar may hurt short-term economic growth in the US.
Tuesday, May 2
- The Reserve Bank of Australia announces its monetary policy decision. Its benchmark interest rate has remained unchanged since September.
- Russian President Vladimir Putin and German Chancellor Angela Merkel meet for talks on economic sanctions. This meeting has the potential to create wild fluctuations in the Russian ruble.
- The FOMC begins its two-day monetary policy meeting
- The BOJ releases the minutes of its March policy meeting
- Economy: US auto sales
- Energy: American Petroleum Institute oil inventory weekly report
Wednesday, May 3
- The FOMC is expected to keep the Federal Funds rate unchanged within a target range of 0.75-1.00 percent.
- Economy: ADP employment for April, Markit Services PMI (April final) and ISM Non-Manufacturing Index for April
- Energy: US Energy Information Administration weekly crude oil inventory report
Thursday, May 4
- UK local elections. Results may indicate the outcome of the general elections in five weeks.
- ECB President Mario Draghi speaks at event in Lausanne, Switzerland. The euro is very sensitive to anything this man says.
- Bank of Canada Governor Stephen Poloz speaks at CanCham Mexico and Club de industrials in Mexico City. It would be interested to hear what these two US NAFTA partners have to say, after Trump slapped Canada with tariffs and is persisting with his plans to build a Mexican wall.
Friday, May 5
- Economists project US nonfarm payroll employment increased by 190,000 in April, backed by improving wages. The unemployment rate is expected to increase to 4.6 percent, after falling to a decade low of 4.5% in March.
- Earnings: Warren Buffett’s Berkshire Hathaway ((NYSE:BRKa); (NYSE:BRKb)) reports results.
- Commodities: Commodity Futures Trading Commission report on futures and options weekly positions, Baker Hughes US weekly rig count.
Saturday, May 6
- Berkshire Hathaway annual shareholder meeting.