by Pinchas Cohen
The Week That Was
The US labor market continues to be a bright spot for the US economy and Friday morning’s nonfarm payrolls release of 220,000 beat estimates, with a revised April up to 200K and a trailing 3-month average at 180K, near the 2016 average of 187K – causing equity markets to rise. However, the unemployment rate ticked up with the participation rate.
So, in essence, people who had not been looking rejoined the effort, which was enough to take up the extra jobs and offset the tightening of wages, keeping wages flat at 2.5 percent growth rate YoY, lower than the Fed expects. That lack of wage pressure is becoming increasingly difficult for the Fed to deal with, because their premise for raising rates for the second half of the year is dependent on wage pressure and heating up the economy, which would put inflationary pressure into the market.
However, inflation has been consistently disappointing in the US. While wage pressure is good, it’s not heating up, hence not pushing up inflation. The basic problem with US equities is that they’re overvalued. The US economy is solid, but it’s not growing. The lack of wage growth will put pressure on Fed regarding both descaling the balance sheet and raising interest rates in the second half.
Bailout of Italian Banks
In the past, when governments bailed out banks, markets sold off. This time, when the Italian government saved banks Banca Popolare di Vicenze and Veneto Banca, markets remained surprisingly calm. Markets were happy because the Italian government didn’t do it single-handedly, but rather with the blessing of the ECB and the support of Brussels. So, everyone was on the same page.
The key issue with Italian debt is that it's owned disproportionately by retail investors. So, if every investor takes a major hit in terms of losses , it puts political pressure on the Italian government. In this instance, the government enforced a haircut upon institutional investors, who should have known better, but at the same time the government protected retail investors.
So, this umbrella approach to support by the Italian government, the ECB and Brussels gives rise to the hope that maybe it’s the start of a recapitalization of the Italian banking system, which has lagged most of Europe in its historical recovery, probably because of the undercapitalization of Italian banks. This instance is a blueprint with which to address that in a manner that’s acceptable to all parties and productive for the economy. Which may be exactly why markets liked it.
Italy is the third largest economy in the EU. Thus it's important for it grow. They will have to call an election next year. Unfortunately, the euro is not popular in Italy—as proven by the problems Mateo Renzi's failed referendum faced. He may have been a popular president, but he backed the EU and the referendum's failure was a strong anti-EU message. Which indicates that there's still strong political risk to the euro next year.
The Week Ahead
Q2 Earnings season kicks off
Energy and Multinationals to lead growth
Investors are expecting a good quarter. Consensus has earnings growing by 6 to 8 percent. A lot of the positive momentum in that will come from energy.
Even though oil prices had recovered in the second quarter of last year, earnings were still very negative. This quarter's YoY growth rate is expected to be high.
The rest of the market’s growth should be more modest, but multinational companies should be doing particularly well in a global recovery. PMI for manufacturing in Europe hit a 74-month high last week. The weakening dollar should also help the multinationals.
Trump heads to France for Bastille Day celebration
Newly elected French President Emmanuel Macron invited US President Donald Trump for his first visit to France to mark the 100th anniversary of America entering the First World War as well as the one-year anniversary of the terror attack in Nice, where 86 people were killed and 434 injured. The visit is meant to underscore cooperation between the two countries in combating Islamic terror, which can boost political support for Trump.
Despite recent anti American sentiment, there is still quite a bit of respect for the US saving France (and the rest of Allied Europe) during both world wars. Trump can use that sentiment to boost his approval ratings, both on the continent and back home. Ironically it can help the US dollar, though that may not be something the US President favors.
Sunday
All times EDT
21:30: China - CPI (June): expected to be 1.5% YoY and 0.1% MoM, from 1.5% and -0.1% respectively. Markets to watch: Shanghai Composite and other China indices, CNY crosses.
Technical Perspective: USDCNY ended its uptrend since January 2014, when the pair crossed below its uptrend line in May. it is now trading at the bottom of a falling channel, which means it may correct to the top, toward 6.84, before it retests the 6.76 low.
Monday
7:00: Germany - Trade Balance (May): The previous release showed a surplus of €18.1 billion; it's expected to be higher in May. Markets to watch: eurozone indices including the DAX, EUR crosses.
Technical Perspective: The euro has reached its near-two-year high resistance. A disappointing trade figure would help the resistance push the price of the single currency back down, whereas a surprising, positive figure could help complete a massive triple bottom breakout with 1.24 target implications.
21:30: Australia - NAB Business Confidence (June): Forecast to fall to 5 from last month's 7. Market to watch: AUD crosses.
Technical Perspective: The AUDUSD confirmed a resistance line since April 2016, when it closed lower after reaching the line week before last. A disappointing figure may send the pair back up to retest that resistance line and possibly achieve an upside breakout. A disappointing figure may send it to retest 0.73.
Tuesday
20:30: Australia - Westpac Consumer Confidence (July): The previous reading was 96. Market to watch: AUD crosses.
EARNINGS
Pepsico (NYSE:PEP) 2Q results are scheduled to be released before the market opens. The company has been adapting to changing consumer taste, catering more to health conscious customers. In the first quarter, it beat expectations, thanks to sales of so-called “guilt free snacks”, considered healthier options, which include sugar free soda, low calorie crackers and baked chips. The company also introduced healthier drinks such as probiotic versions of its Tropicana juices.
Pepsi has been outperforming its rival Coca Cola (NYSE:KO). The big picture growth area for the industry is the shift towards healthier foods demanded by consumers, the biggest reason for the multi-year decline of soda sales. That’s why they have tried to steer away from their core soda products, or at least minimize them, literally, with smaller packaging. Shares of Pepsico hit a record high of $118.24 this past quarter. The company is expected to report EPS of $1.40 on $15.64 billion in revenue.
Technical Perspective: The stock is struggling on the “neckline,” the reversal line, which marks the completion of a small double top. Should earnings disappoint, we can look at a target price of $113 per share, while good earnings will retest the $118 area and investors can then look toward $121.50.
Wednesday
4:30: UK - Employment Data: June's Claimant Count is forecast to be 12K from 7.3K in May, while the May unemployment rate rises to 4.7% from 4.6%, and May's Average Earnings including Bonus) remains at 2.1%, in line with last month. Market to watch: GBP crosses.
Technical Perspective: After confirming the uptrend line since the October flash crash in Asian trading, the GBP/USD pair failed so far to overcome the previous May peak. A good employment number will give the pair a second go at the 1.3000 level and from there upward to higher prices, whereas a disappointing number will retest the uptrend line, perhaps falling as low as 1.2700.
10:00: Bank of Canada (BoC) - Rate Decision: No change expected on rates. Market to watch: CAD crosses.
Technical Perspective: The USDCAD had been up trending since May 2015. The pair crossed below its uptrend line the week before last and extended its decline during the following week as well, falling lower than its previous trough, which now puts it within a downtrend. The impetus for moves, therefore, will be with a downside bias. However, pullbacks often occur that could retest the broken trendline.
10:30: US - EIA Crude Inventories (w/e 7 July): After last week’s 6.3 million barrel drop, stockpiles are expected to fall by 190,000 barrels. Markets to watch: Brent, WTI.
Technical Perspective: Despite its strongest rally of the year last week, oil had entered a bear market and is now trending within a falling channel. It fell back below $45, a key level, and is now more likely to retest the $42 level, rather than rise.
22:00: China - (Tentative) Trade Balance (June): Surplus expected to remain at $40 billion. Markets to watch: China indices, CNY crosses.
Thursday
5:00: US - IEA Oil Market Report: Watch for comments on the overall surplus/deficit of the oil market. Markets to watch: Brent, WTI.
8:30: US - Initial Jobless Claims (w/e 8 July), PPI (June): 246K jobless claims expected, down from 248K; PPI is expected to remains at 0% MoM, core PPI to rise to 0.2% from 0.3% MoM. Markets to watch: Dow, S&P 500, NASDAQ, other US indices; USD crosses.
Technical Perspective: The Dollar Index is trading within a downtrend. That means it wants to trend down. So far, good news has failed to support it, but bad news has always pushed it lower, which is its bias.
Friday
8:30: US - CPI, Retail Sales (June): CPI is forecast to rise 0.1% MoM and 1.8% YoY, from -0.1% MoM and 1.8% YoY. Core CPI forecast to rise 0.2% MoM and 1.7% YoY, from 0.1% and 1.7% respectively. Retail sales expected to rise 0.2% MoM from a 0.3% fall a month earlier. Markets to watch: US indices, USD crosses.
10:00: US - Michigan Consumer Confidence (July, preliminary): Expected to rise to 95.8 from 95.1. Markets to watch: US indices, USD crosses.
EARNINGS
JPMorgan (NYSE:JPM) releases 2Q earnings before the market opens. Investors are optimistic, with the rising outlook for interest rates and regulations on the decline. Should the rotation out of tech into financials continue, JPMorgan will get a serious boost.
However, analysts are lowering their expectations mainly because of a big drop in trading volatility in the first quarter. While the nation’s biggest bank by assets generated $5.8 billion in trading-related income in the last three months of 2016, trading volume in the first quarter of 2017 came to a relative halt. Consensus expectations are for and EPS of 1.6 on revenue of $24.54B
Technical Perspective: As opposed to the recent movement of tech stocks, JPMorgan shares didn’t enter a downtrend. Rather, they're on the edge of a knife, right at the resistance of the previous February peak. This needs to be overcome if the uptrend is to continue. If it does, the stock price, which now stands at $93.85 as of Friday's close, would have a target of $98. However, if traders are disappointed with Friday's earnings release, the price may retest the $82.50 low.
Wells Fargo (NYSE:WFC) is Deutsche Bank’s favorite non-macro dependent stock. Analysts for Deutsche Bank (DE:DBKGn) expect only a 5-percent boost in EPS for the second quarter – again, because of low trading income. For the same reason, Deutsche believes expectations will be missed. They believe big bank earnings will decline 6 percent YoY, but they do expect the large regional banks to do better, with a 9 percent earnings per share growth. The bank reports before markets open; the consensus expectation for Wells Fargo is for EPS to come in at $1.01 on $22.46 billion in revenue.
Technical Perspective: Like JPMorgan, Wells Fargo shares didn’t enter a downtrend. However, its demand-supply structure is weaker in that it didn’t even reach the February peak. As well, last week it produced a weekly bearish Shooting Star. It now looks as if it’s forming a H&S reversal.
However, that would be determined only upon the breaking of the neckline, which is difficult to judge at this angle, because the pattern is extremely sloped. It can occur around $49, but this bearish perspective may be moot, as a better-than-expected report can scale it higher to challenge February’s $60 peak.