Key Events
Yesterday, in what some may see as an auspicious sign for markets, on the first official trading day of 2018 all four major US indices rallied to start the new year. Three—the S&P 500, NASDAQ Composite and Russell 2000—even posted fresh records.
On Friday, the final trading day of 2017, stocks were sold off and gains made during at least 8 previous sessions were erased. Yesterday, however, investors replenished lost value, then continued to break new ground, suggesting Friday’s selloff was not the first move in a trend reversal, but rather, nothing more sinister than profit-taking after a spectacular year, the best since 2013.
While the strong opening session of 2018 trade may suggest that this year will bring more of the same, market internals tell a different story. Since September, fewer and fewer stocks have been participating in the headline-grabbing rallies, forming a series of negative divergences, a possible prelude to a full market correction.
The S&P 500 gained 0.83 percent, making both an all-time high and a record close. The Dow climbed 0.43 percent, the 'laggard' among the US indices and the only one to not post a new record. The NASDAQ outperformed major averages, jumping 1.51 percent, posting both a record high and close, finishing above 7,000 for the first time, while the NASDAQ 100 climbed 1.8 percent, the biggest gain for the index since October 27. Finally, the Russell 2000 advanced 1.07 percent, hitting dual records, both high and close.
On a more granular level, the Energy sector led the rally, up 1.63 percent, followed closely by Consumer Discretionary shares, which were boosted 1.49 percent, Materials, +1.42 percent and Technology, which gained 1.24 percent. The weak dollar helped lift energy and material shares, which are priced in USD. The currency's weakness also affected multinational technology companies, whose products become cheaper on a softer greenback.
Among defensive stocks, Utilities led the decline, falling 0.93 percent. Healthcare was the only defensive sector that advanced, by a whopping 1.12 percent. Some individual healthcare stocks fared even better: Abbott (NYSE:ABT) shares advanced 3 percent after JP Morgan upgraded them to overweight and raised their target price.
The only growth sector that lagged was Financials, which eked out a 0.04 advance. This essentially extends Friday’s 0.71 decline of the sector, which led the pre-weekend selloff.
As we mentioned here, albeit in a different context related to trading gold, investors seem to be betting against continued US growth and therefore rising rates, even as Fed policy makers have forecast another three hikes during the coming year.
Global Financial Affairs
Of interest given the recent slide in US financial sector shares, while financials traded on most Asian and European markets advanced this morning amid overall European market declines, Canada’s financial sector shares fell 0.13 percent—suggesting they may be more aligned with the US.
Energy shares were buoyed by the price of oil, which closed for the second time in three days above $60, trading near its two-year high and enjoying the strongest new year opening for the commodity since 2014.
As of this writing, oil has been maintaining yesterday's gains, as it continues to sit above $60 for a third day. This can be credited to five fundamental causes:
- Saudi Arabia’s seriousness about production cuts and the need to maintain price stability ahead of Saudi Aramco’s IPO.
- The sagging dollar which makes the cost of oil cheaper.
- Unchanged rig counts which remained at 747 for a second week, after US drillers paused production.
- Unlike in Libya, where social unrest has affected the country's export capacity, the current, ongoing political protests in Iran—OPEC’s third largest producer—have not had an effect on the country’s exports, nor are they likely to impact production. As a rule, political unrest in oil producing countries effects sentiment. However, some speculate that should the protests escalate and become more violent, additional oil market risk could ensue. Worth paying attention to though, is the continued tension with Saudi Arabia which could escalate, thereby increasing the potential for actual supply interruption. However, with each country's economy—and ruling regime—completely dependent on oil exports, the conflict is unlikely to escalate beyond the current posturing.
- US stockpiles extended drawdowns for a seventh week and nationwide crude supplies are forecast to decline by 5 million barrels.
This morning, investors in Asia followed their US counterparts, spurring major indices including the Shanghai Composite and KOSPI higher. Hong Kong's Hang Seng closed higher by 0.2% after earlier having hit a new intraday high.
As with US stocks, which were buoyed by a weak dollar, softer regional currencies—led by South Korea’s won—pushed local stocks higher. Japanese markets remain closed for holidays.
European investors followed Asian bullishness as the region's MiFID II investment regulations finally take effect. Investors in Europe are expected to trade more cautiously today, as the biggest shake-up to European regulation in a decade begins. The MiFID II regulations are one of the most seismic regulatory shifts in history, effecting everything from investment research to trade execution.
The Stoxx Europe 600 climbed this morning, led by retailers and healthcare stocks.
The euro fell for the first time in six days. Both European bonds and US Treasuries steadied.
Similarly, gold retreated from a near four-month high, in line with a return-move following an upside breakout. The recent rally in the precious metal offers some gold rush trading opportunities.
Bitcoin is moving higher right now, after the cryptocurrency fell from $15,428, pushed back below the $15,000 key level. A close within the current price level would form a bearish shooting star.
Up Ahead
- US Construction Spending and ISM Manufacturing data are due later today.
- FOMC December Meeting Minutes are also expected.
Market Moves
Stocks
- The Stoxx Europe 600 gained 0.4 percent as of 8:13 London time (3:13 EST) to the highest in a week.
- The U.K.’s FTSE 100 rose less than 0.05 percent.
- Germany’s DAX increased 0.4 percent.
- The MSCI Asia Pacific Index increased 0.2 percent to the highest on record.
- The MSCI Emerging Markets Index jumped 0.4 percent to the highest in almost seven years.
- S&P 500 Futures climbed 0.1 percent to the highest on record.
Currencies
- The Dollar Index increased 0.1 percent.
- The euro declined 0.2 percent.
- The British pound rose less than 0.05 percent to $1.3593, the strongest in almost 16 weeks.
- The Japanese yen decreased less than 0.05 percent to 112.34 per dollar.
Bonds
- The yield on 10-year Treasuries rose less than one basis point to 2.47 percent, the highest in more than a week.
- Germany’s 10-year yield dipped one basis point to 0.46 percent.
- Britain’s 10-year yield decreased one basis point to 1.279 percent.
Commodities
- West Texas Intermediate crude rose less than 0.05 percent to $60.38 a barrel.
- Gold decreased 0.3 percent to $1,314.18 an ounce.
- Copper dipped 0.6 percent to $3.26 a pound, the lowest in more than a week.