Pinchas Cohen
The Week That Was: Animal Spirits Reawaken
Sentiment supports market records
Global equities advanced last week as signs of economic growth kept optimism afloat. US equities were especially buoyed on renewed faith in the Trump administration’s ability to finally pass tax reform. Friday’s closing registered a fresh record for all three major US indexes, the Dow and NASDAQ as well as the S&P 500 which set its 48th record of the year.
As investors rushed to transfer their funds out of safe Treasuries into the hottest growth in stocks since the 2008 financial crisis, yields rebounded. The benchmark 10-year Treasury yield surged a walloping 10 basis points to 2.38 percent, testing Treasury bulls, who’ve kept yields below 2.4 percent since May.
Investor sentiment is very publicly on the rise: 60 percent of newsletter writers are bullish, a jump of 13 percent since just September. Of interest, only 40 percent of retail investors feel bullish about stocks over the next six months, according to the American Association of Individual Investors.
The fact that professionals are more bullish than retail investors is actually a bullish sign in and of itself, as it is usually the non-professional participating public that become gung-ho as markets near a top.
Rate Hike and Tax Reform Ahead
The Beige Book report, released ahead of the FOMC rate decisions reveals a Fed surprised by the US economy’s continued modest-to-moderate growth rate, despite a disruptive series of hurricanes. The Fed’s main takeaways are a tight labor market, continued employment growth and modest inflationary pressure. Based on Fedspeak since July, this report is highly suggestive of a rate increase in December.
After markets had all but given up on arguably the most pro-business portion of the Trump agenda, investors are allowing themselves to be hopeful, again. This after the Senate finally managed to pass the 2018 fiscal budget, allowing the Trump administration to return to what it really wants to deal with and what markets appear to want as well. The issue dreaded by Democrats and prized by Republicans: tax reform and massive corporate tax cuts.
NAFTA Impasse; Brexit Complications
On their fourth round of talks, the negotiating teams from the US, Canada and Mexico are nowhere near their schedule of concluding North American Free Trade Agreement (NAFTA) negotiations by the end of 2018, well in advance of Mexico’s July presidential election and US mid-term congressional elections next fall. The talks are taking a month-long break. This open ended impasse promises significant volatility for the three affected currencies.
German Chancellor Angela Merkel said on Friday that she hopes Brexit negotiations would progress to future trade matters in December. This, after the European Council deferred a decision at its meeting this past week on whether negotiators had made sufficient progress on current issues to be able to move on to the topic of their future relationship with the UK.
Secession Standoff Ratchets Up; Euro Could Head Down
As the deepest constitutional crisis since the restoration of democracy in 1977 continues to play out in Spain, Prime Minister Mariano Rajoy said on Saturday that he was stripping Catalonia of its autonomy and imposing direct rule. After unifying with socialist parties in the opposition, it's all but certain the Senate will approve the proposal and direct rule will be imposed next weekend.
In response, Catalan president Carles Puigdemont threatened to issue a unilateral declaration of independence, if the government invoked article 155 to suspend Catalan autonomy. Spain’s Attorney General Jose Manuel Maza threatened that, should that occur, Puigdemont may be charged with “rebellion,” which carries a maximum 30 year sentence.
The euro has already lost 2.5 percent of its value since the disappointing German elections at the end of September, followed by this month's Spanish crisis. Should the standoff persist, the euro may very well complete an H&S top pattern with another minimum 3.5 percent decline implication.
Week Ahead: Can Manufacturing Rescue The Euro?
All times listed are EDT
Monday
8:30: US – Chicago Fed National Activity Index (September): expected to rise to -0.1 from -0.3.
We have been waiting on the current Dollar Index H&S development since September. Should the 94.50 level be breached, we may have a bottom.
10:00: Eurozone – Consumer Confidence (October, flash): expected to rise to -1 from -1.2.
Earnings Reports
- Halliburton (NYSE:HAL) (premarket): Consensus EPS of $0.38 vs $0.01 YoY
- T-Mobile US Inc (OTC:DTEGY) (after market): Consensus EPS of $0.44 vs $0.27 YoY
After peaking in May, the stock has been unable to join the market trend and hit any records. Should it break the $59.00 support since February 14, it would signal a much steeper fall.
Tuesday
3:00: France – Manufacturing PMI (October, flash): expected to decline slightly, to 55.9 from 56.2 previously.
3:30: Germany – Manufacturing PMI (October): expected to slightly decline to 60.0 from 60.6.
As the two biggest economies in the European Union (excluding the departing UK) the two releases may have a strong impact on the common currency – which has been buffeted by geopolitics since September (as noted above).
In mirror image of the DXY, the most traded pair on the planet is forming an H&S top, pending the neckline penetration. This is occurring not as a result of economics but because of politics. The euro needs an upside surprise in manufacturing to beat a top.
Earnings Reports
- Caterpillar (NYSE:CAT) (premarket): consensus ES of $1.22 vs $0.85 YoY
- General Motors (NYSE:GM) (premarket): consensus EPS of $1.09 vs $1.72 YoY
- McDonald’s (NYSE:MCD) (premarket): consensus EPS of $1.74 vs $1.62 YoY
- AT&T (NYSE:T) (after market): consensus EPS of $0.75 vs $0.74 YoY
Despite it essentially being a tech company, the sector which has led most of the current market rallies into multiple record territory, AT&T's stock is trading within a falling channel since July 2016. Since June of this year, it had three times attempted to climb back to the channel top, but failed each time. It is now retesting the channel bottom. Should the 34.50 level fail to support the price, it would be a signal of sharper declines ahead.
9:45: US – Manufacturing, Services PMI (October, flash): manufacturing expected to rise to 53.6 from 53.1, while services to tick higher 55.6 from 55.3.
Wednesday
4:00: Germany – IFO Business Climate (October): business climate index expected to remain flat at 115.2.
While Germany's DAX registered a fresh record this past Wednesday, it was in the form of a bearish Shooting Star, complemented by a Bearish Engulfing Pattern. A fall, back below the former June 20 peak may signal a return toward the 12,500 area.
4:30: UK – GDP (Q3, preliminary): growth expected to be 0.3%, in line with the previous quarter, and 1.4% from 1.5% a year earlier.
8:30: US – Durable Goods Orders (September): expected to rise 0.9% MoM from 1.7%, while Core Durable Goods Orders, which excludes transportation, expected to move to 0.5% from 0.2% .
10:00: Canada – BoC Decision: rate expected to remain at 1.00%.
10:00: US – New Home Sales (September): sales forecast to fall 0.9% MoM, from a 3.4% drop a month earlier.
10:30: US – EIA Crude Inventories (w/e 20 October): previous week saw a fall of 5.7 million barrels.
While the price of crude oil has been trading within a rising channel, it has been experiencing heavy selling at the $52 level, suggesting a potential retest of the channel bottom and the psychological round-$50 level.
Earnings Reports
Boeing (NYSE:BA) (premarket): consensus EPS $2.65 vs $3.51 YoY
Coca-Cola (NYSE:KO) (premarket): consensus EPS $0.49 vs $0.49 YoY - Flat
The company’s inability to make new highs, against the backdrop of a market which just can’t stop advancing, doesn’t bode well for the near- to mid-term future of the stock’s price. Friday’s sharp decline, while the market registered another one of its many records, may suggest a retest of the bottom of the range, at the mid-40’s. A break below that may signal a sharper drop ahead. Sometimes good companies don't necessarily make good stocks.
Visa (NYSE:V) (premarket): consensus EPS $0.86 vs $0.78 YoY
Thursday
2:00: Germany – GfK Consumer Climate (November): expected to hold at 10.8.
7:45: Eurozone – ECB Interest Rate Decision (1.30 pm press conference): no change in policy expected, but watch for commentary surrounding any plans to taper the QE program next year.
8:30: US – Initial Jobless Claims (w/e 21 October): claims forecast to rise to 236K from 222K.
10:00: US – Pending Home Sales (September): sales expected to fall 1.9% YoY, from a 2.6% drop in August.
19:30: Japan – CPI (September): prices forecast to rise 0.8% from 0.7% in August. National CPI expected to remain flat at 0.7%.
Earnings Reports
- Alphabet (NASDAQ:GOOGL) (after market): EPS $8.32
The stock’s price has fallen even though the market that continues to push higher, including a fresh record on Friday. Moreover, the price has been unable to meaningfully resume the uptrend since June 5. All this suggests a potential retest of the $950 level.
- Amazon (NASDAQ:AMZN) (after market): EPS $-0.02 vs $0.52 YoY
Yet another example of a stock—and a tech stock to boot—which has fallen aside even as the market advances. A break below $940 may complete an H&S top.
- United Parcel Service (NYSE:UPS) (after market): EPS $1.44 vs $1.44 YoY - flat
Friday
8:30: US – GDP (Q3, preliminary): QoQ rate expected to be 2.6% from 3.1%.
10:00: US – Michigan Consumer Sentiment (October, final): expected to be 96, from 95.1.
Earnings Reports
- Exxon Mobil (NYSE:XOM) (premarket): EPS $0.85 vs $0.63 YoY
While the price of the stock has made a nice comeback from the $76 level, it has stopped on the downtrend line since March. Should it fall below $82, it may suggest another leg lower in the decline, while a push above $84 could suggest a bottom has been formed.