- Stocks finish lower for August, on increased volatility
- Macro headwinds are lining up for additional volatility—and potential losses—in September
- Dollar jumps to highest point since mid-2017
A perfect storm of negative macro headwinds are setting up for September's first week of trade, on the heels of a volatile and disappointing August, with U.S. stocks finishing lower on the month for the first time since May.
Among the events currently weighing on markets: as of Sept.1, new U.S. tariffs on over $110 billion of goods will be hitting China; the EU's chief negotiator Michael Barnier said he's “not optimistic” about avoiding a No-Deal Brexit; and anti-government protests in Hong Kong are becoming more violent—clashes Saturday were the worst in three months. All things considered, we expect another rocky week of trade and perhaps another month in which we'll see stock market declines.
Old Fashioned Data Won't Offset Trade Uncertainty
After a raucous session on Friday in which ultimately little changed, U.S. indices finished mixed. The Dow and S&P gained; the NASDAQ and Russell 2000 slipped.
The S&P 500 added 0.06%, with losses from Consumer Discretionary shares, -0.6%, offsetting Materials, +0.67%. For the week, the SPX jumped 2.79% with every sector closing well within positive territory: Utilities, +1.79%, lagged while Industrials, +3.61% led.
On a monthly basis, however, the benchmark dropped 2.88%; Energy plummeted, -8.62%, overshadowing gains by Utilities, +4.6%, and Real Estate, +4.39%.
From a technical perspective, even though the S&P 500 ended the week significantly higher, it failed to overcome the August high or the broken uptrend line since the December bottom, increasing the probability of a decline from the top of a potential continuation pattern. In the longer term, the SPX has been developing a Broadening Pattern, whose implications are a savage bear market.
Investors who hoped old fashoned economic data would offset any trade negotiation confusion were sideswiped by Friday's Consumer Sentiment release, which plunged to 89.8 for August, its lowest reading since October 2016. Though personal spending, which makes 65% of the total U.S. GDP reading, accelerated in June, beating estimates, and real personal consumption remained solid, core PCE, the Fed’s preferred measure of underlying inflation, continues to fall short.
With decidedly mixed data out of the U.S. and the roiling trade dispute appearing to be nowhere near a resolution, how long can the U.S. economy defy a global slowdown? There are no easy answers, of course, but it would behoove investors to try and ascertain whether these apparent cracks are just aberrant noise or actual early signs of a recession.
The dollar surged as the euro dropped to a two-year low. The USD hit its highest point since May 2017, after the euro extended a five-day slide, falling below $1.10, its lowest over the same period. Traders closed out hedges at month’s end, pressuring the single currency after and data showed inflation remained stubbornly low.
Technically, the 50 WMA for the EUR/USD crossed below the 200 WMA, triggering a Death Cross, for the first time since December 2014. At that time the euro preceded to lose 15% in the next three months.
The pound slipped as lawmakers lost a bid to block Prime Minister Boris Johnson’s plan to suspend parliament.
The 10-year yield had the lowest weekly close since July 2016. German bunds reversed early losses while Italian bonds declined as coalition talks faltered. Argentina’s sovereign bonds extended declines after S&P GlobaI Ratings cut the country’s foreign- and local-currency credit ratings.
Gold fell for the third straight day, ending a four-week winning streak, the longest upmove for the yellow metal since October 2018.
West Texas crude fell the most in two weeks, after nearing the downtrend line since Apr. 23, falling back below the 200 DMA. On the other hand, the price bounced off the 200 WMA.
Week Ahead
All times listed are EDT
Sunday
21:45: China – Caixin Manufacturing PMI: expected to contract further, to 49.8 from 49.9.
Monday
4:30: UK – Manufacturing PMI: seen to climb to 48.4 in August, from 48.0 previously, but still within contraction territory.
21:30: Australia – Retail Sales: likely to have fallen to 0.2% from 0.4% in July.
Tuesday
00:30 Australia – RBA Interest Rate Decision: forecast to remain steady at 1.00%.
4:30: UK – Construction PMI: probably rose to 45.5 from 45.3, still in negative area.
10:00: U.S. – ISM Manufacturing PMI: expected to have declined to 51.0 from 51.2, still in expansion mode.
21:30: Australia – GDP: forecast to have climbed to 0.5% from 0.4% in the second quarter.
Wednesday
4:30: UK – Services PMI: seen to have dropped to 5.1 from 51.4, remaining within expansion territory.
10:00: Canada – BoC Interest Rate Decision: forecast to remain at 1.75%.
Thursday
8:15: U.S. – ADP Nonfarm Employment Change: expected to drop to 148K from 156K.
10:00: U.S. - ISM Non-Manufacturing PMI: seen to rise to 53.9 in August from 53.7 in July.
Friday
6:30: Russia – Interest Rate Decision: forecast to be cut 25 bps to 7.00%.
8:30: U.S. – Nonfarm Payrolls: seen to drop to 159K from 164K.
8:30: U.S. – Unemployment Rate: expected to remain at 3.7%.
8:30: Canada – Employment Change: forecast to surge to 15.0K from -24.2K
10:00: Canada – Ivey PMI: Last read was 54.2