by Pinchas Cohen
The Week That Was
Uncertainty is the Name of the Game
US Fiscal Policy
Last week was dominated by politics, from the attempt to recuperate from the North Korea tensions, Charlottesville, and terror in Europe.
The S&P 500 extended a second-week of losses at 2.07-percent, its worst two-day fall since February 2016. It appears that even after seven months of no cohesive agenda, investors are still holding onto to the notion of reflation under President Donald Trump. The market narrative attributes most of last week’s losses to a reduced likelihood of Trump executing his agenda after receiving backlash to his Charlottesville moral equivalency statement.
Monetary Policy
The FOMC minutes from the July meeting revealed key topics among the policy makers: is the inflation impotency temporary or a long-term problem, and what are the implications for the interest rate path? The end result is that the Fed raised rates twice this year, with a possible third on the way. That doesn’t change the economic trajectory.
Investors are keenly aware that any uncertainty expressed by the Fed will compound political hesitation.
Broad-Base Expansion In The EU, But Monetary Policy Uncertain
While economic data has been strengthening in Europe, confirming repeated reports of the non-US market’s advantages—economically, politically and from a valuation perspective—ambiguity across the EU is creating significant potential for market volatility.
The European growth rate is catching up with the US at almost 2.5 percent. Germany was not the only country pushing Europe’s growth; rather, it was joined by the Netherlands and even Italy—after recovering from the verge of a banking crisis. This broad-base expansion provides a more reliable trajectory of further expansion for the Eurozone.
The downside to the region’s biggest expansion since the Great Recession is the rising euro. First, it makes exports less competitive, which may hurt European companies. Second, the ECB minutes revealed the European policymakers are wrestling with the same question, how would the rising EUR impact the ECB path of interest rate hikes?
The Week Ahead
All Times in EDT
Monday
8:30: US - Chicago Fed National Activity Index (July): expected to remain unchanged at 0.1. Markets to watch: S&P 500, Dow Jones Industrial Average, NASDAQ, USD crosses.
Last week’s political turmoil further distances Trump’s business agenda, and the S&P 500 closed beneath the 50 dma (green) and its uptrend line since December 20, 2016.The 100 dma (blue), currently at 2417.1254, is the bulls’ next line of defense. Should the price close beneath that, its trajectory would be the next uptrend line, since February 11, 2016, aiming at 2400.00. Note how the 200 dma (red) follows the angle of the longer-term uptrend line, signifying its meaningfulness.
Tuesday
5:00: Germany - ZEW Index (August): economic sentiment index forecast to fall to 17.1 from 17.5. Markets to watch: DAX, STOXX 600, Euro STOXX 50, EUR crosses.
The DAX has been trading in a short-term falling trend since June 20. On August 11, it bounced off the uptrend line since June 24, 2016, the day the Brexit vote results were revealed. The significance of this uptrend line is confirmed by the 200 dma (red) that is retracing it.
However, although the price found support it stopped short of overcoming the short-term downtrend line and has since turned back down. A further bearish indication was the dead-cross execution, when the 50 dma (green) crossed below the 100 dma (blue) on Friday.
The price is fluctuating, and is looking for an opening for the price to move into; either the short-term downtrend line – with a break above 12400.00 - or longer-term uptrend line – with a break below 11800.00.
EARNINGS
Salesforce (NYSE:CRM) is scheduled to report its second-quarter earnings results after the bell. While the stock outperformed the S&P 500 this year, 32 percent versus the 8 percent, it has been unable to overcome the $91 level since May.
Bulls would point out that on Wednesday the price registered a fresh record $92.24 close; bears would argue that the Bearish Engulfing pattern on the following day – by the resistance since May – renders it moot or even shows the bulls are in a weaker position.
Between November 2015 and March 2017 the price has been trading within a massive ascending triangle. In the beginning of April that price provided an upside breakout, the implications of which provided a $30 upside move to$113. The price pressure since May would be part of a return move, which can return toward the low $80’s.
Wednesday
8:30: Japan - Nikkei Manufacturing PMI (August, flash): expected to fall to 52 from 52.1. Markets to watch: Nikkei, TOPIX, JPY crosses
3:00 – 4:00: French, German, Eurozone - manufacturing & services PMI (August, flash): these are expected to ease off this month. Markets to watch: STOXX 600, Euro STOXX 50, CAC 40, EUR crosses
9:45: US - manufacturing & services PMI (August, flash): manufacturing expected to remain at 53.3 while services fall to 52.8 from 54.7. Markets to watch: S&P 500, Dow Jones Industrial Average, NASDAQ, USD crosses
10:00: Eurozone - consumer confidence (August, flash): forecast to rise to -1.4 from -1.7. Market to watch: EUR crosses
10:00: US - New Home Sales (July): previous reading 0.8% increase MoM. Market to watch: USD crosses
10:30: – US EIA crude inventories (w/e/ 18 August): expected to see stockpiles fall by 760,000 barrels, from 8.9 million a week earlier. Markets to watch: Brent, WTI, SPDR S&P Oil & Gas Exploration & Production (NYSE:XOP)
Whole Foods Market (NASDAQ:WFM) - shareholders vote on the proposed $13.7 billion acquisition by Amazon (NASDAQ:AMZN). The June 16 report of this acquisition made the jump surge 29.20 percent in one day, whereabouts it’s been lying in wait for the next move. Should the vote not go through, the stock would fall back to $33.
EARNINGS
Lowe’s Companies (NYSE:LOW) is scheduled to report earnings before the bell.
The stock price has been fallen 14.4-percent from $86 to $73.64, within a rising channel, suggesting a dip-buying opportunity while the channel bottom is at $68.
American Eagle Outfitters (NYSE:AEO) is scheduled to report earnings before the bell.
The stock has neared its $10 bottom of August 2011. This price level proved an opportune buying opportune in 2014.
HP (NYSE:HPQ) is scheduled to report earnings after the bell.
The May 25, $19.58 high, its highest since March 2011, has proven a point of resistance to the very cent, both on July 25 and August 4. The close below $18.82 completed a small double-top, whose target price is $18.00. However, should the price fall below $17.00, it will have created a much more significant double bottom with a target implication of $15.50
Thursday
4:30: UK - GDP (Q2, 2nd estimate): no change to previous estimate of 0.3% growth QoQ. Markets to watch: FTSE 100/250, GBP crosses
8:30: US - Initial Jobless Claims (w/e 19 August): expected to rise to 236K from 232K, which would be the 129th week that the number has been below 300K. Markets to watch: S&P 500, Dow Jones Industrial Average, NASDAQ, USD crosses
10:00: US - Existing Home Sales (July): expected to fall to an annual rate of 5.4 million. Market to watch: USD crosses
The three-day annual summit in Jackson Hole, Wyoming begins.
19:30: Japan - CPI (July): price growth expected to be 0.4% YoY and 0% MoM, in line with June. Markets to watch: Nikkei, TOPIX, JPY crosses
Friday
10:00: US - Fed Chair Yellen Speaks: Investors will try to form a cohesive view of the path to interest rate hikes. Markets to watch: Dollar crosses, S&P 500, Dow Jones Industrial Average, NASDAQ
2:00: Germany - GDP: forecast to remain steady at a 0.6-percent growth from the previous quarter and a surge to 2.1-percent from last year’s corresponding quarter at 0.8-percent. Markets to watch: STOXX 600, Euro STOXX 50, DAX, EUR crosses
2:00: Germany - GfK Consumer Confidence (September): forecast to rise to 10.9 from 10.8. This will make the fifth straight month of the gauge rising. Markets to watch: STOXX 600, Euro STOXX 50, DAX, EUR crosses
4:00: Germany - IFO (August): business climate index forecast to rise to 116.6 from 116. Markets to watch: STOXX 600, Euro STOXX 50, DAX, EUR crosses
8:30: US - Durable Goods Orders (July): expected to fall by 2% MoM overall, and rise 0.1% excluding transportation orders. Markets to watch: S&P 500, Dow Jones Industrial Average, NASDAQ, USD crosses