Week Ahead: USD Lower; Oil Bullish; Apple, Tesla Report

 | Jul 30, 2017 08:25AM ET

by Pinchas Cohenh2 The Week That Was/h2 h3 No On Healthcare;Tax Cuts Next?/h3

The effect of the failed healthcare repeal and replace initiative on the market is more complex than just the negative headlines. Conventional wisdom had it that enacting healthcare was the gateway to tax cuts. However, now that the healthcare bill is out of the way, lawmakers can turn directly to tax cuts, the promised land for investors.

Again, however, the dynamic is more complex than just a few headlines. Even if lawmakers will now turn their energies toward cutting taxes, the $400 billion dollars in savings the government counted on from healthcare reform evaporated in the early hours of Friday morning when the 'no' vote won. So investor expectations, which have been simmering since November, should be tempered regarding the size of any tax cuts. Faced with the current legislative reality, a simplified tax code that would help streamline business, would be beneficial.

h3 Q2 GDP: Difference Between Global Headlines and US Internals/h3

While economic data from China, Japan, Canada and Europe hitting a 16-year high, all signs point to global economic growth. Even German consumer confidence hit a 16-year high. Still, data out of the US is showing that its economy is merely revving in place.

The initial US Q2 GDP read is 2.6-percent as was forecast, but that's before the number undergoes the customary, repeated revisions. Investor focus should be on the lack of real wage pressure and low inflation. During last week’s FOMC meeting, while the Fed took no action per expectation, they did change their inflationary language from their July statement, when they said that inflation was “somewhat running below” the Fed's 2 percent target to last week’s wording which said that inflation was “running below,” target; no longer “somewhat” but totally outright. The Fed is clearly making a bigger admission, acknowledging what Treasury and dollar traders have been maintaining all along – inflation is simply not happening. With the shorter path to rising rates and the resulting flattening yield-curve, the Fed will not likely raise rates per their earlier rhetoric.

h3 European and US Stocks/h3

If Europe’s economy is doing so well, why did The Stoxx 600 Index decline over 1-percent at the end of last week? It just so happened that the euro appreciated by 2.5 percent against the dollar. This makes European stocks both 2.5 percent more expensive as well as hurts European exports. So, while the European stock market may have declined, it was on strength rather than weakness.

The Fed and Trump administration troubles were only part of the story last week for US stocks. It was also filled with earnings releases which left the market mixed on the week.

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The week started higher on beats, but over the past few days weakness prevailed, rendering the S&P 500 flat overall at Friday's close. Of course, within that bigger picture there were strengths and weaknesses. One area that should be highlighted are the mega cap marquee names—the S&P 100—with earnings beats and upside guidance from the likes of Boeing (NYSE:BA), Caterpillar (NYSE:CAT) and Verizon (NYSE:VZ).

h3 Weakness in Transports: What does that say about stocks overall?/h3

What began during the week before last, with pricing pressures on airlines, rolled over last week to other companies in the transports sector including trucking, railroads and air freight. Generally, when the transports are down, it’s a bad signal for the overall market, due to the sensitivity of these companies to economic cycles.

While factories can manufacture to restock, transport companies deliver only when there are orders to be delivered, and orders only occur when there's demand. The Dow Jones Transports Index is down 7 percent over the last two weeks.