Week Ahead: USD, Oil Higher? Gold Lower? Tesla, Apple Report

 | Oct 29, 2017 07:40AM ET

by Pinchas Cohenh2 The Week That Was/h2

  • ECB reduces QE as expected, surprises by leaving rates open-ended
  • German business sentiment posts record high
  • US Q3 beats estimates with 3% annual rate
  • Senate US budget approval paves way for tax reform

While global stocks edged lower this past week, with the MSCI All-Country World Equity Index losing 0.13 percent of its value, all three major US indices registered yet another in a series of weekly highs. It was the fifth straight weekly high for the NASDAQ Composite and the seventh straight weekly high for the Dow Jones Industrial Average and the S&P 500. Friday's S&P 500 close was also its 49th record of the year.

The week's biggest advance however occurred in Asia where the Nikkei 225, with a 2.65 percent upleg, reached a 21-year high. Prime Minister Shinzo Abe’s sweeping victory, the result of last Sunday's snap election, increased market stability by providing a green light for Abe to resume his massive economic stimulus plan. Six straight quarters of Japanese growth suggest that whatever Abe is doing must be working. Adding to the success story, a weaker yen ensures continued, even higher, exports, for continued growth.

The winning sector for US stocks this past week were technology shares, with a 2.36 percent advance, followed by Consumer Discretionary with 1.14 percent gains; the biggest decliner was Health Care, at negative 2.07 percent, clearly demonstrating that risk-on sentiment dominated the market once again last week.

h3 ECB Shrinks Bond Buys, Emphasizes Ongoing Low Rates/h3

ECB President Mario Draghi is a veteran of market reactions to his statements that economists consider at best exaggerated, at worst totally irrational. In 2013, when policy makers signaled the time had come to moderate quantitative easing (QE), financial markets around the world, including in Europe and the US, went through what was dubbed a “taper tantrum." Similarly, this past June, the euro surged on the understanding that Draghi had signaled the time had come to start thinking about scaling back the ECB's massive balance sheet.

In the aftermath of the euro's move higher, panicked that it might hurt eurozone exports, Draghi sent one his lieutenants, ECB Vice President Vitor Constancio, to downplay the earlier statement. Constancio said his boss’s remarks with “totally” in line with existing policies and investor response was difficult to understand. Investors may have been slighted by this veiled statement of calling them irrational, but after a very brief dip the euro entered another, longer rally.

Judging by market reactions to last Thursday's ECB press conference, it appears Draghi has finally figured out how to appropriately convey the central bank's guidance. While remaining consistent with consensus, the ECB will buy 30 billion euro worth of European bonds each month, down from 60 billion euro, he made it absolutely clear that the near-zero interest rates are here to stay for as long as needed. In other words, even as the Fed enters a faster path to higher interest rates, widening interest-rate differentials. Perhaps not “even as” but “because of…” Draghi wanted a weaker euro, and he got it. The euro fell 1.72 percent against the dollar on Thursday and Friday. What’s more, it completed a H&S top, suggesting the euro is heading to 1.1300.

h3 German Business Confidence Surges to Record High/h3
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The German Ifo Business Climate Index also reached a record high this past week. Considering that Germany is Europe's engine for economic recovery, this data indicates positive sentiment that Europe’s recovery as a whole will resume. This is especially noteworthy considering such recent events as Brexit, along with the ongoing chain reaction throughout the continent of escalating populism, even separatism, is the most actively visible since WWII. Indeed, the latest proof of rising nationalism is Germany’s own far-right AfD becoming the third largest party in the country and Spain's continued standoff with Catalan secessionists.

h3 European Stocks Advance/h3

The combination of a weak common currency boosting exports and making European stocks cheaper for foreign investors, alongside record confidence, helped European stocks advance, while most global stock indices edged lower. Indeed, Europe's Stoxx 600 posted a weekly gain.

h3 US GDP Beats
/h3

For the second straight quarter the US economy grew during the third quarter at a faster-than-expected 3 percent, destroying the 2.5 percent consensus. This beat occurred even after many assumed a slowdown was a foregone conclusion after the devastating hurricanes in August and September.

The inflation-adjusted, real consumer spending, which has become the metric developed-world economies most rely on—and which John Maynard Keynes considered to be the most important determinant of short-term demand in the economy—rose 2.4 percent, showing continued strength, beating the 2.2 percent estimated advance. However, core inflation significantly missed the Fed’s 2 percent target, remaining flat at 1.3 percent. After having made the case for the economic growth surprise despite the expected decline on hurricane effects, we wish to remind that we had forewarned that data will be volatile, and intellectual integrity demands we wait a few months before relying completely on this data.

h3 Tax Reform: One Stop Closer/h3

After a year of political soap-opera with little actual legislation to show for it, Republicans have finally made some headway. It looks as though tax reform is actually in sight.

While the initial bill is scheduled to be released this week, there is already resistance over the possible loss of tax deductions at the state and local level and potential changes to 401K retirement plans.

Greenback Gets Its Mojo Back

The US dollar had the strongest week since post US elections when it pushed higher by 2.15 percent. Last week it advanced 1.35 percent. It looks like things are finally going swimmingly for dollar bulls: first, the US GDP estimate beat; second, reports are circulating that President Donald Trump has ruled out reappointing Fed Chair Janet Yellen, seen as the most dovish candidate on his short-list, even after her recent hawkishness since June; third, the single piece of legislation on Trump's agenda, tax reform, seen as an investor favorite, is back on the table, putting the Trump-Trade back in play.

As well, the dollar’s biggest currency trade peer, the euro, has been falling since the German election outcome at the end of September; its slide has been continuing on Spain’s Catalan crisis and most recently with Draghi’s emphasis on the eurozone remaining at near-zero interest rates for the foreseeable future.

h2 The Week Ahead/h2

All times listed are EDT

This coming week, investors will focus on deriving clues to the Fed's path to higher interest rates from the FOMC statement release on Wednesday, while Friday’s Nonfarm Payrolls report could have markets buzzing about how the results may affect the Fed’s already-stated forward guidance. Meanwhile, the UK is forecast to raise rates for the first time in more than a decade, in what could give both the dollar and sterling a clear advantage over the common currency.

h3 Monday/h3

8:30: US – Core PCE Price Index (MoM) (Sep): expected to remain steady at 0.1 percent.