Week Ahead: USD, Bitcoin Headed Lower? Stocks, Gold, Oil Higher?
Investing.com | Jan 14, 2018 09:20AM ET
US stock market bulls took no prisoners last week as markets closed with back-to-back fresh records for a second consecutive week. Except for the continuously lagging Russell 2000, all major US indexes closed near the highs of the day.
The S&P 500 advanced by 0.68 percent on Friday, posting its 8th record over the first 9 days of the new year. It gained 1.6 percent for the week and 4.2 percent for the year.
As opposed to the Dow and NASDAQ Composite, however, trading volume on the SPX was alarmingly reduced, falling to 2.1 billion, a quarter of the 8.3B of the preceding week, according to Market Watch.
The Dow Jones Industrial Average gapped up 0.25 percent on Friday at the open and gained 0.9 percent for the day, posting a 6th record, pushing higher by 2.03 percent for the week and 4.4 percent for the year. As opposed to the S&P 500, the Dow’s weekly volume has been rising each week, increasing now for three straight weeks.
The NASDAQ Composite rose 0.68 percent on Friday and like the S&P posted an 8th record; The tech-heavy index climbed 1.77 percent for the week and 4.67 percent for the year, unlike the SPX on rising volume.
The Russell 2000 climbed 0.43 percent on Friday, paring a 0.88 percent advance, forming a bearish shooting star. Though still a laggard on a number of metrics, the small cap index beat the Dow on one parameter: it posted its seventh record of the year, one more than the Dow. It climbed 2.05 for the week and 3.13 percent for the year.
Market internals on Friday roughly echoed sector performance for the week. Real Estate and Utilities were the only two in the red, down 0.73 percent and 0.57 percent, respectively. Their weekly performance was proportionally similar: down 3.35 percent and 2.08 percent respectively. Consumer Staples joined the 'fallen angels' on Friday as well, but with a negligible 0.49 percent loss.
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Consumer Discretionary led the gainers on Friday, up 1.29 percent. For the week, however, Industrials led, gaining 3.29 percent. Friday’s sector leader, Consumer Discretionary, closely followed the weekly leader, coming in second, + 3.19 percent.
During 2017, US stocks posted weekly gains of more than 1 percent ten separate times. In the first two weeks of 2018, US stocks have already posted back-to-back weeks of better than 1 percent returns.
The Labor Department’s release on Friday showed the US Core Consumer Price Index (excluding volatile food and energy components) jumped 0.3 percent for the month of December, on robust growth in the cost of rental accommodation and health care, new and used vehicles and automobile insurance, boosting the inflation outlook for added momentum on the key metric. This is the largest increase in 11 months. The hope is this will solidify the Fed's planned three rate increases this year, and maybe even cause the central bank to expand their plans to four hikes in 2018.
That sent the 2-year Treasury yield higher, up over 2 percent for the first time since 2008. This is a textbook setup for a positive outlook for rising rates, as expressed by the tilting of the supply-demand scale to the side of supply for the current rate. As well, on Wednesday the 10-year yield closed at 2.559, its highest since March 14. As with the 2-year, a rising yield suggests the supply-demand balance tips to supply, signaling that investors await higher rates.
Though viewing each independently shows they both support an outlook for higher rates, comparing the two raises a question. If investors were of one mind about rates rising, why would the supply-demand balance tilt more heavily to supply on the longer dated maturity? In other words why would there be more demand for the 10-year than the 2-year, allowing the 2-year yield to rise 2 basis points, while the 10-year rose only 1?
If investors were convinced rates are about to rise, there should be more demand for the 2-year, which doesn’t tie your money down for as long a period, enabling you to buy bonds at the coming higher yield more quickly, since they'll be based on the higher rate. So why was there still more demand for the 10-year yield? The answer could be there's either a difference of opinion among a variety of investors or, the same investors aren't truly convinced and are therefore hedging their bets.
Technically, the 2-year yield’s trajectory is up while the 10-year is still subject to significant resistance, including as recently as Wednesday’s shooting star, whose high remained above Friday’s spike. The yield would also have to overcome the December 15, 2016, 2.641 percent high, which proved itself when the March 13 high hit a brick wall at the 2.628 high.
Conclusion: when longer-dated bonds rise more than shorter-term bonds it signals investor commitment to a positive outlook. Technically, the 2-year is free and clear to keep rising, while the 10-year is bogged down by resistance, which only amplifies the first point.
h3 US Dollar: The Abandoned Asset/h3Neither fresh US stock market records, nor better than expected core CPI growth helped the US dollar on Friday. The euro closed at a three-year high versus the greenback following the single currency’s nearly 0.8 percent jump on Thursday, after the release of minutes from the last ECB meeting showing the European Central Bank sent a hawkish signal, as it may phase out its bond-buying program sooner than expected. Barclays analysts maintain this could happen as early as September and added there could also be a 20-basis point hike in the last quarter of 2018.
This forms a puzzling market picture. US core inflation—the stated reason the dollar is wasting away while stocks are skyrocketing—jumped the most in 11 months based on Friday's release and stocks benefited as they continue to thrust into uncharted territory. Aren’t stocks supposed to fall when there's a looming tightening cycle, as borrowing costs increase, making record prices ever more difficult to maintain? Apparently, not.
On the flip side, isn’t the dollar the immediate and obvious beneficiary of rising rates, and, again, since persistently low inflation has finally abated, shouldn’t investors be grabbing dollars by the fistful? Apparently, not. Right now the dollar is an orphan asset while stocks are everyone’s favorite son.
To be fair, dollar bulls may want to see broader indications of US economic expansion than just core inflation rising.
Technically, the dollar closed on Friday at its lowest point since January 1, 2015. Technically, the lower trough on Friday, below the former, September 8, 91.01 low, put it back on track of the downtrend since January 3 of last year from the high price of 103.82.
h3 Euro: Catch 22/h3While it’s happy days for euro bulls, as the single currency reaches a three-year high, the uptrend must pose a conundrum for the ECB, as it tries to lift eurozone inflation toward its goal near 2%. A stronger currency lowers the price of imports and is a headwind for European exporters, potentially constraining economic growth down the road. Helping spur the advance were minutes of the December meeting of the Governing Council, which suggested the ECB could modify its forward guidance in early 2018 in response to upbeat macroeconomic data. Additionally, news of movement toward political stability in Germany added to the rally.
h3 Gold: Longest Rally Since Mid-2016/h3On January 2 we predicted gold would rise, as it was nearing a bottom. The precious metal has appreciated since then, up $25.49, or 19.4 percent.
At the same time, the 50 week MA (green) crossed over the 100 week MA (blue), which was already above the 200 week MA (red), forming a second golden cross, as it approached the neckline of the massive bottom since August 2013.
h3 Bitcoin: Bears Push Against Bulls Final Stand/h3On Saturday, Bitcoin rose for a second day, from below $13,000, in a failed attempt to break the $15,000 level. Previously, $15K was considered a floor, but it is beginning to emerge as a ceiling, as the 50 dma (green) lays guard, to demonstrate the supply-demand pressure point of that price level.
After being pushed back to half of yesterday’s gain, it continued to fall today, wiping out gains accrued over the last day and a half. Technically, the cryptocurrency is struggling to remain atop the lower boundary of the symmetrical triangle, the bears' line-in-the-sand. A decisive break below would suggest a reversal. One would be called with a trough, lower than the December 22, $10,718 low.
h3 Oil: Three Year High/h3The price of WTI crude pushed higher for a fifth day, leaving it at a three year high, after Iraq joined the United Arab Emirates, Qatar and Oman in calling for OPEC allied producers to maintain production cuts till the end of the year. The cartel supports the current cuts even after price gains for the commodity have become strong enough to support the profitability of US shale production. An opposing view, voiced by Omani oil and gas minister Mohmmed Al Rumhy on Saturday in an interview with Bloomberg TV is that “it’s absolutely crazy, for all of us to increase production by 10 percent and to lose revenue by 40 percent, and this is what we did in 2014.”
Technically, the price of the commodity remained below Thursday’s shooting star high, which may confirm its resistance, which often precedes a correction.
h2 The Week Ahead/h2All times listed are EST
h3 Monday/h3US markets closed for Martin Luther King Holiday
h3 Tuesday/h36:30: UK – CPI (December): forecast to fall to 3% YoY from 3.1% and 0.2% MoM from 0.3%. Core CPI expected to hold at 2.7% YoY.
8:30: US – Empire State Manufacturing Index (January): expected to rise to 18.5 from 18.
h3 Wednesday/h35:00: Eurozone – CPI (December, final): forecast to be 1.4% YoY from 1.5%, while MoM remains at 0.1%. Core CPI to hold at 0.9% YoY.
10:00: Canada – BoC Rate Decision: no change in policy expected.
19:30: Australia – Employment Data (December): unemployment rate expected to hold at 5.4%, while 18,000 jobs forecast to have been created, from 61,600 a month earlier.
21:00: China – GDP (Q4): expected to be 6.8% YoY and 1.7% QoQ.
h3 Thursday/h38:30: US – Housing Starts and Building Permits (December); Initial Jobless Claims: previous MoM readings saw a rise of 3.3% for starts and a drop of 1.4% for permits.
11:00: US – EIA Crude Inventories (w/e 12 January): a drawdown of 3.89M barrels expected.
h3 Friday/h34:30: UK – Retail Sales (December): forecast to rise 0.3% YoY from 1.6% and 0.4% MoM from 1.1%. Market to watch: GBP crosses
10:00: US – Michigan Consumer Confidence (January, preliminary): expected to fall to 95.3 from 95.9. Markets to watch: US indices, USD crosses
/h2
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