Week Ahead: Gold At Top? Can Equities Soar To New Highs?
Investing.com | Mar 11, 2018 10:14AM ET
- Nonfarm payrolls crush expectations, yet stocks rally
- What makes this NFP different from last month?
- Trump accepts North Korean meeting invitation
- NASDAQ posts fresh record
- S&P nears record
- Russell 2000 underperforms again
- BTC consolidates under $9,000 h2 The Week That Was/h2
- It is the only index among the major US indices to climb for a sixth straight day
- It gained the most on Friday, +1.81 percent, and
- Not only did it get closest to its January, pre-selloff record, but it exceeded it by 0.75, claiming a fresh record, at 7560.81
US equities rallied Friday, after the release of February's Nonfarm Payrolls report demonstrated that the American economy had resumed its expansion, with employers hiring the most workers in almost two years.
The S&P 500 advanced after the release, up 1.74 percent and 3.54 percent for the week. The SPX ended 3.06 percentage points off its record. Technically, the S&P closed at its highest since February 1, the start of the initial selloff after the January 26, 2872.87 double record (high and close).
However, the index failed to close, or even penetrate on an intraday basis, above its February 27 high, which occurred prior to the selloff triggered by Fed Chair Powell after he said that he is personally impressed with the faster pace of economic growth since December, and that both he and the rest of the central bank policy committee members are going back to the drawing board to reconsider their path to interest rate hikes, with the only choice of perhaps increasing rates more quickly.
The Dow Jones Industrial Average rose 1.78 percent on Friday and 3.27 percent for the week. While this was comparable to the broader S&P 500 benchmark, the mega cap index is further away from its record by 4.56 percent, owing to having fallen harder during the selloff since February 27, dropping for one day more than the remaining 3 major US indices. The recent selloff was on fears of a coming trade war brought on by the Trump administration's recent imposition of tariffs on steel and aluminum imports. This makes sense given that the multinationals listed on the Dow had the most to lose, since they rely on exports more than relatively smaller companies on other indices.
Get The News You Want
The NASDAQ Composite outperformed the other major indices on nearly every measure:
The only measure in which it has been relegated to second place was its weekly gain of 4.25 percent.
The outperformer on that metric was the Russell 2000. Technically, the index performed an upside breakaway gap, on both a record close and a record high—all bullish signals—demonstrating that the bulls went all in and there were no bears to be found.
Still, overall, the Russell 2000 underperformed on Friday, gaining only 1.58 percent. It did outperform for the week, though, up 4.28 percent.
The reason it outperformed during the Trade War jitters is that its listed companies, domestic small caps, rely less on exports. As such they would therefore suffer less during a trade war when larger caps, which rely on exports to keep profits up, would be effected. Investors therefore assigned it safe haven status among stocks, apropos the trade war risk.
Nevertheless, once President Donald Trump downgraded his steel and aluminum tariffs by excluding two key US trading partners, Canada and Mexico, investors decided the situation is not as bad as they feared, and they jumped back in to equities head first.
Market internals suggest that for the first time since the selloff, there is strong, consistent leadership. All sectors were green, both on Friday and for the entire week.
Also, the outperformers, on both accounts, have been the same growth sectors and in the same order: Financials (+2.41 percent Friday, +4.43 percent for the week), Industrials (+2.2 percent Friday, + 4.42 percent for the week), Technology (+1.89 percent Friday, +4.18 for the week). Materials would have been the next best performer on both Friday and for the week but a jump in oil on Friday pushed Energy ahead by +1.91 percent, overtaking Materials' +1.81 percent; Materials still kept its next weekly slot (+4.00). The laggards, both daily and weekly, were Utilities (+0.28 percent Friday and +0.94 percent for the week) and Consumer Staples (+0.65 percent Friday and +1.6 percent for the week).
h3 The Macro Picture/h3
Investors may find themselves wondering why stocks are going up on an expanding economy, after recently selling off because of the very same reason? It was, after all, a better-than-expected employment report for January that started the selloff, while Treasury yields reached a 4-year high, projecting that bond investors were readjusting their portfolios to an expanding economy, which would bring higher interest rates.
That was the narrative regarding why investors sold bonds, which pushed up yields—to be able to buy higher yielding bonds, after the expected rate hikes. Equity investors anticipated higher rates and sold stocks, fearing higher borrowing costs would hurt corporate growth as well as share prices. But, after investors managed to quell some of the panic they moved back into stocks. At which point Fed Chair Powell reminded them about what they already knew: the economic pace ticked up and policy makers will adjust policy accordingly upward, i.e., higher borrowing costs. That triggered the second selloff, while the most recent one came from the trade war jitters.
If last month’s NFP beat provoked the equity selloff, what happened after the current, February NFP release? With 313,000 new jobs in February, it crushed the 2000,000 consensuses. Additionally, the labor participation rate increased to its highest level since September, keeping the unemployment number steady, while those counted as not in the workforce declined by 653,000 to 95 million.
So, why would a good employment report that beat estimates a month ago provoke a selloff, while this past Friday it spurred a rally? The answer has everything to do with wage growth. Whereas, January’s wage growth jumped 2.9 percent, the fastest since 2009, in February wage growth was muted, with the average hourly rate up 2.6 percent on an annualized basis, 0.2 percent below expectations.
Thus stock investors were handed a rare gift. They got what they wanted—more growth—but didn’t have to be bothered with what they didn't want, higher inflation, which would have galvanized the Fed, tempting them to increase rates. This is referred to as a “Goldilocks Economy," not too hot and not too cold, but rather, just right. so the Fed won’t need to take any additional action, but revert back to its long-standing “gradual” rate increase trajectory.
h3 Geopolitical Risk/h3
At the end of the week President Trump accepted an invitation to meet North Korean leader Kim Jong Un, on the heels of the narrower-than-expected tariff plan which eased speculation of a trade war, driving risk-on sentiment back into markets. The Canadian dollar and Mexican peso naturally strengthened on news they would be exempted from the US tariffs.
Norway’s krone jumped after February inflation rose 2.2 percent YoY, far above the 1.8 percent estimate and the 1.7 percent estimate by its central bank policy makers.
Are stock investors finally out of the woods? While the VIX dropped from 19.59 to 14.64 for the week, it still closed higher than where it was during all of 2017, except for two single weeks, when the highest VIX close for last year, which occurred during April, hit 15.96.
Bitcoin completed a double top, which returned it to its falling channel since December, and pushed the price below the 200 dma, for a second day. Note that Friday’s hammer is still maintaining support. However, it is most likely to falter, at which point the price will resume trading within its downtrend.
h2 The Week Ahead/h2All times listed are EDT
h3 Monday/h319:30: Australia – NAB Business Confidence (February): expected to fall to 10.5 from 12.
h3 Tuesday/h36:30: UK – Spring Statement: Chancellor Philip Hammond will respond to the forecasts from the Office for Budget Responsibility.
7:30: US – CPI (February): expected to hold at 2.1% YoY but fall to 0.2% from 0.5% MoM. Core inflation forecast to be 1.8% YoY, in line with last month, while the MoM figure falls to 0.2% from 0.3%.
The US dollar is trading within a weekly rising bearish flag, the downside breakout of which would suggest a continued downtrend. Note that the 50 week moving average (green), has already crossed below the 100 week moving average (blue) and is about to cross below the 200 week moving average (red).
18:50: Japan – BoJ Minutes: these will provide clues on the Japanese central bank's policy direction.
21:00: China – Retail Sales (February): forecast to rise 9.8% from 9.4%.
h3 Wednesday/h37:30: US – PPI, Retail Sales (February): PPI expected to be 0.2% MoM from 0.4%. Retail sales to rise 0.3% MoM from a 0.4% drop.
9:30: US – EIA Crude Oil Inventories (w/e 9 March): stockpiles expected to rise by 560,000 barrels.
On Friday, the price of oil found support above the 100 dma (blue) but stopped below the resistance of the 50 dma (green), resuming trade within a symmetrical triangle.
h3 Thursday/h37:30: US – NY Empire State Manufacturing Index, Philadelphia Fed Manufacturing Index (March), Initial Jobless Claims (w/e 10 March): NY Fed index to rise to 15 from 13.1, while Philly Fed falls to 22 from 25.8, claims forecast to rise to 234,000 from 231,000.
h3 Friday/h35:00: Eurozone – Inflation (February): forecast to fall 0.9% MoM.
The euro is in consolidation. A break below 1.2165 would suggest a reversal toward 1.1900, whereas a breakout above 1.2500 would signal a resumption of the underlying trend, toward 1.3000.
7:30: US – Housing Starts and Building Permits (February): starts rose 9.7% and permits were up 5.9% last month.
The price of gold fell below its 50 dma, toward the bottom of a consolidation, in what may be a top. Should the 1,305 supports be violated, it may imply a downside move toward $1,250. Note how it resembles the supply-demand dynamic with euro, another asset that valued against the dollar.
9:00: US – Michigan Consumer Confidence (March, preliminary): expected to fall to 99.2 from 99.7.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.