Week Ahead: Equity Market Volatility Expected Ahead Of Fed, After Jobs Gains
Investing.com | Jul 07, 2019 08:13AM ET
- Yields jump, stocks pare gains, on strong jobs growth
- Bonds could correct, boosting equities
Stocks and Treasurys remain out of sync, even after demand for U.S. sovereign bonds hit a brick wall on the heels of Friday's nonfarm payrolls upside surprise. After the release, yields jumped the most since Jan. 3; equities retreated as investors realized they might not get more QE from the Fed with jobs growth on the rise.
Still, one of the market's worst headwinds—escalating tariffs—is off the table, at least for now, after U.S. President Donald Trump’s meeting with Xi Jinping ended with an agreement to resume trade talks, propelling stocks to new records earlier in the week. That exuberance didn’t make it to the Treasury market, where yields kept plunging throughout the week, nearing almost three-year lows as the market's strong expectation of a rate cut triggered a bond grab at current rates, which suddenly looked high given what cuts could bring.
Friday's reversals, however, could continue into the coming week, bringing considerably more volatility, especially for equities.
h2 Bond Correction To Boost Equities?/h2
There's now a case for a bond correction at the very least, which could serve to boost equities.
While 10-year yields are in a downtrend, last week’s hammer doji confirmed the support of the mid-June hammer, certifying the September 2017 low as support. Also, the RSI curved up with Friday’s leap, after falling to 22, the most oversold condition since 2008. The next technical resistance for yields is the 2.2% level, where the downtrend line awaits.
A combination of trade talks back on track, reduced odds of a rate cut and equity exuberance may slow Treasury demand from here. Nonetheless, until Friday, both stocks and Treasuries have been advancing, even though they inherently possess a negative correlation. Fundamentally, equities rise on economic growth while Treasurys advance on economic contraction.
While the U.S.-China tariff ceasefire served as a catalyst for an equity relief rally, we expect investors will need more stimulus in order to keep buying the most expensive stocks in history. Indeed, they're awaiting that much anticipated rate cut, otherwise they might melt down—with stocks to follow.
For stocks to remain buoyant, there will need to be real, quantifiable progress on trade. The Fed will have to figure out how to placate traders, even while the economy doesn’t do too well but, also doesn’t fall into a recession. Should all these pieces align, we expect equities to break out to new records.
h2 Equities Indices Retreat From All-Time Highs/h2
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U.S. equities slipped on Friday after posting fresh all-time highs on Thursday. The S&P 500 Index gave back 0.18% on Friday, paring the index's weekly advance to 1.65%.
Healthcare was the worst performing sector, (-0.68%), after Democratic presidential candidate (and current front-runner), Joe Biden reversed his position on government healthcare for illegal immigrants, and Financials outperformed (+0.36%), after a strong Nonfarm Payrolls release diminished the outlook for lower rates.
Real Estate was the second-worst performer on Friday, (-0.57), as Treasury yields surged to a shade under 2.04, wiping out two-and-a-half days of losses. However, it was the best performing sector for the week (+2.56%), since prior to the NFP surprise, the sector was seen to be a primary beneficiary of easier financial requirements once rates were cut.
The Dow Jones Industrial Average fell -0.16% on Friday, after posting an all-time high on Thursday, for the first time since Oct. 3, paring the mega cap index's weekly gain to 0.29%.
The NASDAQ Composite slipped 0.1% Friday, after Thursday's record close, paring the weekly advance to 1.94%, making it the outperforming index among the major U.S. averages. From a technical analysis perspective, the NASDAQ provides the weakest perspective.
Its weekly trading developed a bearish hanging man—a potential short-squeeze trap—at the exact same level as the previous hanging man, seen during the week of April 29. That hanging man was confirmed when the following week’s trading suffered a setback, leading to a double-digit loss.
Among all the major averages, the NASDAQ’s RSI reflects the weakest momentum, falling 9.4%, against a price that beat the April highs. The second biggest, negative divergence, for the S&P 500, is only 2.9%.
h2 The Week Ahead/h2All times listed are EDT
h3 Tuesday/h38:45: U.S. – Fed Chair Powell Speaks: investors will pay special attention to Powell's remarks after the NFP beat, in order to discern if his conviction on the path to easing wavers.
10:00: U.S. – JOLTs Job Openings: 7.510M expected for May, up from 7.449M MoM.
Tentative: New Zealand – RBNZ Gov Orr Speaks: two more interest rate cuts are forecast, which pushed the USD/NZD higher, blowing out a double-top.
h3 Wednesday/h34:30: U.K. – GDP: seen to have jumped to 0.3% from -0.4%
4:30: U.K. – Manufacturing Production: expected to have leaped to 2.2% from -3.9%
10:00: Canada – BoC Interest Rate Decision: consensus has it remaining steady at 1.75%
10:30: U.S. – Crude Oil Inventories: forecast to keep dropping to -2.964M from -1.098M on market oversupply, as OPEC tries to regain market share from U.S. shale
14:00: U.S. – FOMC Meeting Minutes: could provide some insight into how accomodative policy might become during the second half of 2019
h3 Thursday/h37:30: Eurozone - ECB Publishes Account of Monetary Policy Meeting
8:30: U.S. – Core CPI: seen to have climbed to 0.2% in June from May’s 0.1%.
10:00: U.S. – Fed Chair Powell Testifies: Over the course of two days, the Fed chairman will brief Congress on the state of the economy
h3 Friday/h38:30: U.S. – PPI: expected to remain steady at 0.1%
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