Week Ahead: Bearish Oil To Fuel Stronger U.S. Economic Downtrend?

by Pinchas Cohen

The Week That Was:

Oil Crash Rattles Markets

The markets were dominated last week by the crash in oil, an immediate reversal after having been a market leader during the tech selloff.

However, the continuously rising oil supply, both from Libya and Nigeria, two OPEC members exempt from the production agreement—as well as the ongoing ramp-up of US production—officially reversed oil's bullish trend to bearish, after the price fell 20% from its January high of $55. While analysts expected US shale production to moderate as oil prices fall, which would make shale less profitable, it's been reported that US producers have hedged themselves, guaranteeing a $50 per barrel payout irrespective of spot prices, thus incentivizing capacity pumping while continuing to drive the price down.

Bad Timing for Fed Reflation

Ironically, the timing of the oil crash came just when dollar and bond investors had begun to buy into the Fed’s reflation outlook. However, the oil crash inundated the Fed’s efforts at winning the hearts and minds of investors. In an industrial economy, oil has a dramatic impact on so many other products and services that it’s impossible to see inflation rising in this low oil price environment.

Europe in Economic Correction, while US Economy Trending Down

If that weren't enough, on Friday morning, the US's Flash Purchasing Managers Index offered yet another perspective into the underperformance of the US economy. While the global cycle outside of the US had accelerated from the second half of 2016 till recently, the latest numbers show a small step down from those healthy levels, though still encouraging, as well as solid numbers around the global growth trajectory.

If you take the second quarter in its entirety, Europe is still growing at its strongest pace in the last 6 years. However, in the US, the results were more tepid. While the US had a step down similar to what was seen in Europe, the US economic reading was closer to a 3-month low. Looking at the bigger picture: although the US showed similar growth in the past month, for Europe it was a correction, while the concern is that for the US it’s the trend.

The Week Ahead

Biggest Focus – Senate’s Healthcare Bill Prelude to Tax Reform

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

The biggest focus for investors this week should be the Senate’s healthcare bill. Not so much because of the bill itself, but because it’s in the way of a more investor relevant bill, tax reform.

The Republicans need to pick their battles, and their bread-and-butter is tax reform. The Senate put out its healthcare draft bill last week, and it appears that the Senate Majority Leader, Mitch McConnell, is resolved to get to a vote by Friday—one way or another. He wants the issue in the rear view mirror, so the legislative branch can shift gears and finally focus on taxes. That would be good news for investors, because it keeps tax reform on schedule. Should the timeline remain intact, the ball toward fiscal policy would finally start to roll forward.

Economic Data in Focus

After last week’s investor confidence shakeup, this week's US durable goods orders on Monday morning ET and consumer confidence readings on Tuesday morning should be in the spotlight. Weaker than expected readings could add additional perspective on whether the US economy is indeed slowing as many analysts have forecast.

As well, on Thursday we'll be given some perspective on the world's second largest economy, which has dramatic influence on the global economy – China PMI, released Thursday night EDT, may shed more clarity on that country's economy, after mixed readings in recent months.

Monday

4am EDT– German IFO business climate (June): expected to rise to 115.1 from 114.6. Markets to watch: eurozone indices, EUR crosses

The EUR/USD pair completed a small top, suggesting price might return to the more moderate uptrend line since January.

8:30 EDT – US durable goods orders, Chicago Federal index (May): durable goods orders expected to fall 0.5% MoM from a 0.7% fall a month earlier, while the Chicago Federal index rises to 0.54 from 0.49. Markets to watch: US indices, USD crosses

Tuesday

Economic Data

10:00 EDT – US consumer confidence (June): expected to fall to 116.9 from 117.9. Markets to watch: US indices, USD crosses

Earnings Releases

Restaurant operator Darden Restaurants (NYSE:DRI) will post its fiscal fourth-quarter numbers before markets open, with consensus calling for earnings of $1.15 per share on revenue of $1.86 billion. During the same period last year it earned $1.10 on sales of $1.79 billion. DRI has shown a lot of strength in 2017, with shares rising 23.1% on the year.

The stock has dipped from its near $93 high. It found support at $89, the May peak. The RSI and MACD breakdown suggest there is still more room for a correction. Considering the uptrend line is at $84 per the current angle, $85 may be a good price at which to buy.

Wednesday

10:00 EDT – US pending home sales (May): expected to rise from negative 1.3% to 0.5% MOM and 2% YoY. Markets to watch: US indices, USD crosses

10:30 EDT – US EIA crude inventories (w/e 23 June): stockpiles forecast to fall by 500,000 barrels, from a 2.451 million drop a week earlier. Markets to watch: Brent, WTI

Earnings Releases

Consumer goods maker General Mills (NYSE:GIS) will report its fiscal fourth-quarter results before the market opens on June 28. The consensus is calling for earnings of $0.71 per share on revenue of $3.75 billion. During the same period last year, the company saw earnings of $0.66, on sales of $3.93 billion. GIS shares have fallen 9.9% on the year.

On June 14 the stock was trading near $60. Since then it declined 6-percent, to $55.94 and 23% since its all-time-high of almost $73 on June 2016. What’s interesting about this stock is that it wasn't part of the Trump reflation party. It just moved sideways in the low $60s, till this past March, when it resumed its decline. Perhaps the stock’s lack of participation either in the Trump or Fed reflation trade renders it a value stock. Technically, it’s reaching the support of its May low and is potentially forming a base.

Thursday

5:00 EDT – Eurozone business confidence (June): forecast to rise to 0.95 from 0.9. Markets to watch: eurozone indices, EUR crosses

8:00 EDT – German CPI (June, preliminary): expected to rise 1.3%, after a 1.5% increase a month earlier. Market to watch: EUR crosses

8:30 EDT – US GDP growth (Q1, final), initial jobless claims (w/e 24 June): growth expected to be 1.2% QoQ, jobless claims expected to be 243K from 241K a week earlier. Markets to watch: US indices, USD crosses

19:30 EDT - 12.30am – Japan CPI (May): price growth expected to be 0.3% YoY from 0.4%. Markets to watch: Nikkei, JPY crosses

21:00 EDT – China manufacturing and non-manufacturing PMI (June): manufacturing survey expected to be 51.4 from 51.2, while the non-manufacturing number expected to rise to 54.6 from 54.5. Markets to watch: China indices, CNY crosses

• USD/CNY falls below uptrend line since July 2015
• Performs return move which stops at resistance of January trough
• Aggressive traders would short here, while conservative traders would wait for a potential complete return move, up to 6.9

Earnings Releases

Nike (NYSE:NKE) is scheduled to report earnings, following a week that saw it gain 3.7 percent on reports it would start selling its shoes on Amazon (NASDAQ:AMZN).

Among the pros for the stock this past year:

1. New product innovation platforms, headlined by the Air VaporMax;
2. Rationalization of pricing architecture to competitive levels for premium product;
3. Increasing number of endorsements outside of athletics;
4. NBA license takeover in 2H; and
5. Moderating competitive headwinds from Under Armour (NYSE:UA)

Some headwinds for the shares:

1. Category demand shows some signs of slowing;
2. Adidas (OTC:ADDYY) looks to be successfully offsetting declines of single-style originals product demand; and
3. Currency hedge roll-off is likely to continue to pressure reported gross margins.

Nike's stock price reached an all-time high of $68.12 on December 23, and has been downward-trending since, as it broke through an uptrend line since June 2013, its 50 and 100 dmas. However, in January it broke above its December downtrend and has retested its expected new support successfully, twice, remaining above the 200dma as well as its September trough’s support.

Should it break below the 200dma at $49.90 per the current angle, it would show further weakness, and should it continue falling below the previous September's trough of $49.01, it would mean the downtrend would continue. However, if it breaks above$60, it would suggest a trend shift.

Friday

3:55 EDT – Germany unemployment (June): rate expected to hold at 5.7%, while the number of unemployed falls by 10,600. Markets to watch: eurozone indices, EUR crosses

4:30 EDT – UK GDP (Q1, final): growth expected to remain steady at 0.2% QoQ and 2% YoY. Markets to watch: GBP crosses

The GBP/USD pair's fall brings it back near to its uptrend line since the October Flash Crash, which increases the probability of a bounce along with the trend line, versus a further decline, which would constitute a reversal.

5:00 EDT – eurozone CPI (June, flash): expected to be 1.2% from 1.4% YoY, while core CPI holds at 0.9%. Markets to watch: EUR crosses

8:30 EDT – Canada GDP (Mom) (Apr): expected to fall from 0.5% to 0.2%. markets to watch: CAD Crosses

9:45 EDT – US Chicago PMI (June): expected to fall to 58 from 59.4. Markets to watch: US indices, USD crosses

Written By: Investing.com