Convergence On Deck

If you have been reading my posts these past few weeks you weren’t surprised by the breakdown in stocks on Wednesday. The technicals have been weak as fewer and fewer stocks have been responsible for pushing the broader indices higher and higher. We had a good snap-back on Friday as Wednesday’s pullback created a very oversold condition. So, what now?

One thing about this bounce was that it was accompanied by options expiration (OPEX) which occurs the third Friday of every month. OPEX always brings in buying – its a very technical short-term phenomena but it has consistently showed up over the last several years. So, was Friday a bottoming process or a short-term bounce induced by oversold conditions and OPEX technicals?

I titled last week’s article, “Waiting for Convergence” as the major indices were giving signals of varying strength which normally resolves itself in lower prices. Wednesday’s pullback helped that cause but it was not enough to align all the indices to get a clear message. A larger move to the downside would align the indices and give a cleaner signal of which direction this market will take us over the next several months. A move to new all-time highs across the four major indices would give the same signal, by the way.

And now we are on to Monday for the answer. For the bearish case to play out we will need a resumption of the selling early next week. We may begin to trend higher but the sentiment has to turn for the positive and that might be a lot to ask given how negative the political news cycle is dominating social media and the headlines. This cycle continued after the close on Friday with regards to the President and former FBI leader James Comey. So, the negativity may have got amped up after the nice recovery on Friday.

As I have cautioned in previous updates, the market is pricing in changes to tax policy and the healthcare system which now may be in jeopardy given the level of rhetoric coming from our political class. Will the Trump trade now be to the downside? Congress will need to get its policy changes organized in short order if there is hope of passage in 2017. Keep in mind that the stock market looks forward about six months so the effect of policy changes and their probability of being passed this year are what the market will wrestling with in the coming trading sessions. I think the answer comes this week.

 

Economic & Central Banking Snippets

• Industrial production surged 1.0% in April, the biggest gain in seven years, extending a recovery this year after a two-year declining trend from late 2014 to late 2016. In the two years through November, overall IP fell 3.4% and manufacturing 0.7%; in the five months since then, they’ve rebounded 2.1% and 1.4%. (MS)
• Italy’s sluggish economy failed to pick up pace in Q1 as GDP was reported as a +0.2% rise which lagged the Eurozone’s average of 0.5%. The Eurozone’s third largest economy has been beset by weak growth for over a decade according to the European Commission. Italy has suffered from a weak banking sector, double digit employment and the eurozone’s second highest debt to GDP burden after Greece. (FT)

 

• Mexico’s central bank defied expectations and lifted its key lending rate 0.25% to 6.75% after inflation surged past its target range last month. This is the sixth increase in a row and the eighth since February 2016.
• Prices faced by German manufacturers have climbed to their highest in nearly six years as inflation climbs. Annual producer prices hit 3.4% in April, up from 3.1% in the previous month. (FT)
• Greece has slashed its 2017 growth forecast to 1.8% from 2.7%, according to a mid-term budget plan, driven by uncertainty caused by delays in concluding its latest review of bailout reforms. The projections are also lower than those of the EU Commission, which cut its growth estimates last week to 2.1%, from 2.7% predicted three months ago.
• On Wednesday, investors will get the opportunity to parse the minutes of the Fed’s May 2-3 meeting. The market will be on the lookout for clues on the timing of the next rate move and discussions about when the Fed could begin unwinding its $4.5T balance sheet. (FT)

 

Chart Time!

 

 

 

 

 

Market Snippets

• Tim Cook has been spotted at the Apple campus testing a device that tracks blood sugar that was connected to his Apple Watch. It follows a report from CNBC last month, which said the company has a team in Palo Alto working on the “holy grail” for diabetes: Non-invasive and continuous glucose monitoring.
• Year-to-date retail store closings have already surpassed those of 2008 according to Credit Suisse. On a unit basis, approximately 2,880 store closings were announced YTD, more than twice as many closings as the 1,153 announced during the same period last year. Historically, 60% of store closure announcements occur in the first five months of the year. By extrapolating the year-to-date announcements, CS estimates that there could be more than 8,640 store closings this year, which will be higher than the historical 2008 peak of approximately 6,200 store closings. (Zero Hedge, Credit Suisse)

 

• Criminal hacking groups have repurposed a second classified cyber weapon stolen from US spies and have made it available on the so-called dark web after the success of the WannaCry attack that swept across the globe on Friday. The hacking tool, developed by the US National Security Agency and code-named EsteemAudit, has been adapted and is now available for criminal use, according to security analysts.
• Puerto Rico’s once-influential Government Development Bank has won agreement from some of its creditors to cut its debt burden and restructure its obligations. The organization, which for years acted as the territory’s primary fiscal agent and evolved into a lender of last resort in times of distress, will transfer its assets into a new entity and issue new bonds in a deal that will see creditors take principal losses of as much as 45%. The assets to be transferred to the new entity include its loans to Puerto Rico’s municipal governments, property and excess cash, which the government said are worth $5.3B. This action is separate from the $70B in debt that is currently in restructuring under court supervision. (FT)
• US cities and states face a funding hole in the public pension system which jumped by $434B in just one year, raising fears of further Detroit-style bankruptcies. According to academic research shared exclusively with the FT, US public pension funds lack $3.85T that they need to pay for retirement benefits promised to current and retired workers. Joshua Rauh, author of the research and a professor of finance at Stanford Graduate School of Business, said: “The large deficit in US public pensions is a looming crisis. It is particularly a near-term issue for a number of cities.” The situation is especially difficult for cities such as Chicago, which Mr Rauh estimates has unfunded pension liabilities that equal 19 years of the city’s tax revenues. Fort Worth, New Orleans, Philadelphia and Dallas also have large underfunded pension schemes, while states such as Illinois, Kentucky and New Jersey rank badly in the Stanford research.
• Ascena Retail, owner of Ann Taylor and Loft apparel chains, cut its full-year profit guidance on Wednesday as it warned that it was no longer “appropriate to expect a stabilization of traffic” in the near term. The surprise cut sent the company’s shares down nearly 33%! (FT)

 

• Rue21 has become the latest retailer to file for Chapter 11 bankruptcy with plans to shutter roughly 400 stores across the US.
• Ford said on Wednesday it would cut about 10% of its salaried workforce in North America and Asia by voluntary means, including early retirement. Ford has been under intensifying pressure from shareholders as US auto sales decline from a seven year peak. Ford is simultaneously investing heavily in new technologies such as electrified and autonomous vehicles. Ford’s profits fell sharply in the first quarter, by the way. (FT)
• One of Disney’s forthcoming movies is being held for ransom by hackers, who have demanded payment in bitcoin. The company did not name the film but journalists in Hollywood have reported that it is Pirates of the Caribbean: Dead Men Tell No Tales. (FT)

 

International Snippets

• China’s holdings of US Treasuries rebounded in March and remains the second-largest creditor nation to the US behind Japan. The country’s ownership of Treasuries rose by $27.9B in March for a grand total of $1.09T. Japan nonetheless maintained the top spot, increasing its holdings by $3.4B to $1.12T.
• One of the largest bailouts of the financial crisis is drawing to a close, marking a historic moment for the banking sector. The privatization of Lloyds is expected to be announced on Wednesday, according to bankers briefed on the process, nearly a decade after its £20.3B taxpayer-backed rescue. (FT)
• Britain’s imports of its favorite cheese — cheddar — are under threat because of Brexit. Ireland supplies about a third of the UK’s cheddar but leading manufacturers are now contemplating switching to mozzarella because of fears about a hard Brexit. Cheesus. (Politico)
• Brazilian assets suffered sharp falls at the market open on Thursday, with the Brazilian currency (Real) down 5% as the country was rocked by a fresh corruption scandal. In the opening minutes of trading, the Real dropped 5.2% against the dollar, yields on 10-year government debt jumped half a percentage point and stock futures pointed to a 10% slide in the Bovespa stock index. The sell-off followed allegations that President Michel Temer approved bribery payments for the country’s disgraced former speaker of the lower house.
• China’s Comac and Bombardier have held talks about a deal that could inject new life into the Canadian company’s debt-laden passenger jet business. Comac is working with at least one bank on a tie-up that could involve China’s state-owned aircraft manufacturer making an investment in Bombardier’s commercial aerospace arm or taking a stake in the C-Series 100-150 seater passenger jet program. (FT)