Markets have been choppy and corrective for most of 2017 but we may be seeing signs of that changing as the NASDAQ recovered from its breakdown in early June while the DOW has continued to show it remains in an uptrend. The small caps didn’t do much these past few weeks but they may be on the cusp of breaking to the upside (see more in Chart Time!).
The stock market is showing some rotation among its various sub-components, however. Biotech stocks showed a decided move to the upside this week and provided the backbone of strength to the NASDAQ’s recovery from the June 9th low. However, retail and energy stocks are still weak. I have included a chart of the $XLE ETF below which is a basket of oil and energy stocks that is in a downtrend and could breakdown to much lower levels later this year. The high yield bond sector is heavy in the energy sector so keep in mind that lower oil prices increase the probability of default for the more leveraged companies in this sector.
On a lighter note, stocks have shown some resiliency these past two weeks so we may get some fireworks for the 4th of July as it seems this uptrend may have more to go.
Economic & Central Banking Snippets
- Closings of existing home sales rose 1.1% in May to a 5.62 million unit annual rate, a better result than indicated by a 1.3% decline in the pending home sales index in April. According to the National Association of Realtors, “Listings in the affordable price range are scarce, homes are coming off the market at an extremely fast pace, and the prevalence of multiple offers in some markets are pushing prices higher.” Listed supply was at 4.2 months in May, which is up from a record low 3.5 in January but still very lean compared to a more normal 6 months. The median existing home sales price hit a record high $252,800 in May, up 5.8% year/year. That’s now 9.7% above the July 2006 housing bubble peak. (Morgan Stanley)
- New home sales rebounded 2.9% to a 610,000 unit annual rate in May from an upwardly revised 593,000 in April. New home sales so far this year are on track for their best annual level since 2007, but they are still low historically as homebuilders “continue to express their frustration over an ongoing shortage of skilled labor and buildable lots that is impeding stronger growth in the single-family sector” according to the June NAHB survey. The supply constraints are continuing to boost prices as the median new home sales price in May was up 16.8% year/year to $345,800. That’s 32% higher than the pre-recession peak in March 2007. (Morgan Stanley)
- Australia’s economy is capable of stronger growth, according to central bank governor Philip Lowe, but he said lawmakers must first overcome political gridlock over needed economic reforms. Separately, Moody’s downgraded the long-term credit rating of Australia’s “Big Four” banks, saying surging home prices, rising household debt and sluggish wage growth pose a threat to these institutions. (FT)
- The European PMI survey of economic growth slipped to 55.7 in June, from 56.8 the previous month. However, the region still enjoyed its best quarter in more than six years. (Seeking Alpha)
- Next week’s reports will be highlighted by the Q1 GDP update and the Chicago PMI.
Politics! Politics! Politics!
- Brexit talks are finally underway in Brussels. EU chief negotiator Michel Barnier is sitting down with U.K. Brexit Secretary David Davis, who emphasized Britain and the EU’s “shared European values” and promising Brexit will deliver “a deal like no other in history.” The two-year divorce process is due to end by March 2019.
- Taking a big step towards loosening the shackles on Wall Street, President Trump has nominated James Clinger as chairman of the FDIC, one of the U.S.’s most powerful bank regulators. If confirmed by the Senate, he would begin his term in November. Clinger currently serves as chief counsel for the House Financial Services Committee and has been involved in efforts to rip up Dodd-Frank.
- Angela Merkel, the German chancellor, said she was open to the idea of giving the eurozone a single finance minister and a common budget. This has been one of French President Emmanuel Macron’s signature policy efforts. (FT)
Chart Time!
Market Snippets
- Oil prices are back in bear-market territory, frustrating OPEC members that cut production in an attempt to boost prices and renewing fears that falling prices could spill into stocks and other markets. (FT)
- Uber Technologies Inc.’s co-founder and CEO, Travis Kalanick, has resigned after a group of investors pressured him to step down following a bruising six months of scandal and setbacks, marking a stunning turnabout for one of Silicon Valley’s highest-flying startups. (WSJ)
- American Airlines Group Inc. said Thursday that it received an unsolicited notice from state-owned Qatar Airways indicating the Middle Eastern airline plans to acquire as much as 10% of the company’s stock in the open market. American Airlines—the world’s biggest air carrier by traffic and revenue—has a market value of roughly $24 billion.
- Tesla is getting closer to putting down roots in China. CEO Elon Musk has made it clear that he wants a production base in the country, and on Thursday the company confirmed it was exploring the possibility of a plant close to Shanghai. The US electric car maker’s revenues from China jumped more than four-fold in Q1 of this year and now account for 19% of the company’s sales. (FT)
- The state of Illinois is in dire straits with a financial problem that has been developing over the last several years. Massively unfunded pension schemes (of which the state has 660!) and a shrinking tax base have now prompted some to consider whether Illinois will be the first state to declare bankruptcy, something that, at the moment, only counties and municipalities like Detroit are allowed to do. (Elliott Wave International)
- Amazon has unveiled a service that lets customers try clothes on before buying them, in the tech giant’s latest shot at traditional retailers. The service is called Prime Wardrobe, that “brings the fitting room to you”. Customers have a week to decide what they want to keep and can return the products for free. More than 1 million products from brands such as Calvin Klein and Hugo Boss are eligible for the service, Amazon said. (FT)
International Snippets
- Saudi Arabia is seeking to present investors with a pristine set of financials for Saudi Aramco, its state energy giant, as the kingdom targets a $2Trillion valuation ahead of its planned initial public offering in 2018. The country’s highest authorities are working with to untangle its finances from those of the state. The kingdom will also slash the corporate tax rate for Saudi Aramco from 85% to 50% so that there is a higher dividend to future shareholders and boosting its market value. (FT)
- Argentina has launched the sale of debt maturing in 100 years’ time. Coming just two years after the country ended currency controls, a successful sale will mark the latest step in a swift market rehabilitation for a nation which spent more than a decade fighting investors who held out against its most recent default, in 2001. Initial pricing thoughts for the dollar-denominated bond deal are for an annual yield of 8.25%. (FT)
- Russia sold more than $3B in sovereign debt on Tuesday in its first bond sale since returning to the international debt markets last year. The finance ministry said that it sold $1B in 10-year Eurobonds at 4.25% and $2B in 30-year Eurobonds at 5.25%, the lowest rates in the country’s history.
- The government of Ireland raised at least €3B in the IPO of Allied Irish Banks (AIB) which was acquired by the government during the financial crisis. Ireland’s government will still hold between 71-75% of AIB’s shares after the sale, and expects to slowly sell down its stake in the coming years. The government paid almost €21B to rescue the bank while the IPO valued AIB at only €12B. However, the government expects the bank to increase in value as finance minister Paschal Donohoe said the sale “has created a strong platform for the state to recover all of the money it has invested”.