Stocks ended up higher this week but sold off into Friday’s close in what may have been in anticipation of military action with Syria. From what I can tell, it seems as though the U.S. bombing of Syria may be completed but there may be retaliation (military and/or economic) of some kind in the coming weeks which elevates risks across the board regarding Russia and the middle east.
Interesting that only France and the U.K. joined U.S. forces in the Syria bombing but this graphic below should illuminate why parts of Europe would rather not tussle with Russia over Syria. Russia is a large energy exporter to most of Europe and they have threatened to cut-off some countries in the past so it seems that they may have some leverage over our European allies. No Russian military assets were targeted or destroyed so as to not raise the stakes too high but it seems as though something larger may be at play here that includes Iran, Israel and Saudia Arabia. We will see how this game plays out in the coming months but I anticipate rising global political tensions in the aftermath of this weekend’s military action.
So where does that leave the stock market? The big picture is that the U.S. stock markets are still within a corrective price pattern that started in early February after a top in late January. The big question is wether this is a correction or a change in trend where much lower stock prices may be afoot. There may be an answer coming soon as earnings season is upon us and the next few weeks will be busy as 421 stocks report earnings this week, 949 the week of the 23rd and 1,223 the week of the 30th. If the market reacts poorly to good earnings like we saw with JP Morgan and Citibank on Friday, that may signal investors are unwilling to bid stock prices up higher (buying fatigue).
Keep in mind that the increased volatility in 2018 is driven by the Fed withdrawing liquidity from the system by reducing their balance sheet and raising interest rates. Good news from corporate America’s earnings may backfire if it means the Fed will accelerate the withdrawal of liquidity from a stock market that has been bouyed by easy monetary policy since 2009.
Here is what the S&P 500 looks like after this week’s price action:
What to watch for next week: Watch the high profile stocks that are reporting and what their stock prices do AFTER earnings. Some to watch are Netflix, Bank of America, IBM and Goldman Sachs. We want to see follow-thru to the upside if we are going to resume this multi-year rally in the stock market. Remember, the tax cuts should help the bottom line so a negative reaction may signal the good news was priced in during January’s ramp to new all-time highs.
Chart of the week!
Remember that trade war with China?
Economic & Central Banking Snippets
- German exports pulled back sharply in February, marking the latest in a series of downbeat reports that have prompted economists to question how the eurozone’s biggest economy fared in Q1. Exports dropped 3.2% which was the biggest since August of 2015. “While the prospects for the German export machine have deteriorated significantly in recent weeks, the present state of the economy gives some reasons for concern. In fact, the entire start to the year 2018 has been a disappointment,” said Carsten Brzeski, one of ING’s economists. (FT)
- China appears to be quietly easing its monetary policy. Do the Chinese anticipate a slowdown due to trade tensions?
- The Iranian currency, Rial, hit another record low against the dollar as domestic dealers stop trading the dollar and the euro. The government is becoming increasingly concerned about the situation. (WSJ)
- Core CPI rose 0.2%M in March, raising the year/year rate to 2.1% from 1.8%. With food up 0.1% and energy down 2.8%, headline CPI fell 0.1%, raising the year/year rate to 2.4% from 2.2%. (MS)
- The University of Michigan consumer sentiment survey for April registered a reading of 97.8 this month, compared to the 12-year high of 101.4 recorded in March and below the 100.4 that analysts surveyed by Bloomberg had expected.
- Fed officials appeared to lean hawkish at their most recent policy meeting, with “all participants” expecting the economy to strengthen and inflation to rise “in coming months.” The Labor Department’s inflation report was also in focus as core inflation rose above 2% for the first time in a decade.
Macro Snippets
- Nine West is now in Chapter 11. The US-based retailer of shoes, clothing and other accessories has became the latest private equity-backed retailer to seek bankruptcy protection. New York-based Nine West Holdings, owned by private equity group Sycamore Partners, filed the petition on Friday in Manhattan federal court, listing assets between $500m and $1bn and liabilities between $1bn and $10bn. Nine West becomes the latest private equity-backed retailer to file for bankruptcy amid a challenging retail environment, as more consumers shift from brick-and-mortar shops to e-commerce sites like Amazon. Others have included Payless Shoes, Claire’s Accessories and Toys R Us.
- Chinese billionaire Jack Ma’s financial-technology business is about to vault into the ranks of the world’s most valuable companies. Ant Financial Services Group, carved out of his e-commerce giant Alibaba seven years ago, is preparing to raise $9 billion in a private funding round, according to people familiar with the matter. That could value Ant at close to $150 billion, they said, making it by far the world’s largest unicorn—a term used to describe private companies valued at over $1 billion.
- General Electric has published restated earnings for 2016 and 2017 to reflect new accounting standards, showing a 17 per cent reduction in the reported profits of its industrial operations for last year. The revised numbers use a new standard for recognising earnings from long-term contracts, which led to reported industrial segment profits being cut by $2.48bn. The company also disclosed an additional $1.2bn hit to last year’s earnings from the recent US corporate tax cuts, which made its accumulated tax losses less valuable. It had previously reported an impact of $3.5bn.
- Geopolitical tension in the Middle East propped up oil prices and pushed them to their biggest weekly advance in over eight months and highest level since late 2014. Brent crude, the international oil benchmark, was up 0.8% to $72.58 a barrel, putting it on track for the highest closing level since late November 2014. For the week, Brent was up 7.9%, its biggest advance since the week ended July 28.
- China will allow overseas investors to trade the steel-making ingredient iron ore on the Dalian Commodity Exchange, the latest move by Beijing to exert influence over the global pricing of raw materials. China is the world’s biggest consumer of iron ore and imports around 1B tons annually.
- The price of aluminum hit its highest level since 2012 Thursday, putting it on track for its biggest weekly gain on record, after the US sanctioned Russian producer Rusal. The price off the metal has surged 15% since the US Treasury unveiled sanctions against Russian oligarchs Friday, including Oleg Deripaska and his company Rusal. That’s the metal’s biggest gain since data began in 1987.
- A petition to split California into three separate states has gathered about 600,000 signatures, well more than the 365,880 required to be on the ballot in November. Leading the effort is venture capitalist Tim Draper, who has been lobbying for the initiative since 2014. To go into effect, California would have to certify the signatures, voters will need to pass the measure, followed by U.S. Congressional approval.
- SpaceX has authorized a $500M Series I financing round and is selling equity at $169 per share, meaning the company could be worth almost $24B. At the new valuation, SpaceX (SPACE) would be the third-highest valued U.S. private company after UBER and Airbnb (AIRB).
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
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Regards,
Paul J. McCarthy, III
President – Kisco Capital
(347) 709-9539
