Almost a good week for the stock market. What looked to be a breakout mid-week, ended up being weak price action that confirmed a technical pattern that implies we are likely to test the lows again next week. Let’s take a closer look at the S&P 500 to see what is going on:
Another sign of weakness was in the semiconductor (computer chips) sector that led the way lower. This sector is ground-zero for growth in our economy so seeing these names perform poorly is something to watch in the coming sessions. A breakdown in semiconductors may mean a larger move lower in the broader indices.
The weakness in stocks coincided with a sharp move higher in 10 year Treasury yields this week. The 10 year has been rangebound since early January and may now be poised to test 3.05%. Let’s take a look at this chart that is an index of ten year Treasury yields.
So, we may now have a market where bond prices and stock prices are falling at the same time. Of course, the two are inter-related as the Federal Reserve stimulus program has fueled the stock market higher with easy money and low interest rates. Those low-vol rally days are gone and with full employment and rising inflation, the Fed mandate is being fulfilled so there is no reason why interest rates won’t be raised in the coming year.
The current technicals of the stock market remain in a corrective price pattern. There is no evidence of a trend transition yet but that change may begin if we lose the support levels established over the last several weeks.
What to look for next week:
- Earnings and more importantly how stock prices react AFTER the news is released.
- That we hold 2,605 on the S&P 500 index which is the 200 day moving average that has acted as support. We closed at 2,670 on Friday.
- The semiconductor (computer chips) index has been leading the weakness in the S&P 500 which is the economy’s most critical growth sector. This sector needs to be a leader for the broader indices to maintain their uptrend.
Chart of the Week!
Interesting that the Euro nanny state checks the water for this stuff. I am surprised that Amsterdam and Reykjavik are not at the top of the list.
Economic & Central Banking Snippets
- Industrial production — which measures output at factories, mines and utilities — rose 0.5% in March which is down from the 1% advance recorded in February. Mining output climbed 1%, mostly reflecting strong gains in oil and gas extraction as US shale producers ramped up production in response to higher oil prices. This marks the sixth consecutive month of gains for the mining index which is now 10.8% higher than its year ago level. (FT)
- The rate of US new home construction rose in March, bouncing back following a drop in the previous month, according to official data released on Tuesday. New housing starts rose 1.9%. Permits to build new homes rose 2.5%.
- China’s GDP growth was reported at 6.8% for Q1. The rebound in private investment helped buffer a 20% decline in China’s goods-trade surplus in the first quarter. Real estate investment also accelerated following a slowdown in response to measures by a dozens of cities aimed at containing a frothy property market.
- Japanese exports grew at a slower pace than forecast in March with imports falling for the first time in more than a year. Outbound shipments rose 2.1% according to the Ministry of Finance.
- The IMF on Wednesday sounded the alarm on excessive global borrowing, warning that with a total of $164T owed, the world’s public and private sectors are deeper in debt than at the height of the financial crisis a decade ago. Global debt is now more than twice the size of the value of goods and services produced every year and at 225% of global gross domestic product, it is now 12% higher than at its previous peak in 2009.
- The EU is seeking emergency powers in the event of a hard Brexit. The European Commission has drafted 30-40 proposals to amend laws and give special powers to regulators so that the union can deal with a no-deal scenario, either on Brexit day in March 2019 or after a transition period. The push is intended to reduce uncertainty for business by granting more powers to Brussels and other EU authorities so they are better able to cope with sudden complications.
- Amid a growing chorus of increasingly upbeat views about the health of the global economy, March PMI surveys fired a warning shot. The surveys showed the pace of global economic growth waning for the first time in six months. The slowdown was most pronounced in the euro area and the UK, though rates of expansion also cooled in the US, Japan and across the emerging markets. Any further weakening of the US and UK numbers will call into question the extent to which the Fed and Bank of England will hike rates in 2018, while any further slippage in the eurozone and Japan will add to worries that talk of pulling back on current stimulus is premature. (MARKIT)
- Facebook is requiring EU users to accept targeted ads as a condition for using its service, ahead of strict new privacy rules that take effect across the bloc next month. “Facebook is an advertising-supported service,” Deputy Chief Privacy Officer Rob Sherman declared. “All ads on Facebook are targeted to some extent, and that’s true for offline advertising, as well.”
- Amazon has launched an international shopping feature that will allow customers across the world to shop more than 45M items that can be shipped to their country from the U.S. It will display pricing, shipping costs and import duty estimates, with Amazon managing courier service and customs clearance in case of potential surprises at the time of purchase or delivery.
- Morgan Stanley has posted a record quarterly profit, bringing down the curtain on a generally bright first-quarter earnings season for the big US banks. Stock trading revenues were up 30%, consistent with strong numbers at other big banks. Fixed-income trading was better too, rising by $200m to $1.9bn.
- Netflix will escalate its assault on European broadcasters by sharply increasing its content investment across the continent, with plans to spend about $1bn on original productions this year. The company will expand both its English and foreign language offerings, with new dramas going into production in Spain, Germany, Italy, France, Poland, Turkey and the Netherlands.
- General Electric has shown that it is still bearing the scars of its financial services ventures, taking a charge of $1.5bn relating to a subprime lender that it shut down in 2007. The charge relating to WMC Mortgage is the latest sign of how GE’s financial services operations, which once contributed half the group’s profits but have now mostly been sold, are still leaving a negative mark. (FT)
- Japanese equity funds posted their biggest net outflow since 2001 as investors regained their taste for risk assets in the past week and directed cash to emerging market equities and junk bonds.
- Apple supplier Taiwan Semiconductor Manufacturing Co slumped to a four-month low after it forecasted higher costs and lower sales in the second quarter amid weaker smartphone demand. Its announcement sent shares of other chipmakers and Apple lower.
- Oil prices have rallied nearly 50% in the past year. Brent, the international benchmark, touched $74.75 a barrel on Thursday — the highest since 2014 — after having gained 10% since the start of this month. Prices eased in late US trading and on Friday morning in Asia, with Brent trading just above $73. Traders pointed to tightening supplies at a time of political uncertainty — such as Venezuela’s economic collapse or the potential reimposition of US sanctions on Iran’s oil exports. The rise in price, which has spurred a rally in energy shares, also follows 16 months of supply cuts by Opec and Russia that have removed at least 1.8m barrels a day from the market. (FT)
- Wells Fargo has agreed to pay a penalty of $1bn to settle allegations from US regulators over compliance failings, including mis-sold car insurance and mortgage fees. The penalty, announced on Friday by the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency, marks one of the most severe punishments of the banking industry.
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.
Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client.
Paul J. McCarthy, III
President – Kisco Capital