This month has been one of chugging along on the low volume train to the upside with an arrival into earnings season. Earnings are good but the growth in earnings is abating. Some companies are blaming misses on trade tensions but the realty is that currency volatility and inflation are pressuring margins. Both are a result of Fed policy as ultra low interest rates of the past were bound to fire the coals of inflation that in-turn would cause the Fed to raise interest rates and unwind historically low volatility in stock and bond prices. The 4.1% GDP announced Friday is great but it also means the Fed will absolutely continue to raise rates and remove the punchbowl from the market.
On Wednesday, the temperature around trade tensions seemed to lessen as the EU came out and said they would negotiate for more friendly trade terms which rallied the market to a near euphoric high. Combined with the good GDP data on Friday, we had no business selling off into Friday’s close unless we are near an exhaustion point where stocks are likely to pull back in the coming sessions. How much of a pullback is still in question but I think next week will give us some good data to work with on the health of the stock market.
The thing that sticks out to me is that the only volume spike we saw in the last few weeks was on Wednesday’s high after the EU trade announcement. Volume spikes are typically associated with tops and bottoms.
What to watch for next week:
- We got a good move higher towards 3% this week in the 10YR so that should continue if stocks are healthy.
- Reactions to earnings are more important than earnings right now. Large moves to the downside like we saw with Facebook, Twitter and Netflix were met with very high volume which tells me investors are hitting the eject button on these names.
- Volatility – it has refused to retreat. Wednesday’s euphoric move to the upside did not move volatility lower which means investors were buying insurance (puts) in the options market. A way of selling the good news.
Chart of the Week!

Economic & Central Banking Snippets
- Initial jobless claims are near the lowest level of weekly claims since December 1969 which reflects the scarcity of qualified workers.
- The soaring dollar is turning emerging-market currencies into roadkill (again). The dollar index struck a high of 95.56 last week as the Fed continues to signal for higher interest rates. (FT)
- The Irish economy recorded near double-digit growth in Q1 for 2018. Ireland’s Central Statistics Office on Thursday said Irish gross domestic product had accelerated at a rate of 9.1% as IT and communications made the biggest contribution to this increase by rising 34%. (FT)
- Europe’s head central banker, Mario Draghi, gave an upbeat take on the outlook for eurozone growth on Thursday, playing down concerns about an economic slowdown as he signalled that the European Central Bank remained on track with plans to halt bond purchases after December.
- Japan’s manufacturing sector recorded its slowest growth in 20 months as the data pointed to a slowing of growth momentum for Japan’s manufacturing sector at the beginning of the third quarter. New business grew at a much weaker rate and was broadly flat, while export demand, despite further yen depreciation, deteriorated for a second month running.
- U.S. home sales are slumping, a potentially worrying trend for a key sector of the economy. Housing contributes about 15% to 18% of gross domestic product and drives home-improvement spending, construction and mortgage lending. For now, the housing slowdown is a blip in an otherwise booming stretch for GDP—Macroeconomic Advisers is tracking a 5% pace of growth in the second quarter. Longer term, a hot economy could compound problems: in this case with rising interest rates and spiraling construction costs. More entry-level buyers will end up priced out of the market. (WSJ)
- Price pressures continue to grow in parts of Europe as the PPI (inflation measure) for June indicated higher prices are coming. PPI annualized readings for France rose 3.4% , Spain 4.1% and Sweden, which still has negative interest rates, spiked 8% y/o/y.
- US GDP accelerated in the second quarter of this year with growth hitting an annual rate of 4.1%. The first estimate of US growth in the three months to June 30 matched the estimates of Wall Street economists compiled in a Reuters poll. In the first quarter, the US economy grew at an annual rate of 2.2%, according to the US commerce department. (FT)
Macro Snippets
- Google was hit with a $5.1 billion fine by European antitrust officials for abusing its power in the smartphone market. The decision on Wednesday underlined how European authorities are aggressively pushing for stronger regulation of the digital economy.
- Twitter shares dropped sharply in pre-market trading on Friday after the social media platform revealed that the number of its monthly active users fell in the second quarter. The group’s shares declined as much as 20% in volatile trading.
- Nike Inc. is raising salaries for more than 7,000 employees after an internal pay review and changing how it awards annual bonuses to its global staff, part of a broad overhaul of compensation at the sportswear giant, WSJ reports. (WSJ)
- Facebook suffered the biggest-ever one-day loss in market value for a U.S.-listed company after it warned about slowing growth. Facebook’s loss in market value Thursday is larger than 457 of the 500 companies in the S&P 500.
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