Another options expiration Friday that pulled prices higher into the weekly close. Lots going on for summer trading with Turkey’s currency crashing and U.S. stocks trying to breakout to new all-time highs. Technology has been the laggard so that throws some caution into the wind as its benchmark index (NASDAQ) trended down to close the week. Perhaps new leadership sectors will emerge with a breakout of the S&P 500 to new highs. Some of the nest performing sectors lately have been Utilities and REITs, for example.
If we do breakout, we can use the previous high and low from earlier this year to project a minimum upside target for the S&P 500 in the chart below:
The breakout of the S&P 500 could be the most significant thing in the immediate future so there is not much else to say as we roll into the end of August and towards the mid-term election portion of the calendar.
Things to watch next week:
- Turkey’s financial markets will be closed for all of next week due to a national holiday. A perfect opportunity for Turkish leadership to find support for the Lira from an outside party. Watch for news of some kind of bailout/deal/support to hit the tape.
- Breakout of the S&P 500.
- Semiconductors need to regain their footing. Weak earnings outlook have pushed these stocks into bear market territory.
Chart of the Week!
The chart below should give you an idea of how Turkey’s woes can spread into other countries. As the Lira depreciates, it becomes even harder for Turkish companies to repay debt they have issued in Euros. Quite the problem for Spanish banks which amounts to almost 5% of their GDP.
In response to the Lira’s rapid decline, local interest rates have skyrocketed.
Economic & Central Banking Snippets
- Japanese exports rose 3.9% in July to miss the 6.3% increase expected by economists. The exports growth was slower than the 6.7% pace seen in June. Exports to the U.S. fell 5%, while exports to China jumped 12%. Japan’s exports to the U.S. have been in a slowing trend for several months due to some negative business sentiment associated with recent protectionist trade policies. (Seeking Alpha)
- The Philly manufacturing index for August fell by more than half from July to 11.9 from 25.7. The estimate was 22. New orders plunged to 9.9 from 31.4. That’s the least since September 2016. (Boock Report)
- China appears to be propping up the yuan just as its government prepares to restart trade negotiations with the U.S. that likely will include warnings against further depreciation of the currency, which has dropped more than 8% vs. the dollar since March.
- Real average hourly earnings for all employees decreased 0.2% from July 2017 to July 2018.
- Redfin, a residential real estate brokerage firm, suffered a loss of 22% on their stock price after earnings. On the conference call, the CEO commented, “For the first time in years, we are getting reports from managers of some markets that homebuyer demand is waning, especially in some of Redfin’s largest markets.” He specifically cited Seattle, Portland and San Jose but also said “The trend is continuing in July and reports are now coming in from Washington, DC, Boston, VIrginia and parts of Chicago as well that the homes there are getting harder to sell.” (Boock Report)
- US securities regulators have served Tesla with a subpoena as part of an investigation that was opened due to a tweet by Mr Musk, in which he said he wanted to take the electric car company private and had “funding secured”. Separately, investors and analysts say that $420 per share may not be a big enough premium to take Tesla private. (FT)
- There was a sharp rise in foreign net selling of US Treasury debt of $48.6B in June. It is the largest one month of selling since October 2016. China sold notes and bonds for the 3rd month in the past 4 which takes their holdings to the lowest level since January. Japan resumed its selling after a temporary respite in May and they hold the smallest amount of longer term Treasuries since October 2011. (Boock Report)
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