Month: February 2016

Monday’s strong open was thwarted by weaker-than-expected regional manufacturing data and a decline in treasury yields. Existing home sales were also lower than anticipated for January, citing weather and low inventory. Investors are still hoping to carry last week’s momentum into March, but it will need to overcome junk bonds and rising treasury prices to do so. Oil prices rallied over 3 percent as OPEC and Nigeria hype production cuts, but for the first time this year the market failed to follow.  Many analysts predicted the split, which may signal both defensive hedging and weariness with energy-driven volatility.  Despite Monday’s disappointing returns, ending the market’s lockstep with oil has the potential to alleviate some volatility.

Key earnings reports due out this week include retailers Dollar Tree (DLTR), Costco (COST) and Staples (SPLS) as well as the grocery store chain Kroger (KR). Investors see strong growth potential for Dollar Tree on Tuesday, as the company streamlines its operation and seeks additional cost savings as part of its Family Dollar acquisition. Consensus calls earnings per share of $1.07 and revenues of $5.41 billion. Costco takes center stage on Wednesday. The company is still seeing rapid growth as it sells in bulk at lower prices, which continues to draw new shoppers. Analysts estimate that Costco will report EPS of $1.28 and revenues of $28.51 billion.

Thursday will see how well Kroger’s fourth-quarter results meet consensus estimates of $0.54 in EPS on revenues of $26.26 billion. On Friday, the office supply store Staples is expected to report EPS of $0.28 and revenues of $5.42 billion. Analysts will scrutinize the report for how well the new leadership team is performing in its efforts to restructure the company and drive growth. In addition to reports from all these firms, guidance will also be critical. Investors have been reacting more to guidance than to results in recent weeks, such as last week’s rally in Target (TGT). Investors overlooked weak earnings and rewarded the company for its positive guidance.

Key domestic economic reports this week are the ISM and Markit manufacturing PMIs due on Tuesday. The ISM survey is expected to show a reading of 48.6, up from the prior reading of 48.2, while the Markit survey is projected to come in better at 51 and could counteract Monday’s disappointing Chicago PMI. The Federal Reserve Beige Book, a summary of economic data and anecdotes from each Federal Reserve bank ahead of its FOMC policy meeting, will be released on Wednesday. Weekly unemployment claims will be out on Thursday, along with productivity and unit labor costs for the fourth quarter of 2015. Both are expected to improve from the prior estimates since GDP was positively revised last week to 1.0 percent growth. The key data for the week will be monthly jobs report and the unemployment rate for February will be released on Friday. It will be the last jobs report before the two-day Federal Reserve meeting in March. With the rise in core inflation now confirmed by the core PCE last week, a positive jobs number would signal an accelerated pace of rate hikes this year versus what investors were expecting only a few weeks ago. Financials will benefit the most from rising rate expectations, while utilities will be negatively impacted.

The meeting of G-20 finance ministers over the weekend in Shanghai did not produce any changes in overall monetary policy. China did cut its reserve requirement ratio as it tries to shore up its slowing economy. The Eurozone reported deflation fell below zero to negative 0.2 percent. This could push the European Central Bank to ease monetary policy at its March meeting, and the euro weakened on the news as a result. Tuesday will see the release of Chinese PMI manufacturing data that will reveal the current strength of the world’s second largest economy, along with PMIs from the Eurozone and other key economies.

Monday’s market gap underwent a brief bout of selling pressure on Tuesday and early Wednesday, but quickly resumed its upward climb. The S&P 500 Index closed lower on Friday but gained  1.6 percent on the week.  An upward revision of fourth quarter GDP to 1.0 percent growth added to the week’s strong data.

The market continues to move in lockstep with energy. The Saudi-Russian deal to freeze production fell apart as expected, sending oil lower, but a draw on oil and gas inventory in the U.S. pushed prices higher, catching short sellers off guard. Oil prices jumped six percent in response and the stock rally resumed. Financials benefited as well, due to increased concerns about the impact of energy loans.

The Bureau of Economic Analysis raised its estimate of fourth quarter GDP growth to 1.0 percent on Friday. Stronger personal consumption, residential construction and government spending lifted the estimate. The BEA also released personal income and outlays for January, which showed inflation heating up. Although headline PCE inflation was only 0.1 percent for the month and 1.3 percent in the past year, core PCE increased 0.3 percent and climbed 1.7 percent in the past year.

Core PCE has fallen short for the Federal Reserve; the target range for the Fed is 2 percent to 3 percent. Last year, core PCE was 0.1 percent on average, an annual run rate of less than 2 percent. At 0.3 percent, prices would be at the upper end of the Fed’s target zone by late 2016, excluding any inflationary boost from energy.  This could be an aberration, but core CPI is rising as well, suggesting inflationary pressures may be building. It is too early to say which way the data will move in coming months, but if the economy remains strong and oil prices rebound, this inflation data argues strongly in favor of multiple rate hikes in 2016. The financial sector rebounded as a result, with SPDR Financial (XLF) rising more than 1.1 percent on the news, well ahead of the S&P 500’s gain of about 0.3 percent. The U.S. dollar rallied as well, gaining nearly 1 percent on the euro, while gold dipped as much as $25 an ounce.

In global news, Bank of Finland Governor Erkki Liikanen reiterated that the European Central Bank was ready to enact additional policy measures if necessary to support the eurozone economy. On Wednesday, the president of the Richmond Federal Reserve, Jeffrey Lacker said he saw no signs of an imminent recession in the United States. He also presented a case for the Fed to raise interest rates again in 2016. The day prior, Federal Reserve Vice Chairman Stanley Fischer stated that the Fed had yet to determine what course of action it would take at its next meeting in March. There were also reports that the Bank of Japan would increase its quantitative easing. G20 finance ministers meeting in Shanghai indicated they were prepared to combat slowing growth in China, but there was no consensus on a policy course. The International Monetary Fund called for the G20 to consider a global stimulus package. With the U.S. economy already doing well, any global stimulus effort could accelerate both U.S. growth and inflation.

Aside from GDP and core PCE, there were several other key economic reports this week. On Monday, eurozone PMI came in at 52.7, its lowest reading in over a year. Existing home sales in January rose to six-month highs, but new home sales dropped 9.2 percent. The Richmond Fed manufacturing survey released Tuesday showed slowing growth in the Mid-Atlantic Region. On Thursday, unemployment claims were only slightly higher than last week’s data, which was expected. Durable goods orders jumped 4.9 percent in January, the most in 10 months and significantly higher than the expected 2.5 percent increase.

As for earnings, Europe’s largest banks reported mixed earnings. Shares of HSBC slid 3 percent after news of a surprise fourth quarter loss, Lloyd’s shares rose more than 13 percent after it reported an increase in earnings. In the U.S., retail earnings season was in full swing. Home Depot’s (HD) revenues and earnings per share beat expectations. The company also announced that it would raise its quarterly dividend by 17 percent. Shares climbed about 4 percent on the week. Lowe’s (LOW) also reported better-than-expected quarterly sales and raised its guidance for next quarter as well, though shares only saw a small gain. Target (TGT) reported earnings and sales were below consensus estimates, but strong guidance sent shares higher by 8 percent. Best Buy (BBY) released earnings and sales that were slightly higher than expectations. The company also announced a share buyback plan along with a special one-time dividend, pushing shares up about 9 percent on the week. SPDR Retail (XRT) was sitting on gains of 4 percent for the week in Friday trading. Overall, it was a very encouraging week for companies reporting earnings.

WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares Canadian Dollar (FXC)
CurrencyShares Japanese Yen (FXY)
WisdomTree Emerging Market Currency (CEW)

The Japanese yen’s rally is playing into market volatility. It’s possible the yen rally will reverse and that stocks are “right” as to the direction of the market, but the global market will dictate long-term outcomes.

The U.S. dollar remains in limbo with both USDU and UUP in trading ranges. The euro shows an inverse pattern. Eventually this trading range will break, though should the dollar remain in a bull market, odds are in favor of the dollar. The European Central Bank is expected to increase quantitative easing in March or further cut interest rates below zero.

The Canadian dollar is among the weakest developed-market currencies. The new government announced plans for much greater deficit spending and the Bank of Canada is considering negative interest rates.

United States Oil (USO)
SPDR Energy (XLE)
FirstTrust ISE Revere Natural Gas (FCG)
Global X Copper Miners (COPX)
Market Vectors Coal (KOL)
Market Vectors Steel (SLX)

Oil prices rallied on rumors of a Saudi-Russia agreement to freeze production with a provision that Iran stop production as well. Unsurprisingly, Iran’s refusal to co-operate has left the plan in the wind, bringing oil prices down 4 percent early in the week.

Both crude oil and energy producers are hitting resistance, but energy stocks are in an uptrend. The very short-term outlook is cautiously positive. Natural gas producers are at their lows and will be vulnerable to any further downside action.

Steel producers, coal and copper miners have all bounced strongly toward key resistance points.

iShares MSCI Emerging Markets (EEM)

We’ve been keeping an eye on the $31 level for some time and the break in early 2016 was a harbinger of lower prices, with a downside target around $26. A move above $31 would violate this outlook, but as long as EEM stays below $31, it will remain in effect.

Market Vectors Indonesia (IDX)

Indonesia remains one of the strongest emerging markets and continues in a short-term bullish pattern that, while somewhat dependent on EEM, should remain in effect if levels hold above $17.

SPDR Utilities (XLU)
SPDR Pharmaceuticals (XPH)
SPDR Materials (XLB)
SPDR Consumer Staples (XLP)
SPDR Consumer Discretionary (XLY)
SPDR Healthcare (XLV)
SPDR Technology (XLK)
SPDR Financials (XLF)

Utilities snapped out of their losing streak last week and remain the strongest of the S&P 500 sectors in 2016. Consumer staples aren’t far behind, near their 52-week high. Consumer discretionary experienced a sharp rally in recent weeks as employment and income data were strong in January.

Internet stocks are trying to hold on to recent gains. There’s some support at $62 and resistance at $66. Due to the volatile nature of the shares, a test of either could occur in the next week to ten days.

iShares iBoxx High Yield Corporate Bond (HYG)
iShares iBoxx Investment Grade Corporate Bond (LQD)

High quality bonds continue to attract investment, while high-yield struggles under oil prices.

The 5-year Treasury yield is near the bottom of its nearly 3-year trading range.

SPDR Gold (GLD)
SPDR S&P 500 (SPY)
iShares Russell 2000 (IWM)
S&P Midcap 400 (MDY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)
SPDR S&P Dividend (SDY)

Mid-caps are still relatively strong versus the broader market but small-caps are gaining ground. The Dow is still in a relative uptrend to the S&P 500 Index going back to August 2015, but its lead in 2016 has eroded. The Nasdaq has the potential to arrest its relative underperformance versus the S&P 500 if this week’s gains are sustained. Dividend shares have pulled back only slightly and remain a good choice for investors.

SPDR Retail (XRT)

Retail earnings season heats up this week. XRT rallied in spite of weak guidance from Wal-Mart (WMT) due in part to positive consumer data. Shares of Target (TGT) rallied strongly after missing earnings and revenues today, in response to positive guidance. XRT needs to climb above $44 to improve the near-term outlook. As a generally equal weight fund, no single holding has much influence on value. Groupon (GRPN), however, is one of only a few online retailers in the fund and currently the largest holding at 1.63 percent of assets. The fund has faltered since November 2015 but has rebounded after recent takeover talks.

Stocks are poised to continue last week’s rally following positive news on the energy front. On Saturday, Russian Energy Minister Alexander Novak indicated the possibility of a formal agreement with Saudi Arabia by March 1 targeting $50 per barrel oil. Oil prices reacted with a 6-percent rally in early trading today.

Rising oil prices are generally a negative for the economy, all else holding constant, but with many companies facing bankruptcies, an increase in oil prices lowers the potential for defaults in the oil patch and reduces the risk for banks with oil and gas industry exposure. While the news of a pricing deal is positive, the United States still has record high inventories. Caution is warranted for investors looking to buy low.

January’s unexpectedly high core inflation reading (0.3 percent on the month and 2.2 percent versus a year ago), along with the drop in unemployment filings will put the Federal Reserve back in the spotlight. Investors will be on alert for any clues as to the central bank’s next move at its March meeting. Investors have discounted any near-term moves, but economic data is mixed, with inflation, employment and GDP growth estimates increasingly supportive of another rate hike. Expectations for another rate hike this year have gone from 25 percent to 50 percent in the past week.

Manufacturing continues to hold back interest rate progress. The flash PMI for February was 51.0, below an expected 52.4 reading. On Tuesday, January existing home sales and the Richmond Fed manufacturing survey will be released, followed by January new home sales on Wednesday. Thursday’s data will include weekly unemployment claims, expected to be slightly higher than last week. Durable goods data for January are out on Thursday as well and consensus is for a 2 percent increase in orders. On Friday, the BEA will release the second estimate of fourth quarter gross domestic product, along with the Personal Income and Outlays for January, which will contain the Fed’s favored measure of inflation, the Core PCE. If core PCE converges with core CPI, this last data point could potentially sway interest rate expectations toward a hike.

Scheduled appearances by Fed Vice Chairman Stanley Fischer and Atlanta Fed President Dennis Lockhart this week may provide hints regarding the Fed’s current mindset. The meeting of G-20 finance ministers in China at the end of the week will also raise the potential for coordinated global action by central banks.

Flash eurozone PMI fell to 52.7 in February, the worst showing in more than a year. The flash PMI for Japan fell to 50.2, barely in expansionary territory. The Japanese PMI was pulled lower by a drop in export orders, pointing to continued weakness in the Chinese economy. January CPI data for the Eurozone is scheduled to be released on Thursday.

In addition to earnings reports from some of Europe’s largest banks such as HSBC, Lloyd’s and RBS, the markets will digest reports from retailers Home Depot (HD), Lowe’s (LOW) and Target (TGT), as well as Best Buy (BBY) and J.C. Penny (JCP). Consensus estimates are for Home Depot, Lowe’s and Target to all show an increase in revenues and earnings per share. Target is expected to show a profit due to strong online holiday sales. Best Buy is expected to report lower quarterly numbers as its holiday sales were weak and it continues to struggle against online retailers such as Amazon. Turnaround efforts are expected to return J.C. Penny to profitability after last quarter’s losses. The slew of retail numbers out this week will affect funds such as SPDR Retail (XRT), which have broad exposure to the sector.