Month: November 2015

Investors will be paying close attention to a wide range of economic reports and news from key officials this week. Fed Chair Janet Yellen will speak at the Economic Club in Washington on Wednesday and will testify before a joint committee on Capitol Hill on Thursday. Other Fed officials are also scheduled to speak throughout the next two weeks leading up to the Fed’s much anticipated December meeting. The futures market odds of a December rate hike stood at 78 percent coming into this week.

Several important economic data points affecting interest rate policy will also be released over the coming days. Things got off to a weak start on Monday when the Chicago PMI came in at 48.7 for November, below the 56.2 reading in October. A number over 50 signals manufacturing expansion, below signals contraction. The dip in the reading came as new orders fell to levels last seen in March. Pending homes sales in October rose 0.2 percent, which could improve the PMI with a delayed boost in manufacturing sales.

Tomorrow will bring the more important Markit and ISM PMIs for November, which unlike the Chicago PMI, covers the entire nation. Both numbers are expected to show expansion. PMIs for other nations, such as China, will also be a factor for markets.

On Friday, we will see the release of the last monthly unemployment report before the Federal Reserve meeting. The unemployment number, along with average hourly earnings, may have a significant impact on the Fed’s expected decision to raise short-term interest rates. Economists expect employers to have added 200,000 jobs in November. The unemployment rate is projected to remain unchanged at 5 percent, and average hourly earnings are expected to have increased 0.2 percent.

Other reports that can either support or chip away at the consensus opinion include the Federal Reserve Beige Book, which is expected to show an increase in economic growth. October’s trade deficit is projected to have fallen slightly, to $40.6 billion.

Key earnings announcements late in the week include Sears Holdings (SHLD) and new homebuilder Hovnanian Enterprises (HOV). Homebuilders have been on a winning streak the past couple of weeks and this earnings report will be an important data point for the sector in the short-term.

In overseas news, the International Monetary Fund is expected to announce on Monday that it will include the Chinese yuan in its basket of reserve currencies in 2016. The yuan will join a select group: the British pound, euro, yen and U.S. dollar. While a positive step forward for China, it will not be bullish for the currency. The yuan will not function as a reserve currency until China opens its capital account, making the addition to the SDR mainly symbolic for the next couple of years. Also, with the U.S. dollar rising to a new 52-week high and Chinese economic indicators yet to bottom, depreciation pressures are mounting.

The European Central Bank will hold a key meeting on Thursday. Traders anticipate monetary easing of some sort: another round of quantitative easing, lower interest rates or other monetary tools designed to stimulate the stagnant Eurozone economy. This move has been priced in by the markets and is a big reason why the U.S. Dollar Index made a new 52-week closing high on Friday of last week. The U.S. dollar could sell off if policymakers disappoint, and the euro could fall to a new 52-week low if they follow through. Odds are favoring the U.S. dollar bulls to start the week, but anything is possible given the amount of central bank activity this week.

Finally, on Friday OPEC will gather in Vienna as crude oil continues to face a prolonged slump in prices. Iranian production is set to hit the world market soon and several nations need prices to rise in order to protect their currencies or national budgets, including Saudi Arabia.

WisdomTree Chinese Yuan (CYB)
WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares Swiss Franc (FXF)
CurrencyShares Swedish Krona (FXS)
CurrencyShares Japanese Yen (FXY)
CurrencyShares Australian Dollar (FXA)
CurrencyShares Canadian Dollar (FXC)
WisdomTree Emerging Market Currency (CEW)
WisdomTree Commodity Currency (CCX)
PowerShares DB U.S. Dollar Bullish Index (UUP)
WisdomTree Japan Hedged Equity (DXJ)
WisdomTree Europe Hedged Equity (HEDJ)

The U.S. economy grew at a 2.1 percent annualized pace in the third quarter, faster than the initial 1.5 percent estimate and in line with forecasts. The accelerated growth is promising for those looking forward to a long-awaited interest rate hike.

European Central Bank officials have made public statements that may indicate increased quantitative easing in December, resulting in a slide for the euro. The Swiss franc ETF (FXF) sank to a new low, but the currency itself continues to cling to its former 52-week low. The Swedish krona is also struggling.

USDU, in contrast, held steady after climbing to a new 52-week high. This reflects the strength of support and we can look forward to another potential break out. Given the overall bullish trend in the U.S. dollar, odds support a resolution in the greenback’s favor.

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 remain locked in the lower $40 range due to persistent selling pressure, despite a number of recent events. Saudi Arabia made assertive pledges last Monday, pushing oil prices up about $1 a barrel. The attack launched by Turkey that resulted in a downed Russian fighter plane was reflected in oil markets, which responded by bidding up prices. Geopolitical risk tends to be short-lived; the Russian incursion into Ukraine temporarily sent oil prices above $100 last year, but they quickly crumbled under the weight of fundamental economic forces.

Copper sank to a new multi-year low in the past week, briefly falling below $2 a pound in the futures market.

iShares US Home Construction (ITB)

ITB spiked this past week, reversing recent underperformance versus the S&P 500 Index. New homes sales for October were out today and showed a pickup in activity. As rate hike expectations have solidified, the fund has rallied, which is an encouraging sign. The strong housing number further raised rate hike expectations, bringing the odds of a December rate hike up to 78 percent.

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)

Healthcare was the worst performing sector over the past week, while consumer discretionary was the strongest. Within the consumer sector, retail firms powered the advance as they recovered from recent losses.

Healthcare is still struggling to recover its former glory. One subsector helping last week was pharmaceuticals, aided by the Pfizer (PFE) offer for Allergan (AGN), which pushed pharma funds to their highest levels since August. Health providers remain under pressure, having steadily lost ground since July. The nation’s largest insurer, UnitedHealth Group (UNH) said it may quit the Affordable Care Act in 2017, due to high costs. UNH is a relatively small insurer within the ACA, but investors are taking its potential exit as a sign others may follow suit.

Regional banks rebounded last week, nearer to their highs. Insurers are another emerging financial subsector that is piquing our interest. Insurance companies will benefit from rising interest rates which will increase the profits on the capital held in asset pools used to pay claims.

The FANG stocks, Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG) continued to pull the Internet sector and technology higher last week.

iShares MSCI Turkey (TUR)

The Turkey/Russia tensions rattled global markets on Tuesday. TUR slipped more than 4 percent on the day. Turkey has been immersed in a growing economic crisis and this incident may distract the public from the economy, but won’t change the overall trend.

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

The charts of HYG and LQD show the price without dividends, which approximates the value of the underlying bond portfolio. HYG is approaching its 2015 low and LQD recently bounced off its lows. With rate hike expectations hardening, interest rates are rising across the board. The 2-year treasury yield climbed above its 2011 highs this week. Both the 5- and 10-year treasury yields have been growing as well.

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- and small-cap shares ETFs have displayed improvements since late October, followed by strong economic data. These funds generally include higher financial exposure; in both MDY and IWM, financials are the largest sector. Additionally, a strong U.S. dollar is considered negative for large-cap multinational earnings, as smaller firms are generally domestically focused, particularly in the financial sector.

After scoring one of its best weeks of the year, the U.S. markets are now looking forward to a holiday-shortened week. The exchanges will be closed on Thanksgiving Day and will close at 1 P.M. on Friday. Global markets, however, will remain open.

As a result of the short week, economic reporting activity will be front-loaded over the next two days. This morning, it was reported that October existing home sales fell by 3.4 percent, though they are up 3.9 percent when compared to last year.  Home construction shares rallied last week along with retailers Home Depot (HD) and Lowe’s (LOW), who are both up over 1 percent through early trading this morning, despite the home sales report.

Revised third quarter GDP data will be reported on Tuesday and durable goods index report will be released on Wednesday. Also out on Wednesday: consumer spending, core inflation, personal income and new home sales for October. The durable goods report, which measures consumer’s willingness to purchase big-ticket items, will be key for the Fed. Economists are forecasting robust growth of 2.1 percent for the month.

The upcoming personal income and spending report contains the PCE deflator used by the Fed to measure inflation. An uptick in inflation will strengthen the case for the Fed to tighten at its meeting on December 15^th and16 ^th. The initial estimate of third quarter economic growth was lower than economists expected at 1.5 percent, but a substantial upward revision to 2.2 percent is expected.

The totality of these economic reports could push the Fed much closer to a rate hike, which the market has increasingly priced in. Traders see confidence from the Fed and New York Fed President Dudley said an increase in rates is as much about signaling confidence as it is about setting policy. Vice Chairman Fischer has also spoken in terms that are interpreted as signaling an increase.

In earnings news, well-known names reporting this week include Tyson Foods (TSN), Hewlett-Packard (HPQ), Dollar Tree (DLTR) and John Deere (DE).

Overseas, European Central Bank President Mario Draghi reiterated on Friday the central bank’s commitment to lifting inflation as soon as possible, which is a sign that action will be taken at the agency’s governing council meeting in early December. The euro slumped in overnight trading, but was back to Friday’s closing levels on Monday. The euro will be the most important factor for the U.S. Dollar Index. The index came within a few tenths of its 2015 high on the euro’s drop overnight.

The S&P 500 finished 3.3 percent higher last week and the Dow Jones Industrial Average climbed 3.6 percent, reversing similarly sized losses a week earlier. Stock investors have much to be thankful for in Thanksgiving week: over the past 20 years, the stock market has rallied an average of 1 percent. Going back to the late 19^th Century, the stock market has rallied 62 percent of the time in the Tuesday to Friday trading window, one of the best odds for any three-day period during the year.

While stocks have history on their side, commodities are still under pressure. Oil spiked on Monday following Saudi comments about doing whatever it takes to stabilize oil, but then quickly gave up the gains. Copper futures briefly fell below $2 a pound. Last year, oil prices crumbled over the Thanksgiving holiday, in part due to lower volumes over the holiday. Copper is behaving similarly to oil last year and commodities selling has been picking up in China. If there are any surprises this week, they are likely to come out of the commodities market.