Month: December 2015

European Quantitative Easing

The European Central Bank (ECB) implemented a quantitative easing program in 2015 that benefited European equities, which rallied strongly despite a weakened euro headwind. From the announcement in January through implementation in March, the euro experienced an almost straight-line decline versus the U.S. dollar.

Investors with currency-hedged exposure fared even better. WisdomTree Europe Hedged Equity (HEDJ) rallied 26 percent following QE, versus about 17 percent for iShares EMU Index (EZU).

Accounting for 57.6 percent of the U.S. Dollar Index (tracked via futures by PowerShares DB U.S. Dollar Index Bullish (UUP), the QE program fueled a strong bull rally in the U.S. dollar.

The Bloomberg U.S. Dollar Index, tracked by WisdomTree Bloomberg U.S. Dollar Bullish (USDU), outperformed its popular Eurocentric counterpart tracked by PowerShares DB US Dollar Index Bullish (UUP).

Internet Stocks

FANG, an acronym which stands for Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOG), wormed its way into 2015 market vernacular with impressive performances from all four brands. These household names dominated the stock market in 2015 and are largely responsible for the Nasdaq’s outperformance. They may also be solely credited if the S&P 500 finishes the year in the black.

FirstTrust Dow Jones Internet (FDN) counts the four among its top five holdings and is poised to finish the year with a gain of around 25 percent.

A driving force for the rally was the emergence of cloud services as a profit center. Growth in Amazon’s cloud services, which are a high-margin business as opposed to retail, raised investors’ assessments of the firm’s value. If the trend carries into 2016, shares of older tech stalwarts implementing similar strategies, such as Microsoft (MSFT), could benefit.

 Interest Rates

The Federal Reserve finally fulfilled analysts’ expectations with a much-anticipated and long overdue interest rate hike in December. The Fed passed on rate increases in June and September, frustrating investors and engaging rate-sensitive sectors in a period of watchful waiting and volatility.  The delay gave investors time to price in the hike, thus muting the impact on financial markets, although a few sectors flourished with the December 16 announcement.  Regional banks met our analysts’ predictions with substantial growth and fluctuations indicating their potential to thrive in 2016.  Insurance companies also performed well.  These sectors are both up mid-single digits for the year.

China

The slowdown in China’s economy and depreciation of the yuan led to market turmoil in 2015.

China’s economic growth has been slowing for several years, especially in the industrially dominant Northeast region. Coal and steel have been in decline since 2011. In late 2014, however, other industries such as cement protracted due to weakness in real estate. Infrastructure and housing investments initially served as a buffer to industrial erosion, but real estate investment fell steadily in 2015, leaving behind little to stimulate economic growth.

The impact was felt in global markets dominated by Chinese demand, such as copper and iron ore. Chinese steel mills compounded the problem by dumping excess steel into the global market as demand in China collapsed.

Export-dependent emerging markets, such as Brazil, suffered direct hits both from China’s slowdown and a decision to allow the yuan to depreciate in August.

Developed-market currencies such as the Canadian dollar also suffered due to the drop in resource prices.

Oil Prices

Pressure on oil intensified throughout 2015, resulting in December lows rivaling those reached during the 2008-2009 financial crisis.

China’s economic decline led to a global slowdown in oil demand. Although China continued to buy cheap oil to fill its strategic reserves, producers banked on strong, long-term global GDP growth that proved unsustainable. Additionally, Saudi Arabia grew market shares in an effort to capitalize on falling oil prices, hoping to increase sales at the expense of higher cost producers, such as U.S. shale. American producers did slash rig counts, but oil inventory increased as drillers ramped up output from higher quality. Financial stress in various nations from Russia to Venezuela also added to pressure on sellers. Finally, the Iranian nuclear deal paved the way for Iran to re-enter the global oil market. At the December OPEC meeting, Saudi Arabia and other Gulf states voted against cutting production to make room for Iran.

The drop in oil prices weighed on the energy sector and losses hindered the S&P 500’s growth.

Weak energy prices also spilled over into high-yield bonds. Many shale oil producers made use of cheap debt to finance operations, resulting in exposure to the sector for many high-yield funds. The bonds portfolio of iShares iBoxx High Yield Corporate Bond (HYG) fell about 10 percent on the year, although interest payments remediated losses to about 5 percent.

Holidays will keep volume light this week. Some markets are closed today for Boxing Day (including the UK and Canada) and several European markets will be closed on December 31. The U.S. markets will be open for a full day on Thursday and all markets will close for New Year’s Day on Friday.

The holiday-shortened week will limit trading opportunities and could determine which indexes finish the year in the black. The S&P 500 advanced slightly on Thursday following a rally in commodities and is up just 0.1 percent on the year excluding dividends. The S&P 500’s two percent yield could ensure a gain for the year, provided any drops that occur this week aren’t drastic. The Dow Jones Industrial Average has a steeper hill to climb, but dividend payments and a small gain this week could potentially lead it back into positive year-end territory as well. The NASDAQ needs no help and could finish with a respectable mid-single digit return by the end of the week. The Russell 2000 and the MSCI EAFE Indexes are both likely to finish the year with losses.

The market should generally finish higher in a light trading week. The last few trading days of the year are traditionally bullish, though Monday’s trading gave no clear indication of adherence to that trend.  The downside risk relates to the selling of shares for year-end tax purposes. Investors have until the last day of trading to harvest tax losses for 2015.

The Dallas Federal Reserve manufacturing survey, the S&P/Case-Schiller Home Price Index and pending home sales data will be released this week. Last week’s existing home sales data was weaker than expected, which may have been the result of rule changes regarding the extension of time surrounding closing periods that complicated the house-buying process. An increase in sales this week could indicate that the market quickly adjusted to the new rules. The S&P/Case-Schiller index is expected to match its highs from 2007.

An unexpected draw in crude inventories boosted oil prices last week, so investors will be watching the oil inventory report for a repeat on Wednesday. The Chicago Purchasing Managers’ Index will be released on Thursday. It is expected to rise to 50 from the 48.7 reported last month. A reading above 50 signals expansion in the manufacturing sector. There will be limited economic news from overseas markets.

A recovery in oil and commodity-related shares helped to propel the stock market higher during the holiday-shortened trading week. The Santa Claus rally also lifted the S&P 500 Index into positive territory for the year.

Chevron (CVX), Exxon Mobile (XOM) and other energy firms saw impressive gains this week, rallying on a surprise reduction in U.S. crude inventories. The IMF, OPEC and Russia all came into the week with negative sentiment, predicting depressed oil prices would last into 2016 and beyond. The most active futures option was a put on December 2016 crude at $30. Investors also began adapting to the change in U.S. law which now allows exports of crude oil.

Better-than-expected economic news supported the bounce in stocks. Although third quarter gross domestic product growth was revised down to 2.0 percent, the reading exceeded many economists’ expectations. The University of Michigan Index of Consumer Sentiment also beat estimates with a confidence rating of 92.6. Personal incomes increased 0.3 percent in the United States, making November the eighth consecutive positive month. Consumer spending rose by the same 0.3 percent, while core inflation, as measured by the core PCE, came in under the Fed’s ideal 2-3 percent range at 1.3 percent. New home sales also rose in November, though the sale of existing home sales declined.

Central banks also supported financial markets during the week. The People’s Bank of China added liquidity and alluded to adding stimulus to combat deflationary pressure. Peter Praet, an executive board member of the European Central Bank, said the organization would continue its accommodative monetary policy as long as necessary.

Nike (NKE) shares reversed all-time highs in after-hours trading on Tuesday when the company announced a rare miss in quarterly sales. The stock was off 2 percent on Wednesday and nearly another 2 percent at the open on Thursday. Shares also split 2 for 1 on Thursday. Bed Bath and Beyond (BBBY) was down more than 2 percent on news that it was lowering its third quarter guidance. Shares of the retailer have been sliding all year long and the firm’s stock buyback policy has proven to be a waste of shareholders’ money. Disney stock was also lower on the week, despite record box office receipts for Star Wars and an overall uptrend in the stock market. ConAgra (CAG) is up 5 percent this week after earnings per share exceeded estimates. The company benefited from the sale of its private label business and cost cutting.

WisdomTree Chinese Yuan (CYB)
WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares Swedish Krona (FXS)
CurrencyShares Canadian Dollar (FXC)
WisdomTree Emerging Market Currency (CEW)
WisdomTree Commodity Currency (CCX)
PowerShares DB U.S. Dollar Bullish Index (UUP)

The Canadian dollar, emerging market and commodity-related currencies fell to 52-week lows versus the U.S. dollar over the past several days, while oil dropped to its 2004 lows. The Canadian economy enjoyed a housing boom tied to the rise in oil prices, which has now evaporated. Canada’s dollar is now at 2004 levels and a push to 2000 lows is possible. The U.S. dollar has gained more than 20 percent versus the loonie in 2015. Another rally of 15 percent would take it to those turn-of-the-millennium highs.

The Swedish krona rebounded nicely from a potential triple-bottom. The euro has not fallen below its March lows and could challenge the U.S. Dollar Index if it maintains short-term strength. USDU continues to outperform UUP due to its emerging market exposure. The Chinese yuan has further weakened the emerging market with its continued decline.

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

Investors moved back into MLPs, which sent steel stocks higher. The U.S. government will place a 256 percent tariff on some Chinese steel exports in retaliation for dumping. China has been selling nearly all of its excess steel onto the world market at deep discounts. Similar steel tariffs are likely to be imposed in 2016 in response to China’s selloff.

Russia is planning for $30 oil and demand for OPEC’s oil could fall for in response to increased production in non-OPEC countries, such as the USA and Russia. According to the International Monetary Fund (IMF), Iranian production could lower oil prices by $5 to as much as $15 a barrel.

iShares Biotechnology (IBB)

Biotechnology is reaching the short-term resistance level of $340. A break above would be bullish and shares could run as high as $360 or $370 before facing resistance.

iShares MSCI Emerging Markets (EEM)

EEM bounced off the $31 key support level on December 11. For now, a push towards $36 is possible.

Guggenheim Solar (TAN)

Solar rebounded sharply on the extension of alternative energy tax credits, but has since stalled at the $34 level of resistance.

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)

All sectors lost ground in the past week, with utilities weathering the storm as financials suffered. While financials typically benefit from rising interest rates, many traders closed their financial long positions and utilities shorts following the Fed’s decision.  Energy drifted lower due to the dip in oil prices, but the sector did push higher on Wednesday.

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

The charts below depict bond funds without dividends. HYG and JNK bounced over the past several trading days. The lows hit on December 14 are now key support levels and a test is likely before high-yield can fully recover. Rebounding oil prices would go a long way to shoring up these funds. Rising bond yields are starting to chip away at portfolio value for investment-grade LQD, but interest payments offset the small dip.

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)

Barring an extremely volatile final week of trading, the Nasdaq will be 2015’s best-performing major index. Small- and mid-cap stocks will complete a second consecutive year of underperformance versus large-caps. With dividends, both the S&P 500 and Dow Jones Industrial Average are likely to close with a gain for the year.