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WEEKLY SECTOR PERSPECTIVE The equity markets rallied last week, led by a 4.33-percent advance in the MSCI EAFE Index. The euro weakened on expectations of additional monetary easing by the European Central Bank, which benefited […]
The recent rally was sustained through the holiday shortened week, providing for the market’s best trading periods since August. Global stocks also edged higher, as emerging markets were lifted by signs of stabilization in oil prices around $30 per barrel. West Texas Intermediate (WTI) gained almost 18 percent per barrel at its peak on continued reports of OPEC and Russian production freezes as well as a reduction in U.S. inventory levels.
Overall economic news, however, remained positive. The market was bolstered by an unexpected decline in the number of Americans filing for first time unemployment benefits. Producer prices edged up unexpectedly and U.S. industrial output rose 0.9 percent in January. Mortgage refinance applications rose more than 8 percent to the highest level in over a year. Capacity utilization also ticked higher, to 77.1 percent in January, ahead of estimates. The Empire State Manufacturing Index climbed back to -16.6 from January’s plunge to -19.4 as manufacturers struggled with dollar strength and sluggish global demand.
In earnings news, the share price for the online hotel and travel company Priceline (PCLN) advanced more than 11 percent after reporting positive forward guidance, better-than-expected earnings per share and revenue growth for the fourth quarter of 2015. Adding a record number of customers, T-Mobile U.S. (TMUS) tripled its net income and easily beat expectations. On the downside, Duke Energy (DUK) and Wal-Mart (WMT) missed consensus estimates. Duke Energy was hurt by volatility in its Central and South American business units. Wal-Mart’s net profits fell 8 percent, but the real hit to the stock came when the company lowered its sales forecast for next year. A dividend hike by fellow Dow component Coca-Cola (KO) helped offset Wal-Mart’s slide.
Overseas, European Central Bank (ECB) President Mario Draghi indicated the ECB may soon engage in another round of monetary easing, perhaps at the upcoming March meeting. In the United States, President of the St. Louis Federal Reserve James Bullard said that it would be unwise for the Fed to raise interest rates in light of declining inflation expectations and current market volatility. On Thursday, San Francisco Fed President John Williams said “underlying U.S. growth is strong” despite global volatility, comments that supported this week’s rally.
WisdomTree Chinese Yuan (CYB) WisdomTree Bloomberg USD Bullish (USDU) CurrencyShares Euro Trust (FXE) CurrencyShares Swedish Krona (FXS) CurrencyShares Canadian Dollar (FXC) CurrencyShares Japanese Yen (FXY) WisdomTree Emerging Market Currency (CEW) WisdomTree Commodity Currency (CCX) PowerShares DB U.S. Dollar Bullish Index (UUP)
The yen continues to wield heightened influence over the broader stock market following a pullback in the currency amid rallying U.S. stocks. The critical area for FXY is $82-83. The yen might bounce from there, which would be bearish for stocks in the short-term, but a fall into the $78-82 range could benefit the market.
The Chinese yuan has also moved back into the spotlight. As the Chinese New Year holiday concluded, the People’s Bank of China publicly declared support for the yuan ahead of a spate of negative economic data. When trading opened on Monday, the central bank strengthened the yuan and traders sent the offshore yuan sharply higher, with reports of Chinese banks dumping U.S. dollars. It was the largest one-day gain for the yuan since 2005. On Tuesday, we learned China’s lending surged in January to a record high, almost exceeding the peak set during the 2009 stimulus and the yuan weakened on the news.
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)
Industrial suppliers, copper miners and steel mills have seen their share prices rebound in recent days, but the bounce in oil was subdued. A Russia-Saudi Arabia output freeze sparked expectations of higher prices and briefly boosted oil. As details emerged, however, the rally lost momentum. The deal was contingent on other nations agreeing to similar freezes, but newly-unsanctioned Iran plans to ramp up production. Additionally, production was to be frozen at January levels, when Saudi Arabia’s prices were near all-time highs.
Until there is a fundamental change in the supply-demand picture, oil is likely to continue its slide. Production remains high around the globe, despite excessive inventory. The drop into the $20s in early February looked like a capitulation move, but this week’s reaction to the Russia-Saudi Arabia deal illustrated the bulls’ commitment to market timing.
Emerging markets have regained some ground over the past week. There is a small uptrend in place as February’s lows thus far have been higher than the low in January. As long as EEM can hold at or above that February low, just below $29, the short-term outlook is bullish.
We looked at Indonesia last week. It continued to rally in the interim and may be poised for a pullback. That said, if this rally holds, the fund could be back in the mid-$20 range by the end of the year.
IDX is not immune from global markets, but as the chart shows, it is much less affected than other countries due to its major domestic infrastructure investment policy.
The past week’s rally was reflected in the sector performance breakdown. Utilities was the only major sector to decline, followed by only a modest advance in consumer staples. Consumer discretionary, technology, energy and healthcare all enjoyed strong gains. A rally in the oversold Internet and biotechnology funds lifted both sectors out of their oversold conditions.
iShares iBoxx High Yield Corporate Bond (HYG) iShares iBoxx Investment Grade Corporate Bond (LQD)
Investors sent bond prices lower and yields higher, but credit risk also eased. As a result, investment-grade bonds fell as Treasury yields went up, while high-yield bonds rallied.
The 5-year Treasury yield briefly broke out of its nearly 3-year trading range, but has bounced back. Rate hike expectations are edging up again and this has eased buying pressure in the treasury market.
Uncertainty leading up to Yellen’s testimony last week sparked a fear-induced spike in gold that quickly reversed once the market regained composure. The $1180 level is an important support line for gold, though a sustained breakout is unlikely and some speculate gold will fall well below that line by the end of the year.
Mid-caps continued their steady outperformance versus the S&P 500 Index last week. Small-caps also outperformed for the first time since mid-December. The Dow Jones Industrial Average’s relative outperformance slumped slightly, but for now it continues to edge out the other indexes. The Nasdaq is approaching two weeks of relative outperformance. The outperformance of dividend paying shares also saw a reversal.
iShares US Preferred Stock (PFF) PowerShares Financial Preferred (PGF)
These two ETFs reflect investor reactions to problems at Deutsche Bank (DB) in February. Both of these funds have exposure to European banks and concerns regarding DB’s ability to repay maturing debt and the exposure of specific banks to defaulting energy loans caused the European banking sector to tumble. This extended to their preferred shares, leading to a dip in the price of PFF and PGF. As the panic evaporated, so did the losses in PFF and PGF.
Click Here to view The Investor Guide to Vanguard Funds Market Perspective: 70 percent of S&P 500 Firms Beating Estimates The Atlanta Fed’s GDP Now is currently forecasting 2.5 percent […]
