Month: February 2016

Positive consumer spending data and the U.S. labor market fueled a Friday rally that carried over into Asia and Europe. Those gains continued into the open of trading today. Energy rebounded on Friday as well, and the advance extended on Tuesday after Russia and Saudi Arabia agreed to freeze production at January levels. Although the deal is contingent on other producers agreeing to the freeze, and Iran has said it will not, markets are still taking it as a positive sign.

Earnings season continues this week, but with more than 75 percent of the S&P 500 reporting, there are fewer blue chips in the mix. Companies that will be watched closely by investors include Priceline (PCLN), Wal-Mart (WMT) and John Deere (DE). The state of the precious metals industry may be revealed when Newmont Mining Corporation reports Wednesday. Analysts expect EPS of $0.13 and revenues of $1.82 billion. That same day, T-Mobile (TMUS) is forecast to report EPS of $0.15 on revenues of $8.20 billion. On Wednesday, analysts are looking for Priceline to report earnings per share of $11.81 on revenues of $1.96 billion.

Wal-Mart is scheduled to report its latest quarterly earnings before trading begins on Thursday. Analysts predict a decline in revenues from a year ago as the company faces the negative effects of a rising dollar on overseas earnings. The consensus prediction is an EPS of $1.43 on revenues of $131 billion. Wal-Mart voluntarily increased wages last year to the detriment of earnings and has since strategically pulled away from areas that hiked minimum wages. Duke Energy (DUK), the largest U.S. utility company in terms of market capitalization, is expected to report a consensus EPS of $0.90 on revenue of $6.29 billion. John Deere will shed light on the condition of the capital goods export market when it reports earnings before the bell on Friday. Analysts are calling for EPS of $0.70 on revenues of $4.96 billion.

The market will receive the minutes from the most recent Fed meeting and data on U.S. inflation, as well as manufacturing in the Northeast and mid-Atlantic regions. The Empire State Manufacturing Survey and the home builders’ index, both for February, will be released Tuesday. Wednesday’s reports will include January U.S. housing starts, building permits, capacity utilization, the producer price index (PPI) as well as the FOMC minutes. Weekly unemployment claims, oil inventory levels and the Philadelphia Federal Reserve business outlook survey will be available on Thursday. The Consumer Price Index (CPI) for January, both headline and core, is due out Friday. While inflation is expected to remain in check due to a reduction on the price of oil, analysts expect the other data will reflect continued growth in the U.S. economy.

Over the weekend, Japan reported a 1.4-percent contraction in fourth-quarter gross domestic product (GDP). Chinese trade data was weaker than expected, with both imports and exports falling from year ago levels. News broke on Tuesday that China flooded the economy with credit in January by issuing nearly triple the number of new bank loans in a typical month and 30 percent higher than peak credit. Later this week, China will report its CPI and PPI.

Remarks on Monday by ECB President Mario Draghi, as part of his quarterly testimony to the European Parliament’s Economic and Monetary Affairs Committee, sent the euro lower as investors anticipate the ECB will do more to weaken the currency. This week several Federal Reserve officials are scheduled to speak. They include Philly Fed President Patrick Harker Tuesday, St. Louis Fed President James Bullard Wednesday, San Francisco Fed President John Williams Thursday and the Cleveland Fed’s Loretta Mester Friday. At the moment, investors do not expect rate hikes until sometime in 2017 and treasuries have rallied strongly as a result.

Investors experienced another volatile week of trading. The Standard & Poor’s 500 sold off slightly more than 2.5 percent on Monday, rebounded Tuesday and Wednesday in the lead up to Federal Reserve Chair Janet Yellen’s two-day congressional testimony. Selling pressure resumed Thursday as oil reached a multi-year low of $26 per barrel and Yellen’s ambiguous testimony. While the Fed failed to completely rule out negative interest rates should the economy slow, Yellen expressed a continued commitment to raising interest rates later this year.

Thursday’s decline was halted by a strong afternoon oil rally on a report of production cuts at OPEC. The market was also helped by the Bank of Japan’s intervention in the currency markets. Treasury yields claimed their biggest single-day gains in months on Friday. Oil also rebounded and equities erased most of their losses. The S&P 500 was still down about 1.5 percent due to Monday losses.

Yellen’s testimony to Congress this week contributed to a temporary spike in gold by nearly $100 from last week’s close to its intra-week high as investors reacted to market uncertainty.  Gold has been in a fear-driven uptrend since the Bank of Japan announced it would cut rates below zero at the end of January, and Yellen’s comments may have had a similar impact.  It pulled back sharply today.  It is important to remember that the largest purchasers of gold are the very economies investors aim to protect against. China accounts for 40 percent of global gold consumption and purchased 19 metric tons in December alone.

In earnings news, Coca-Cola (KO) rallied and shares bucked the downtrend in the market. Walt Disney (DIS) investors focused subscription losses in the company’s ESPN division, lowering share prices despite blockbuster earnings from “Star Wars” that exceeded all estimates.   Cisco Systems (CSCO) advanced almost 10 percent after earnings beat street estimates. Shares of CVS Health rallied slightly more than 8 percent as reported sales increased more than 12.5 percent in the most recent quarter. Time Warner (TWX) beat earnings per share estimates, but missed revenue forecasts and earnings plunged from a year ago in the struggle to compete with Netflix (NFLX) and other streaming entertainment options. PepsiCo net revenue as income rose to $1.72 billion. The better-than-expected report lifted shares higher on the week.

The Bureau of Labor Statistics reported job openings rose in December. According to the Job Openings and Labor Turnover Survey (JOLTS), there were 5.6 million openings in December, increased from the 5.43 million reported in November. The report reinforces the Fed’s belief that the labor market is strong. Workers are also quitting their jobs at higher rates, a sign of confidence among workers. On Thursday, the initial weekly unemployment report showed 269,000 people filed for benefits, which was 12,000 less than estimates.

The mortgage purchase application index Wednesday revealed strength in the housing market, as well. The report indicated a 9.3 percent increase over the previous week as buyers took advantage of lower mortgage rates. Refinancing applications were also up 16 percent. The Atlanta Fed’s GDP Now model also raised its estimate of first quarter GDP growth to 2.5 percent based on strong wholesale data. Retail sales were also stronger than expected in January, rising 0.2 percent versus an expected 0.0 percent.

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 Japanese yen broke out of a trading range that stretches back to December 2014. The euro is also rallying against the U.S. dollar, and weakness in the dollar has been generally bullish for the global economy. The U.S. Dollar Index would need to break below 94 on the downside, or the euro above $1.15, in order to signal a breakout. The yuan, commodity currencies and emerging market currencies have all experienced a small bounce.

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 continued to tumble, falling to $27.39 per barrel on Wednesday, but the equity market did not follow the decline as it has in recent weeks. ConocoPhillips (COP) cut its dividend by two-thirds last week and Anadarko (APC) slashed its payout by 82 percent yesterday, ending uncertainty and shoring up the firms’ financial positions. The moves will free up capital for acquisitions and capital investments to increase long-term value. Industrial commodities such as copper, steel and coal stocks are also enjoying a small bounce.

iShares MSCI Emerging Markets (EEM)

Emerging markets mirror the resource sector and the emerging market currencies. Weakness in the U.S. dollar lifted all three sectors over the past week, but EEM needs to climb above $31 before it starts turning even short-term bullish.

Market Vectors Indonesia (IDX)

IDX is bucking the overall trend in emerging markets. The Indonesian economy was hurt by the slowing Chinese economy, particularly in the area of coal and other natural resource exports, but Indonesia also has domestic infrastructure development that can fuel economic growth. GDP grew at an annualized 5 percent in the fourth quarter thanks to government infrastructure investment. Long-term reforms will take time to kick in, but if the government continues investing in public works, Indonesia can buck global economic trends for some time.

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)

Industrials, materials, utilities and consumer staples were the week’s best performers. Those returns are quite good against the 3 percent decline in the SPDR S&P 500 (SPY) over the same period. Consumer cyclicals underperformed technology due to weakness in Amazon (AMZN), which is the top holding in XLY, but not in XLK. Disney (DIS) also pulled the fund lower.

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

Investors continued to favor investment grade credit over high-yield last week, but treasuries were still dominant; a dip in the U.S. dollar did not deter investors from buying. Positive yields have benefited the U.S. bond market. Japan’s 10-year government bond yield fell below zero yesterday. The German 10-year bond is barely positive with a 0.2 percent yield, and there is some expectation the European Central Bank could cut interest rates further below zero in March.

SPDR Gold (GLD)
Market Vectors Gold Miners (GDX)

Gold prices have rallied in the past month. A pullback is likely though, and the $1200 level has served as resistance.

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)

Although small-caps are still falling relative to the S&P 500 Index, mid-caps have outperformed in the past month. The Dow is also showing strength and a long-term chart shows the current move may signal a reversal in relative performance.

The relative underperformance in the Nasdaq is similar to the pullback in early 2014, which the Nasdaq went on to erase by late summer. If the current move tracks that dip, the Nasdaq should start a relative recovery soon and has shown a modest climb over the last week.

Dividend-paying shares reflected the greatest reversal. There are many dividend funds with different strategies, but overall they’ve struggled in the past few years. SDY has lagged since late 2009, but in the past seven months, it has erased five years of underperformance.

Investors anticipate yet another volatile week of trading following Monday’s disappointing losses that were preceded by a selloff in the European banking sector. A renewed drop in oil and regulatory concerns over energy loans are presenting European banks with a liquidity problem that hit some major U.S. banks with exposure to the sector. Deutsche Bank (DB) slid 8 percent on the day and Germany has begun strategizing with France to prevent further financial turmoil in the Eurozone. U.S. treasury bonds and high quality corporate bonds are rallying as investors opt for safety.

All eyes will be on Federal Reserve Chair Janet Yellen on Wednesday and Thursday, as investors look for direction on rate policy during the Fed’s semiannual testimony to Congress. The futures market puts the odds of a March hike at 0 percent and many speculators don’t expect rates to increase at all in 2016.  Yellen is unlikely to diverge from the Fed mantra of data dependent policy, but she may clarify the Fed’s view on the economy. Any indication of delayed rate hike expectations could potentially send long-term bond yields higher as investors become less concerned about hawkish Fed policy.

Earnings are still in full swing. Possible market movers reporting earnings this week include Dow components Coca-Cola (KO), Walt Disney (DIS) and Cisco Systems (CSCO). Time Warner (TWX), CVS Health (CVS), PepsiCo (PEP) and Twitter (TWTR) are also due to report earnings. Coca-Cola (KO) is expected to report earnings per share of $0.37 on revenues of $9.9 billion. KO shares have been resilient this year, in tandem with the consumer staples sector’s relative outperformance. Disney EPS estimates are looking for $1.45 on revenue of $14.79 billion. Shares of the firm are down about 25 percent since peaking before the Star Wars release in mid-November.  Cisco is expected to show EPS of $0.54 on revenues of $11.77 billion. Consensus estimates have Time Warner reporting EPS of $1.00 and revenues of $7.54 billion. CVS Health is expected to report EPS of $1.53 and revenues of $41.13 billion. PepsiCo is forecast to report EPS of $1.06 and revenues of $18.59 billion. After the severe drop in shares of LinkedIn (LNKD) last week, Twitter’s reaction will be of particular interest to investors. Analysts are looking for EPS of $0.12 and revenues of $710 million.

In addition to the two-day congressional testimony of Fed Chair Yellen, other economic news this week includes the Tuesday release of the Job Openings and Labor Turnover Survey (JOLTS) and wholesale inventories for December, which will impact the next estimate of fourth quarter GDP. The JOLTS report will be an important follow-up to last Friday’s mixed labor report. The initial weekly unemployment report will be available on Thursday, while Friday will see the release of retail sales for January and the latest University of Michigan Consumer Sentiment Index. Initial jobless claims are expected to be 281,000 and down slightly from last week. Retail sales are expected to increase 0.1 percent based on the average forecast, although half of the analysts predict no change or a decline.  The consensus on preliminary consumer sentiment is a reading of 92.5, an increase from the final January reading of 92.0. The consumer discretionary sector has taken a beating in February, sliding about 8 percent through midday Monday trading, so any positive news on the consumer will be warmly welcomed by investors.

Finally, commodity markets can breathe a sigh of relief: Chinese markets are closed all week in observance of the Lunar New Year. January and February data will be released together in March due to light activity during the 15-day holiday period.