Month: June 2018

The Chinese yuan fell nearly 2 percent this week, compounding trade tensions and weighing on U.S. stocks. China’s attempts to slow credit growth have led to higher defaults in the bond market.

The Dow Jones Industrial Average led the week’s index performance, despite heavy exposure to trade-sensitive companies such as Boeing (BA) and Caterpillar (CAT).

The SPDR DJIA (DIA) bounced off its 200-day moving average this week. It has rebounded at or near this level in April, May and June.

SPDR S&P 500 Index (SPY) has also found strong support at the 200-day MA in 2018.

iShares Russell 2000 Index (IWM) remains well above its breakout level of $160.

Sector rotation has continued in the domestic market. Smaller sectors have outperformed over the past week. Utilities rebounded 3 percent as long-term interest rates declined and investors bought defensive sectors. Consumer staples, energy, and materials all gained in early Wednesday trading, while technology and consumer discretionary fell as investors rotated into underperforming sectors.

Government, investment-grade and corporate bonds performed well as yields declined. High-yield bonds dipped as credit spreads increased. Floating-rate funds held steady.

Energy funds rallied strongly this week with explorer, services and natural gas subsectors all gaining. West Texas Intermediate crude pushed towards its 52-week high of $73 a barrel. Brent was still $3 off its 52-week high of $80.

The U.S. dollar gained this week. SPDR S&P 500 (SPY) and MSCI EAFE (EFA) performed similarly, while emerging markets remained weak.

iShares MSCI Emerging Markets (EEM) is nearing its 52-week low of $40.

China is driving emerging markets lower. China’s mainland A-share market is approaching its post-2015 low. It is down more than 20 percent on the year.

Copper and gold prices have fallen with the rising U.S. dollar. The copper/gold ratio has dipped based on conditions in China, but it has remained in an uptrend since the 2016 low. This comports with economist forecasts for U.S. second-quarter GDP growth, currently at 3.5 percent.

Equities opened the week lower as losses in the Chinese market were followed by declines in Europe and then the United States. The Dow Jones Industrial Average bounced off its 200-day moving average.

Technology led the market lower with SPDR Technology (XLK) sliding 2.08 percent. SPDR Utilities (XLU) and Consumer Staples (XLP) rallied 1.66 and 0.50 percent. Some of this rotation may be seasonal as investors position for the second-half of the year. June was the only down month for technology in 2017.

New home sales rose to an annualized pace of 689,000 in May, beating expectations and April’s figure. Sales were 8.8 percent higher than year-ago levels. Over the past 10 years, only November 2017’s figure of 712,000 was higher. Later this week, the government will release durable goods orders, advance trade in goods and pending home sales for May. Economists forecast a 1.3-percent decline in durable goods and see the trade deficit in goods climbing to $69.2 billion. Initial claims for unemployment should remain near multi-decade lows. The final estimate of first-quarter GDP growth should match the prior 2.2 percent estimate.

Overseas data this week will include Eurozone inflation and Australian new home sales. China will release its manufacturing and service PMIs after the markets have closed on Friday.

Crude oil was steady on the day at $68 a barrel. The 10-year Treasury yield eased to 2.88 percent amid declining equities. The U.S. Dollar Index declined slightly as the euro and yen strengthened, but it gained against a broad basket of emerging-market currencies.

Homebuilder Lennar (LEN), Bed, Bath & Beyond (BBBY), General Mills (GIS), Paychex (PAYX), RiteAid (RAD), Accenture (ACN), KB Home (KBH), Nike (NKE) and Walgreen’s (WBA) will report earnings this week.

The Russell 2000 Index gained 0.10 percent this week. The other indexes declined as emerging markets weighed on global equities.

Utilities, energy and consumer staples were the best performing sectors this week. SPDR Utilities (XLU) advanced 2.4 percent, Energy (XLE) 1.4 percent, and Consumer Staples (XLP) 0.1 percent. OPEC voted to increase oil production by 700,000 barrels per day on Friday. Crude oil jumped more than $3 per barrel to near $70 as investors had priced in a rise of 1 million bpd or more. SPDR S&P Oil & Gas Exploration & Production (XOP) and similar energy subsector ETFs gained 3 to 5 percent.

SPDR Industrials (XLI) fell 3.3 percent. Caterpillar (CAT) and Boeing (BA) lost ground on the week as trade tensions escalated globally. General Electric (GE) was removed from the Dow Jones Industrial Average. It was the only surviving original member of the index. Since the Dow is a price-weighted index, GE’s slide into the low teens meant its weighting in the index fell to just 0.4 percent. Walgreen’s (WBA) will replace it.

The Supreme Court opened the door for states and localities to tax online retailers. Amplify Online Retail (IBUY) fell 1.4 percent on Thursday following the ruling. It was down 0.8 percent on the week. SDPR Technology (XLK) fell 1.3 percent on the week.

The manufacturing and services flash PMIs have eased in June but remain in expansion. Housing starts reached their highest level in more than a decade. Existing home sales declined 0.4 percent from April and 3 percent from year-ago levels. Initial unemployment claims fell to 218,000 and remain near four-decade lows. The Atlanta Federal Reserve kept its second-quarter GDP growth forecast at 4.7 percent.

The S&P 500 Index declined 0.8 percent on the week. iShares MSCI EAFE (EFA) and iShares MSCI Emerging Markets (EEM) declined 1.2 and 2.3 percent, respectively. The U.S. Dollar Index and emerging- market currencies were largely flat on the week, while the Chinese yuan declined.

Shares of FedEx (FDX) fell 8.3 percent this week. The firm beat on earnings and revenue and shares initially rallied on the strong results. The beat, however, was generated by the sale of a division and lower taxes, and operating results were slightly weaker than forecast.  Oracle (ORCL) slid 4.7 percent for similar reasons. It beat analyst profit and sales estimates, but stopped detailing its cloud revenue leading investors to suspect the firm may be hiding slowing growth. Micron Technology (MU) moved higher after it too beat earnings but lost 2 percent on the week as the overall semiconductor sector lost 3.6 percent.