Investor caution prevailed in the last full week leading up to the Federal Reserve meeting. The S&P 500 Index declined more than 3 percent on the week, revisiting negative territory for the year. Rate-hike speculations intensified volatility, extending even to sectors that are expected to benefit from higher interest rates, such as financials.
The market has faced turbulence marked by bursts of heavy selling in anticipation of rate changes since 2009 as various quantitative easing measures expired. Next week’s presumed increase will signify rate-normalization, in stark contrast to the six-year period of suppression, which should eventually improve the health of equities and the overall economy.
High yield bonds were also hit by selling as oil prices fell to $35 on Friday and is potentially poised to suffer its largest weekly loss in 2015. Bearish traders are targeting $30, but shale oil producers need new borrowing to repay maturing bonds. If the capital markets doubt their solvency, interest rates on junk bonds will rise and some firms will be pushed out of the market. Kinder Morgan (KMI) slashed its dividend by 75 percent in a bid to shore up its finances, which helped shares rally following the announcement.
November retail sales rose 0.2 percent, while ex-auto sales gained 0.4 percent, well above its 0.1 percent growth estimate. Business inventories were strong as well. Atlanta Federal Reserve’s fourth quarter GDP Now forecast to increase from 1.5 percent to 1.9 percent, supporting the likelihood of a rate increase at next week’s Federal Reserve meeting.
A significant merger between DuPont (DD) and Dow Chemical (DOW) may be in the works as the two firms plan to combine their businesses and create three new companies out of the combined divisions: agribusiness, materials and specialty products. The deal could be blocked by regulators, but since the firms are breaking apart, analysts think it stands a good chance of being approved. Since the firms are multinationals, they will require approval in more than just the United States.
Speculators have raised the odds of rate hike in the futures market to 87 percent as of Wednesday morning. November’s CPI numbers will be announced next week. Unless there is a major surprise in this data, or a Fed official breaks the normal pre-meeting silence, the market should head into next Wednesday expecting an increase in interest rates.
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 Chinese yuan is at its lowest 2015 levels after continued producer price deflation in November compounded with weak trade numbers. The yuan anticipates further depreciation in 2016 and sentiment has shifted considerably; many were hopeful the addition to the SDR would stabilize the currency. The yuan was additionally hit by an acceleration in currency outflows in November, to the fastest pace since August’s surprise devaluation.
The yuan has dragged the Asian Dollar Index to near multi-year lows, burdening emerging market currencies. USDU outperformed UUP today due to its exposure to emerging market and smaller developed market currencies.
The U.S. Dollar Index battled strength in the euro and other developed currencies, with the exception of the Canadian dollar, which broke to a new 52-week low versus the U.S. dollar. The head of the Canadian central bank stated a lower bound for the current policy range hovers around negative 0.50 percent. The European Central Bank (ECB) expanded its monetary policy, but not to a large enough extent to satisfy the market, prompting ECB President Draghi to announce the bank’s commitment to further interventions. The Swedish krona also bounced and may have triple bottomed.
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)
Oil prices broke to a new 52-week low in the wake of OPEC’s failure to modify production. Equity investors have not “bought” the decline yet, as energy stocks remain in an uptrend from the August lows. Master Limited Partnerships (MLPs), a favorite of income investors, made news today as Kinder Morgan (KMI) shares achieved a double-digit rally following yesterday’s 75 percent slash in dividends, though those gains have eroded. Income investors never welcome dividend cuts, but such moves have the potential to revive the company’s fortunes.
Freeport McMoRan’s (FCX) decision to eliminate its dividend also dominated headlines due to the company’s size relative to the industry, stabilizing copper prices while coal and steel stocks fell to new lows over the past week. Steel was impacted by news of Chinese mills dumping iron ore at losses in order to repay bondholders, suggesting the next step will be dumping of steel inventory.
Emerging markets are still a key asset class to watch. A test of the low at $32 appears likely, perhaps as soon as this next week with the Fed rate decision looming.
The Greek stock market had been under restriction since the summer, allowing investors to buy, but unable to draw from their accounts. Those restrictions were lifted this week and Greek stocks promptly fell to a new 52-week low due to the release of pent-up selling pressure. Greece and Europe’s failure to address the debt problems will likely lead to further losses. Unfortunately, the political landscape in Greece currently warrants little optimism.
Energy was by far the worst- performing sector over the past week, pulling the broader market lower. There was also some pullback in internet names and financials, perhaps indicating investor apprehension ahead of the Fed’s decision next week. Defensive consumer staples and utilities displayed the strongest performance.
The relative performance of regional banks versus large banks ebbed nicely, reflecting investor wariness. Regional banks should outperform following a rate hike, though some traders may shy away from their inherent volatility over the immediate short-term in order to minimize risk.
iShares iBoxx High Yield Corporate Bond (HYG) iShares iBoxx Investment Grade Corporate Bond (LQD)
The below charts reflect HYG and LQD dividend adjustments. LQD has been in an uptrend since 2011, but high-yielding HYG is near its 2011 lows. Bankruptcy concerns for shale oil producers continue to weigh on the market. Bond yields were steady in the past week with the 2-year treasury yield holding near its highs for the year. The Fed’s interest rate policy impacts shorter-term bonds far more significantly than long-term bonds.
Traders are offloading some risk ahead of the Fed’s decision, which has weighed on mid- and small-cap shares. The relative performance in the Dow Jones Industrial Average has been the week’s notable emerging story. Industrial and consumer giants such as General Electric (GE), Coca-Cola (KO), Procter & Gamble (PG) and Home Depot (HD) have led the Dow to outperform the S&P 500 in recent weeks. Dow Chemical (DOW) and Dow component DuPont (DD) announced merger talks today, delivering another boost to the index.
Click here to read the December 2015 issue. Market Perspective: Interest Rates May Dictate Performance in December Equities paused in November and maintained a trading range that has dominated most […]
A robust jobs report for November and upward revisions on the previous two months reinforced expectations that the Fed will raise interest rates at their mid-December meeting. Speculators have increased the odds of a rate hike to 79 percent in the futures market. If they are correct, this will be the last full week of the zero-interest rate policy since 2008. Though the market has prepared by pricing in the hike and investors have responded favorably, the potential exists for some volatility should data points over the next ten days catch speculators, traders and/or investors off-guard.
The November retail sales report due out on Friday will provide an indication of consumer sentiment and holiday spending. October’s wholesale inventories report, another important consumer barometer with significant influence on the GDP calculation, will be released on Wednesday and could shift the Atlanta Fed’s GDP Now estimate, which is currently forecasting growth of 1.5 percent this quarter.
Earnings season draws to a close this week with top companies scheduled to report, including Adobe Systems (ADBE), AutoZone (AZO), Costco (COST), H&R Block (HRB) and luxury homebuilder Toll Brothers (TOL). Better than expected earnings and retail sales data will continue the upward momentum enjoyed by the market for nine of the past ten weeks. Home builders have rallied slightly over the past month to a near 52-week high which could be further fueled by a strong report. TOL comprises more than 7 percent of iShares US Home Construction (ITB).
In contrast to solid U.S. economic and equities data, commodities continue to suffer. Traders’ delayed reaction to OPEC’s decision on Friday to leave oil production unchanged led to selling on Monday. West Texas Intermediate Crude broke the $40 price level in early trading, falling to $38 and change. A test of the 2015 lows now appears likely, while Brent crude, the price for European oil, is already at a new low.
Governors are not expected to change interest rates at the upcoming Bank of England meeting. Overseas news will instead focus on China’s economic data. The world’s second largest economy’s recent struggles have resulted in falling commodity prices. China’s foreign exchange reserves fell at their fastest pace since August last month, leading investors to dump the freely traded offshore yuan. Chinese trade data, along with inflation and industrial production reports due early this week, is expected to indicate a continuation of the downward trend in economic activity. Global demand for China’s industrial commodities will be an important factor for new lows.
A weak yuan is also troubling for commodity producers and emerging markets. U.S. equities, however, should be bolstered by low commodity prices and a strong dollar, which attracts foreign investment, as well as by the traditionally optimistic holiday season.
Click here to view the Global Momentum Guide for December 7, 2015 Weekly Sector Perspective Despite last week’s volatility incited by the central banks, the markets experienced little overall movement when […]
