Click here to view the January 2016 issue Market Perspective: Market Correction Is No Cause For Alarm Volatility dominated the first trading sessions of 2016. The S&P 500 Total Return […]
Stocks look set to bounce back after suffering their worst start to a year in history. Last week’s focus on China’s losses may be waning as both European and American investors concentrate on strong domestic data. Shares rallied in Europe and into the U.S. open and a continued surge may signal a much-needed perspective shift.
On the bright side, Monday kicks off a new earnings season. Earnings have surpassed expectations in recent quarters. Telecom, financials, consumer discretionary and healthcare stocks are all expected to report solid gains. The slump in energy has led analysts to predict a 67 percent decline for the sector and a subsequent 5.3 percent drop in S&P 500 earnings.
Alcoa (AA) will be the first major company to report earnings after the bell on Monday and is expected to announce earnings per share (EPS) of $0.04 on revenues of $5.34 billion. The company’s earnings report may provide insight into the current state of the commodity sector. Aluminum and copper prices have tumbled under weak Chinese demand. China’s decreased demand for coal has also taken a major toll on the sector. Arch Coal (ACI), the second-largest coal reserve in the U.S. filed for Chapter 11 on Monday in an attempt to staunch a growing $4.5 billion debt.
All eyes will be on JPMorgan (JPM), Citigroup (C) and Wells Fargo (WFC) when they report earnings at the end of the week. Analysts expect EPS of $1.30 on slightly more than $23.0 billion in revenue for JPM. WFC is expected to report $1.03 earnings per share and top line revenue of $21.8 billion and Citi is predicted to announce EPS of $1.14 and $17.9 billion in revenue. Intel (INTC) will also report this week and is expected to report $0.63 per share in earnings and $14.8 billion in revenue. Heightened scrutiny will accompany this first post-rate hike earnings and will set the tone for the next several market weeks.
Several key reports will highlight the state of the overall economy. Federal Reserve Beige Book, a collection of economic indicators, will be released on Wednesday, while the December Producer Price Index, expected to show a decrease of 0.2 percent and December retail sales, expected to rise 0.2 percent, ex-autos will be available on Friday. The initial consumer sentiment index and the Empire State Manufacturing Survey for January will also be released on Friday. Chinese trade data, scheduled for a Tuesday night release, will provide critical data for overseas markets. Analysts forecast an 8 percent year-over-year drop in exports, and an 11.5 percent drop in imports.
On Monday, the People’s Bank of China guided the yuan higher in an effort to reinforce currency markets. On Friday, European Central Bank governing member Philip Lane committed to additional quantitative easing if necessary. Several Federal Reserve officials are scheduled to speak publicly this week, including a Tuesday panel discussion with Vice-Chairman Stanley Fischer, whose remarks will be closely examined for the Fed’s current mood and the timing of the next rate hike.
Click here to view the Global Momentum Guide for this week Weekly Sector Perspective Stocks opened the year with heavy selling in response to China’s volatility, despite the country’s relatively […]
Significant selling pressure marked the year’s first full week of trading as commodity losses and China’s sell off rattled investors. China’s government responded to last August’s crisis with a ban on large institutional stock sales that were set to expire on January 8, 2016. Smaller investors moved to sell ahead of the policy change, initiating a major drop that forced Chinese stock market regulators to unveil a new “circuit breaker” policy on January 4 that kicked in almost immediately to interrupt Monday trading. On Thursday, the market opened straight down, triggering a halt after 13 minutes of trading. Stocks plunged again after trading resumed, and the exchanges closed for the day 30 minutes after the opening. China abandoned the “circuit breaker” on Friday, instead announcing an extension of the sales ban which temporarily stabilized stock prices.
While China’s turmoil may provide endless fodder for financial media sources, the Chinese market is not worthy of the attention. In reality, China’s market is still underdeveloped, depending primarily on its housing assets and lacking the equities and individual investment access to seriously impact the U.S. markets beyond media-driven sentiment.
Crude oil slid below $34 a barrel, a level not seen in more than a decade. Saudi Arabia sold oil for less than $30 a barrel this week amid tensions with Iran and heightened conflict in the Middle East. Saudi Aramco, the country’s largest energy company, has announced the possibility of a public offering this year to secure its already daunting market presence. Copper and other industrial commodities also slid on the week.
In domestic economic news, 292,000 jobs were created in December and labor figures for October and November were revised higher. Unemployment claims have held at 5 percent since October, far surpassing analysts’ predictions. An error in the calculation of housing construction growth may require a downward revision of GDP growth for 2015. ISM Manufacturing Survey for December came in at 48.2, four-tenths below the November reading, while the Markit survey was 51.2, signaling expansion. The non-manufacturing ISM survey demonstrated clear expansion at 55.3.
The week’s events may have jostled investors’ nerves, but Fed officials are focused on jobs and inflation. Fed minutes reflected concerns over the market’s reaction to rate hikes, but strong continued jobs growth could quickly ignite inflation with a rebound in commodities. Friday’s jobs data also pushed up expectations of another rate hike.
China, emerging markets and commodities will remain on the front page to weigh on the market emotionally, but continued resilience in the U.S. economy may likely improve the longer term economic outlook.
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)
2015’s currency market trends have spilled over into the new year as emerging markets and commodity exporters struggle to get a foothold. Over the past week, the Canadian dollar fell to a new 52-week low versus the U.S. dollar and the Australian dollar reversed sharply, though the uptrend it has experienced since September should remain intact. Commodity-related emerging market currencies slumped as oil prices approached 2015 lows. The freely-traded offshore Chinese yuan has already depreciated 2 percent in 2016 in anticipation of expiring stock-selling bans that were initiated to remedy August’s 4 percent depreciation.
Despite the stock market’s shaky 2016 start, 18-month correlations between the U.S. dollar and U.S. equities have been positive.
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)
Rising tensions between Iran and Saudi Arabia lifted oil prices over the weekend, but a large increase in U.S. inventory sent West Texas Intermediate Crude sharply lower on Wednesday. Gasoline price tumbled more than 6 percent.
Natural gas prices spiked in December in anticipation of Arctic air blowing into the lower 48. Cold temperatures have finally arrived and could fall lower in January, but natural gas producers haven’t responded to the jump in prices yet. Meanwhile, energy equities have caught up with oil and are sitting near their 2015 lows and could initiate a new selling wave.
Two weeks ago a break above a short-term resistance level of $340 would have been bullish. A decline in prices, however, has lowered the level to $320. A mini head-and-shoulders pattern has formed and a break lower could carry the fund to around $300 per share, a drop of about 7 percent.
We are looking at a possible breakdown in emerging markets and a new closing low could be reached today. Unlike the small downside risk in IBB, the potential decline for EEM is nearly 20 percent, dropping to $25 per share.
Energy led through last week’s lower market, but due to today’s losses, that short-term lead dissipated. Utilities will maintain short-term leadership, with shares only slightly down on Wednesday. Defensive issues are minimizing losses, as consumer staples and healthcare outperformed the broader market.
iShares iBoxx High Yield Corporate Bond (HYG) iShares iBoxx Investment Grade Corporate Bond (LQD)
The short-term panic in the high-yield market has abated as prices recover. Attractive yields are bringing in bargain hunters and buyers were tolerant of today’s dip in oil. Exposure to shale oil producers weighed on high-yield funds in 2015.
Treasury yields are contributing to strength in bonds. The 5-year treasury yield summited its trading range at the end of 2015 before promptly pulling back. The 2-year treasury reached a new high following the Fed’s rate hike, but bonds with longer maturities are holding firm.
SPY remains in a $195 to $210 per share trading range, excluding the August drop.
Mid-caps have firmed versus the S&P 500 in the past couple of weeks, but small-caps continue to underperform. Strength in consumer staples and dividend-paying shares are evident in the relative strength of SDY. Internet stocks weakened last week as companies such as Amazon (AMZN) and Facebook (FB) pulled back from the gains that brought the market into positive territory last year. This retreat makes room for indexes with more consumer staples and healthcare exposure, such as the S&P 500, to pull ahead in terms of relative performance.
