Month: September 2016

SPDR S&P 500 (SPY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)
SPDR S&P MidCap 400 (MDY)
iShares Russell 2000 (IWM)

The past four trading days have been dominated by volatility. The S&P 500 Index is off its all-time high, but has significant support around the 2100 to 2120 level, or about $208 to $210 for SPY. Above this level the bulls are clearly in control of the market. The Friday drop in stock prices (which ended Monday morning) terminated at the 2120 levels. On Tuesday, stocks fell and the 2120 level was again the termination point.

The Nasdaq and Russell 2000 Index are up over the past two months following solid July and August gains. The S&P 500, Dow Jones Industrial Average and S&P MidCap 400 are down slightly due to sideways trends during the summer calm spell.

Fidelity Floating Rate High Income (FFRHX)
DoubleLine Core Fixed Income (DLFNX)
Thompson Bond (THOPX)
Fidelity Corporate Bond (FCBFX)
iShares iBoxx Investment Grade Bond (LQD)

Rising interest rates around the globe have influenced much of the recent volatility. New U.S. money market regulations forcing funds to sell (or stop buying) commercial paper and instead hold U.S. treasuries are exacerbating the situation. The new rules are designed to prevent another situation similar to the 2008 financial crisis, when money markets froze and sparked a brief financial panic. Money market funds can avoid the new rules (which include allowing the value of the fund to fall below $1, freezing redemptions and instituting high fees during periods of extreme volatility) by holding U.S. government bonds. The new rules will take effect in October and are likely to result in a rising spread between the interest rates paid by banks and corporations and those paid by the U.S. government.

Rising interest rates benefit funds that hold bonds and loans which adjust their interest rates, such as Fidelity Floating Rate High Income (FFRHX). These funds are likely to see increased dividend payments over the next year as long as these rate increases hold, which is why FFRHX has not declined along with other bond funds over the past week. The actual interest rate many of these securities are based on is LIBOR, the London Interbank Offered Rate. The chart below reflects the clear spike in late 2015 as investors priced in the Fed rate hike, then stabilization followed by another rally starting in July.

Investment-grade and corporate bond funds have slipped as interest rates increased. High yield funds such as SPHIX and iShares iBoxx High Yield (HYG) have declined as well. Thompson Bond (THOPX) held up better as managers came into 2016 expecting the current interest rate environment.

The 10-year Treasury yield briefly climbed about 1.7 percent in the past week, pushing it back into the trading range seen earlier this year. This will be a key test for the bond markets in the days and weeks ahead. A move higher will be a continuation of the current trend, while a move back below 1.70 will stabilize bond prices.

Sector Performance

All sectors fell last week, but the chart below isolates relative index performance for clarification. Financials benefited from rising interest rates, while healthcare and consumer staples, traditionally defensive sectors, held up better than expected. Materials fared poorly as the possibility of higher interest rates and a stronger U.S. dollar hit commodities.

Among subsectors, the biotechnology and regional banking sectors saw some of the strongest relative performance, while commodities such as steel and mining saw large losses on the week.

Rate-sensitive sectors such as utilities and real estate remained in a short-term downtrend, while home builders retreated to levels seen in spring 2015, placing it back in the middle of a long-term trading range.

SPDR Energy (XLE)
First Trust ISE-Revere Natural Gas (FCG)
Market Vectors Steel (SLX)
Market Vectors Coal (KOL)

West Texas Intermediate Crude fell over the past week. The Energy Information Administration recently stated domestic crude oil demand was overstated, and it revised its data to show larger exports. This also helps explain the stubbornly high inventory in the United States, which has kept oil prices suppressed. Oil inventory fell last week, but the inventory of refined products such as gasoline increased, pointing to lower crude demand going forward.

Chinese economic data was largely the same in August as in July, lending no help to commodities under pressure from rising global interest rates. While coal, steel and copper funds all pulled back, they also remain in a bullish pattern for 2016, trading close to their 52-week highs.

After trading in a narrow range for several weeks, the major indexes broke to the downside Friday as investor expectations for a September interest rate hike increased along with global interest rates. Asian and European markets played catch-up overnight and markets had stabilized prior to Monday’s opening bell as buyers looked for bargains.

Comments from Federal Reserve officials contributed to last Friday’s drop. Boston Federal Reserve Eric Rosengen expressed concerns that low interest rates are increasing the risk of an overheating economy, suggesting a slow rate increase might be an appropriate course of action. FOMC voting members Lael Brainard and Dennis Lockhart will speak today. Their highly anticipated statements have the potential to nudge the markets in either direction this week.

Oracle is the only major stock due to report earnings on Thursday, but it has historically had a powerful impact on the entire technology sector. Oracle (ORCL) is expected to report earnings per share of $0.58 on revenues of $8.7 billion, which are slightly higher than the same period a year ago. Analysts will be paying particular attention to the company’s 12C database and cloud computing services.

In overseas economic news, China is scheduled to release the most recent industrial production numbers Tuesday. Analysts are anticipating a 6 percent year-over-year increase. Fixed asset investment and real estate investment will also be released. The market expects the slowdown in investment halted in August. The UK Consumer Price index (CPI) and the Producer Price Index (PPI) will also be available on Tuesday. Both reports are expected to show slight increases. Eurozone inflation numbers will be out on Wednesday. The Bank of England is expected to remain steady when their interest rate policy is announced this week. Eurozone leaders will also gather Friday to discuss the implications of the UK leaving the EU.

The latest mortgage purchase application numbers are expected to show an increase as homebuyers try to lock in rates ahead of any possible rate hike. The weekly oil inventory report is expected to remain unchanged after last week’s unexpected drop. New unemployment claims are expected to rise slightly from last week.

Retail sales for August will be out on Thursday and are expected to fall 0.1 percent. Analysts forecast retail sales ex-autos rose 0.2 percent during the month, a reversal from the 0.3 percent decline in July. Economists are looking for a 0.1 percent rise in the August Producer Price Index (PPI), a swing from the 0.4 percent drop in July. The September Philly Fed and Empire State Index, two measures of economic activity in the Mid-Atlantic and Greater New York region will also be released. Industrial production and capacity utilization for August and July’s business inventories will be reported Thursday as well. Retail sales and these latter three reports will all have a direct impact on GDP growth forecasts for the current quarter.

The University of Michigan Consumer Confidence Report and CPI numbers for August will be released on Friday.  The data is expected to show a 0.9 percent year-over-year increase in headline inflation. Economists forecast core CPI increased 2.1 percent, which is close to the Fed’s 2 percent target, but it will take a surprisingly strong number to change rate expectations.

The Nasdaq achieved another record high during this shortened trading week and the Russell 2000 pushed to a new 52-week high. Shifting interest rate expectations sent most shares sharply lower on Friday, but sparked a financials rally even as the S&P fell to July levels.  Shares of SPDR S&P Regional Banking (KRE) lost 0.72 percent on the day, dramatically outperforming the S&P 500 Index, which lost 2.45 percent.

Foreign central banks did little to move this week’s markets.  The Royal Bank of Australia left its key interest rate unchanged at a record low 1.5 percent, as expected, and Bank of England Governor Mark Carne said nothing noteworthy in his public testimony. On Thursday, the European Central Bank (ECB) left interest rates unchanged and said its bond-buying program will end as scheduled next year.

More importantly, 10-year German and Japanese government bond yields climbed to 0 percent, the highest level in two and five months. The odds of a September rate hike reacted in the U.S. futures market with a ten percent swing to more than 30 percent. While a September hike is still highly unlikely, a clear shift in sentiment is evident across global markets.

The week’s economic reports were mixed. As expected, the Job Openings and Labor Turnover Survey (JOLTS) reflected a large increase in job postings, offsetting a dip in the Federal Reserve Labor Market Indicator. The ISM nonmanufacturing index came in lower than expected. Mortgage applications rose less than 1 percent on the week, while weekly unemployment claims were lower than expected. The Federal Reserve Beige Book showed slow to moderate economic growth, little concern over inflation and minor wage growth. Hurricane Hermine disrupted oil supplies, which led to a drop in crude inventories. The price of a barrel of West Texas Intermediate Crude rose almost 8 percent on the week before falling back on Friday.

Overseas, the Chinese Purchasing Managers’ Index (PMI) for the service sector showed moderate growth and the Producer Price Index indicated approaching inflation trends follow years of deflation. The pound sterling rallied Monday when the UK PMI numbers outstripped expectations, suggesting the UK economy should dodge a recession in the second half of 2016. Eurozone retail sales grew a better-than-expected 1.1 percent from June to July as consumers on the continent shrugged off those same worries. Australia announced its 100th straight quarter of GDP growth on Wednesday, which is three calendar quarters short of the all-time record set by the Netherlands. Japan’s government announced a revised GDP number showing faster economic growth than initially estimated, while eurozone GDP growth slowed from April to June.

There were no major earnings surprises this week. Hewlett Packard Enterprise (HPE) officially announced the expected sale of its software business to Micro Focus for $8.8 billion during its Wednesday earnings report, which delivered better-than-expected earnings per share, but missed revenue estimates. Shares of HPE fell on the news. Shares of Kroger (KR) were flat following missed sales estimates in the prior quarter and lower guidance for 2016. Hovnanian (HOV) shares fell more than 10 percent after the firm also reported a loss in the prior quarter; analysts expected a profit. The miss dinged the homebuilder sector, sending iShares US Home Construction (ITB) down more than 2 percent.