SPDR Retail (XRT)
Retail sales increased by 1.3 percent in April, but it has been a tough year for many department stores as online retailers such as Amazon (AMZN) continue to dominate the sector. Amazon is on pace to nearly triple its share of the apparel market to nearly 20 percent by 2020. A few mergers or bankruptcies are likely to occur as brick-and-mortar retailers figure out how to prosper in this new environment.
Crude oil prices pushed higher into this week, crossing the $49 level. $50 was the October 2015 high for crude, and the low $50s was a February 2015 resistance level. A move above $50 could spark a quick rally. Crude at much higher levels could also potentially factor into inflation expectations. Near term, inventory and production are driving prices. U.S. production fell and inventory increased this week, leading to choppy trading on Tuesday and Wednesday.
Chinese economic data was weaker in April and credit growth has slowed, putting downward pressure on industrial commodity prices. Steel production hit a record high in April, sparking protectionist tariffs in the U.S. and elsewhere around the globe.
Biotech and pharma shares and medical devices outperformed the sector last week.
Earnings season has largely completed and biotech absorbed a few hits, such as the drop in Gilead (GILD), without making new lows. Valuations are compelling in the sector with-single digit price-to-earnings ratios for some biotech giants, but value buying hasn’t fully offset momentum selling.
The tech rebound extended into a second week as the QQQ outperformed. Apple (AAPL) shares dropped to a new 52-week low on Thursday, but are now up for the week on news that Berkshire Hathaway was adding shares during the prior quarter.
WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares British Pound (FXB)
CurrencyShares Canadian Dollar (FXC)
CurrencyShares Japanese Yen (FXY)
WisdomTree Emerging Market Currency (CEW)
Strong economic data and a rebound in rate hike expectations extended the U.S. dollar’s strength over the past week. The Atlanta Fed’s GDP Now Model has climbed to 2.2 percent growth, up from 1.7 percent two weeks ago. Rising oil prices accelerated headline inflation in April. Rate hike expectations for June were 4 percent a week ago and didn’t cross 50 percent until December, but now June odds are at 19 percent and the odds of a September hike are at 57 percent.
The British pound rebounded sharply today after a new poll favored continuing EU membership in the upcoming referendum.
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)
SPDR Retail (XRT)
Materials and energy performed well over the past week as the broader market trended lower. Consumer staples and utilities struggled last week. Utilities will be most at risk should the market anticipate a faster pace of rate hikes.
The financial sector would benefit greatly from accelerating the pace of rate hikes. Regional banks bounced on Wednesday, with KRE gaining 4 percent.
Solid home improvement retail earnings at Home Depot (HD) and Lowe’s (LOW) helped to offset weaker-than-expected April housing starts. HD and LOW are both top ten holdings in SPDR Homebuilders (XHB) and iShares U.S. Home Construction (ITB).
Rising rate hike expectations abruptly interrupted the investment grade bond rally. Investment-grade bonds will trade with interest rates in the near-term.
The 10-year treasury price versus LQD (in green) depicts the investment-grade bond cycle YTD.
Mining shares have rallied with commodities due to central banks cutting interest rates below zero. As commodities correct and precious metals miners push higher, investors are not betting on inflation, but against central bankers.
Rising rate hike expectations and the advancing U.S. dollar will provide another test in the coming weeks. The chart below compares the price of gold, copper and oil priced in non-U.S. dollar currencies (the U.S. Dollar Index basket of currencies).