Market Perspective for August 1, 2016

This week begins a new month of trading, and bulls will try to keep up the five-month win streak for the S&P 500 Index. Money flowed into equities at the fastest pace in more than a year last month and this optimism should continue in the upcoming week as stocks ride the wave of stellar earnings, accommodative central banking policies and generally positive economic news.

Midway through this earnings season, more than 80 percent of S&P 500 companies have beaten expectations. The technology sector led the way in July, rising 7.81 percent on the back of strong reports from Alphabet (GOOG), Microsoft (MSFT), Apple (AAPL) and Facebook (FB). Healthcare was strong as well, rising 4.86 percent.  Energy was the only sector to significantly decline, while defensive utilities and consumer staples sectors saw small dips as investors rotated into more volatile sectors.

Earnings season is still in full swing, but the blue chip names are fewer and further between. Technology and health care firms scheduled to report this week include Activision Blizzard (ATVI), 3D Systems (DDD), Pfizer (PFE) and Teva Pharmaceutical (TEVA). International mining company Rio Tinto (RIO), Chesapeake Energy (CHK) and Proctor & Gamble (PG) will also report this week.

Central banks could play a pivotal role in the currency markets over the next 10 days. The Royal Bank of Australia will meet on August 2nd. While the odds of an Australian rate cut are nearly 70 percent, most analysts are not concerned about that country’s impact on the broader economy.

On August 4, the Bank of England’s (BoE) will make its interest rate decision, with a cut being a near certainty. Although the BoE did not take any action at its last meeting in the wake of the Brexit vote, it released a statement indicating that the central bank was ready to step in if necessary to combat any economic weakness. Finally, on August 11, the Reserve Bank of New Zealand will meet. Rate cuts are also possible. A cut for all three banks would be bullish for the equity markets and the U.S. dollar.

In the U.S., the monthly non-farm payroll and unemployment report for July will provide a major data point later this week. Following disappointing second quarter GDP, investors are keen to see if this weakness extended into July. The consensus calls for the unemployment rate to remain at 4.9 percent and 185,000 new jobs.

Manufacturing Purchasing Managers Indexes (PMI) for July were mixed, with the U.S. showing an uptick in manufacturing and China a downtick. Light vehicle sales for July will be out on Tuesday. The weekly mortgage application index and crude oil inventories will be available on Wednesday. Larger-than-expected inventories will pressurize oil prices which was already trading at $40 on Monday. Over the weekend, Saudi Aramco slashed its prices on Asian oil in an attempt to increase market share. A dip back into the $30s is possible this week.

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