Market Perspective for March 23, 2015

The Russell 2000 looks to extend its march into record territory this week after breaking out to a new all-time high. The Nasdaq will also try to break its all-time high. The S&P 500 and Dow Jones Industrial Average are just below their highs, with only a small gain needed to push them back into record territory.

Although new highs are likely and certainly positive news, U.S. stocks won’t be the most watched assets this week. Instead, oil, the U.S. dollar, euro, yen and treasury bonds will take center stage as traders look for last week’s post-Fed rally in oversold markets to continue. Oil remains the weakest of the pack. On Monday, a Saudi official said production remains high and they will not cut production until non-OPEC countries do so. With Russia desperately needing oil exports to support GDP and U.S. shale producers holding steady, the two biggest non-OPEC suppliers aren’t cooperating just yet.

The euro is the most likely asset to rebound given how many speculators have bet against it. However, a report by The Wall Street Journal this morning, Torrent of Cash Exits Eurozone, explains that many large investors have been selling euro assets due to the extremely low yields. In many countries, bond yields are negative out to 7 years (Germany) or 10 years (Switzerland). Three central banks, including Switzerland, Sweden and Denmark, have cut interest rates below zero in order to deter foreigners from buying their currencies. A rebound in the euro is very likely to occur in the short-term, but if assets keep flowing out of Europe, the long-term trend of a weaker euro will eventually reassert itself.

In the U.S. stock market, biotechnology performed well last week, with a successful drug trial at Biogen (BIIB) boosting the sector. However, BIIB was just downgraded by Stifel, sending the stock lower. Fellow biotech giant Gilead (GILD) reported some patients have fallen ill, and one died, from taking its hepatitis C drug. This has resulted in biotech sector funds losing a little over 1 percent in early Monday trading. Moving higher in Monday trading were energy, materials, consumer staples and consumer cyclicals. Home builders also advanced on the positive existing home sale data, but new home sale data out tomorrow will have a bigger impact.

Several important pieces of economic data will be released over the coming days. Today, existing home sales for February were reported and were in line with expectations. Tuesday, the consumer price index for February will be reported, including the core CPI. Based on up to date inflation data we track, these numbers could come in a little higher than expected. Also on Tuesday, the Markit flash PMI for March will be out. The economy has been weak during the first quarter and the flash PMI will tell us whether this trend is still in effect, or whether economic activity has started picking up. Durable goods orders for February are out on Wednesday; not a key number, but it will also provide more information on first quarter GDP. On Friday, the government reports the third and final estimate of fourth quarter 2014 GDP growth. Analysts expect an increase to 2.4 percent growth.  Also on tap this week is the flash PMI for China on Wednesday and Japanese inflation numbers on Thursday.

Companies reporting earnings this week include Paychex (PAYX), Yingli (YGE), Lululemon (LULU) and Blackberry (BBRY).

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