A screen displays foreign exchange outside Mexico’s stock exchange building in Mexico City, Mexico November 18, 2016. REUTERS/Henry Romero September 26, 2017 By Sheky Espejo MEXICO CITY (Reuters) – As many as 10 companies could list on Mexico’s stock exchange by the end of 2017, sources from the exchange said, potentially marking a record year ahead of slower expected activity in 2018 due to Mexico’s elections. Since January, four companies have listed in Mexico, raising a combined $2.1 billion in initial public offerings (IPOs). In addition, Sigma Alimentos, a unit of industrial conglomerate Grupo Alfa <ALFAA.MX>, and Traxion, a transportation company controlled by private equity funds Nexxus and Discovery Americas, this week confirmed their IPOs. In October, Banco Mifel is expected to launch its IPO, as is the transportation subsidiary of Mexican miner Grupo Mexico <GMEXICOB.MX>. Two more companies are considering IPOs, said one of the two sources, who declined to be named citing confidentiality. In 2013, a record year, Mexico added nine new companies to its bourse. “A committee within the Mexican stock exchange is created for each new listing, and we’ve never had as many committees as we have this year,” said one source. The pace of IPOs in Mexico typically slows during an election year, and some investors are especially wary of the current front-runner for next July’s presidential contest, leftist hopeful Andres Manuel Lopez Obrador. The four new listings named above have not been affected by the massive earthquake that struck Mexico City on Sept. 19 and killed more than 330 people, market sources involved in the transactions said. Sigma aims to raise about 18.5 billion pesos ($1.03 billion) while Traxion expects around 4.32 billion pesos. If all the planned IPOs take place, Mexico could also break its 2012 record amount raised, which according to consultancy firm Dealogic stood at $6.8 billion, mostly driven by the $4 billion listing in 2012 of Spanish bank Santander <SANMEXB.MX>. Tequila maker Jose Cuervo <CUERVO.MX> raised $900 million, Mexican energy investment firm Vista Oil & Gas <VISTAA.MX> raised $650 million, Banco del Bajio <BBAJIOO.MX> raised $482 million, and Mexican real estate investment trust (REIT) Fibra Nova <FNOVA17.MX> raised $68 million. Juan Manuel Olivo, head of promotion and issuers for the Mexican stock exchange, said the IPO spike this year is primarily due to stable economic conditions, new business opportunities that require capital and attractive valuations. He said the Mexican stock exchange has also stepped up efforts to better inform companies of their financing options, which also include issuing debt and new real estate investment trusts known locally as Fibras. “In the last 18 months, more (financing) instruments have been created that in the previous 10 years,” said Olivo. ($1 = 17.9540 Mexican pesos) (Reporting by Skeky Espejo; Writing by David Alire Garcia; Editing by Lisa Shumaker) from https://capitalisthq.com/mexico-eyes-record-ipos-before-election-season-slowdown-sources/
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Jay Clayton, Chairman of the Securities and Exchange Commission, testifies at a Senate Banking hearing on Capitol Hill in Washington, U.S. September 26, 2017. REUTERS/Aaron P. Bernstein September 26, 2017 By Michelle Price and Pete Schroeder WASHINGTON (Reuters) – The chairman of the U.S. Securities and Exchange Commission (SEC) told a congressional committee on Tuesday he did not believe his predecessor Mary Jo White knew of a 2016 cyber breach to the regulator’s corporate disclosure system, the exact timing of which could not be known “for sure.” Jay Clayton, who was formally appointed to his role in May, also said listed companies should disclose more detailed information on cyber breaches “sooner,” and that the U.S. regulator was working on new guidelines to ensure this. The Senate Banking Committee grilled Clayton on Tuesday over a 2016 hack of EDGAR, the agency’s online corporate financial disclosure system, only disclosed last Wednesday, which has shaken confidence in the SEC’s cyber defenses. Clayton said he had decided last weekend to disclose the breach once he had enough information to establish it was “serious,” but he would not be drawn on who at the agency had known about it and whether there was an attempt to cover it up. “I have no belief sitting here that Chair White knew,” Clayton said when asked whether his predecessor had been aware of the hack, adding: “I don’t think we can know for sure” on the exact timing of the breach. Clayton fielded several questions from senators on the recent Equifax Inc <EFX.N> data breach in which hackers stole personal data of about 143 million customers of the credit reporting firm, including on the timing of the company’s disclosure. Although the former Wall Street lawyer declined to comment on whether the SEC was investigating stock sales made by Equifax executives prior to the disclosure, he said he was “not ignoring” the issue. The hearing, which had been scheduled prior to the disclosure of the SEC’s breach, offered lawmakers, companies and investors the first opportunity to hear from the SEC chief on the incident. Clayton originally had been scheduled to discuss capital market reform at his first hearing before the committee since being formally appointed in May, but his pro-growth agenda was largely eclipsed by the SEC breach and the Equifax scandal. Wall Street’s top regulator came under fire last week after disclosing that hackers might have used information stolen from EDGAR, which houses millions of market-sensitive corporate disclosures such as earnings releases, for insider trading. “When we learn a year after the fact that the SEC had its own breach and that it likely led to illegal stock trades, it raises questions about why the SEC seems to have swept this under the rug,” Senator Sherrod Brown, the ranking Democratic member of the committee, asked Clayton during opening remarks. “What else are we not being told, what other information is at risk, and what are the consequences?” Brown asked. “How can you expect companies to do the right thing when your agency has not?” CYBER DEFENSES EYED Reuters reported on Monday that the Federal Bureau of Investigation and the U.S. Secret Service have launched investigations into the breach, which occurred in October 2016 and appeared to have been routed through servers in Eastern Europe. The breach appeared to have been one of several cyber incidents documented by the SEC in recent months, Reuters reported. Clayton said he only learned about the 2016 hack in August and that the SEC’s enforcement staff and inspector general’s office have launched internal probes. The regulator reported the breach to the Department of Homeland Security’s Computer Emergency Readiness Team when it was first discovered, Clayton said in the testimony, adding the regulator plans to hire more cyber security experts. Clayton said the hack was possibly the result of a defect in the EDGAR software and said that personally identifiable information did not appear to have been put at risk, but he declined to provide further detail. He said the SEC was still determining the extent and impact of the breach and that it could take “substantial time” to complete due to the amount of data that needed to be analyzed. The committee also quizzed Clayton about other potential breaches at the agency and the regulator’s general cyber defenses. Clayton said he could not say with “100 percent certainty” that the EDGAR breach was the only one suffered by the agency, and added that he planned to ask Congress for more funds to tackle the rising cyber threat. “We’re going to need more money for cyber security, and I intend to ask for it.” (Reporting by Michelle Price and Pete Schroeder; editing by Leslie Adler and G Crosse) from https://capitalisthq.com/sec-chair-grilled-by-senate-panel-over-cyber-breach-equifax/ Kurds celebrate to show their support for the independence referendum in Erbil, Iraq September 25, 2017. REUTERS/Ahmed Jadallah September 26, 2017 By Maher Chmaytelli ERBIL, Iraq (Reuters) – The Iraqi government ruled out talks on possible secession for Kurdish-held northern Iraq on Tuesday and Turkey threatened to choke it off, after a referendum on independence there showed strong support for a split. Initial results of Monday’s vote indicated 72 percent of eligible voters had taken part and an overwhelming majority, possibly over 90 percent, had said “yes”, Erbil based Rudaw TV said. Final results are expected by Wednesday. Celebrations continued until the early hours of Tuesday in Erbil, capital of the Kurdish region, which was lit by fireworks and adorned with Kurdish red-white-green flags. People danced in the squares as convoys of cars drove around honking their horns. In ethnically-mixed Kirkuk, where Arabs and Turkmen opposed the vote, local Kurdish-led authorities lifted an overnight curfew imposed to maintain control. The referendum has fueled fears of a new regional conflict; on Tuesday Turkey, which has fought a Kurdish insurgency within its borders for decades, reiterated threats of economic and military retaliation. Kurdistan Regional Government (KRG) President Masoud Barzani says the vote is not binding, but meant to provide a mandate for negotiations with Baghdad and neighboring countries over the peaceful secession of the region from Iraq. But Iraq’s opposition to Kurdish independence did not waver. “We are not ready to discuss or have a dialogue about the results of the referendum because it is unconstitutional,” Iraqi Prime Minister Haider al-Abadi said in a speech on Monday night. The Kurds held the vote despite threats to block it from Baghdad, Iraq’s powerful eastern neighbor Iran, and Turkey, the region’s main link to the outside world. “This referendum decision, which has been taken without any consultation, is treachery,” Turkish President Tayyip Erdogan said, repeating threats to cut off the pipeline that carries hundreds of thousands of barrels of oil a day from northern Iraq to global markets. Oslo-based broker Sparebank 1 Markets said oil companies could sell some oil locally if exports were blocked but their revenues would take a hit. Iraqi Kurds – part of the largest ethnic group left stateless when the Ottoman empire collapsed a century ago – say the referendum acknowledges their contribution in confronting Islamic State after it overwhelmed the Iraqi army in 2014 and seized control of a third of Iraq. Voters were asked to say ‘yes’ or ‘no’ to the question: “Do you want the Kurdistan Region and Kurdistani areas outside the (Kurdistan) Region to become an independent country?” With 30 million ethnic Kurds scattered across the region, mainly in Iraq, Iran, Turkey and Syria, governments fear the spread of separatism to their own Kurdish populations. Iraqi soldiers joined Turkish troops for military exercises in southeast Turkey on Tuesday near the border with Iraq’s Kurdistan region. Turkey also took the Rudaw TV channel off its satellite service TurkSat, a Turkish broadcasting official told Reuters. The U.S. State Department said it was “deeply disappointed” by the KRG’s decision to conduct the referendum but added that Washington’s “historic relationship” with the people of the Iraqi Kurdistan Region would not change. Asked about the referendum, White House spokeswoman Sarah Sanders said on Monday: “We hope for a unified Iraq to annihilate ISIS (Islamic State) and certainly a unified Iraq to push back on Iran.” Iran announced a ban on direct flights to and from Kurdistan on Sunday, while Baghdad asked foreign countries to stop direct oil trading with the Kurdish region and demanded that the KRG hand over control of its international airports and border posts with Iran, Turkey and Syria. Iranian Major General Yahya Rahim Safavi, a top military adviser to the Supreme Leader, called on “the four neighboring countries to block land borders” with the Iraqi Kurdish region, according to state news agency IRNA. Tehran supports Shi’ite Muslim groups that have ruled or held security and government positions in Iraq since the U.S.-led invasion that toppled Saddam Hussein in 2003. Syria, embroiled in a devastating civil war and whose Kurds are pressing ahead with their own self-determination, rejected the referendum. KRG Prime Minister Nechirvan Barzani said he hoped to maintain good relations with Turkey. “The referendum does not mean independence will happen tomorrow, nor are we redrawing borders,” he said in Erbil on Monday. “If the ‘yes’ vote wins, we will resolve our issues with Baghdad peacefully.” British Foreign Secretary Boris Johnson reiterated London’s opposition to the vote, urging “all sides to refrain from provocative statements and actions in its aftermath. “The priority must remain the defeat of Daesh and returning stability to liberated areas,” he added, a reference to Islamic State militants who continue to control parts of Iraq and Syria, including a pocket west of Kirkuk. (Editing by Philippa Fletcher; Additional reporting by Ece Toksabay in ANKARA and Umit Bektas in HABUR, Turkey and Gwadys Fouche in OSLO) from https://capitalisthq.com/turkey-threatens-retaliation-after-iraqi-kurdish-independence-vote/ An Israeli gas platform is seen in the Mediterranean sea August 1, 2014. To match Insight ISRAEL-TURKEY/GAS REUTERS/Amir Cohen/File Photo September 26, 2017 By Osamu Tsukimori TOKYO (Reuters) – Oil prices took a breather on Tuesday after Brent crude earlier rose to a 26-month high, supported by Turkey’s threat to cut crude flows from Iraq’s Kurdistan region to the outside world. Turkish President Tayyip Erdogan threatened on Monday to cut off the pipeline that carries oil exports from northern Iraq, intensifying pressure on the Kurdish autonomous region over its independence referendum. The pipeline to Turkey’s port of Ceyhan usually pumps between 500,000 and 600,000 barrels per day (bpd). The loss of this supply combined with the 1.8 million bpd of supply cuts by the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers has raised concerns of tighter supply. The Iraqi government said it will not hold talks with the Kurdistan Regional Government about the results of the referendum, which is expected to show a comfortable majority in favor of independence after the results are announced in about 72 hours. “The high compliance of producers in jointly curbing output as well as the news of (Turkey’s response to) the referendum helped oil prices,” said Tomomichi Akuta, senior economist at Mitsubishi UFJ Research and Consulting in Tokyo. London Brent crude for November delivery <LCOc1> was up 1 cent at $59.03 a barrel by 0621 GMT after settling up 3.8 percent on Monday. Earlier it rose to $59.49, the highest since July 10, 2015. U.S. crude for November delivery <CLc1> was down 10 cents at $52.12, after hitting $52.43, a five-month high. Brent has jumped from just over $55 a barrel a week ago, as OPEC and non-OPEC producers confirmed the market was well on its way toward rebalancing, while oil inventories declined. However, other analysts were cautious of further price gains because of higher oil output from the United States. The U.S. Energy Information Administration said that production from wells in shale formations will rise for a 10th month in a row in October. “With oil this high, shale oil output will accelerate, capping oil prices,” said a Tokyo-based oil analyst who declined to be identified. U.S. crude prices have lagged behind Brent’s gains amid a large oversupply exacerbated by Hurricane Harvey, which forced the closure of nearly 25 percent of U.S. refining capacity. The spread between WTI and Brent futures <CL-LCO1=R> widened to $7.17, its steepest since August 2015. U.S. crude inventories likely rose by 2.3 million barrels last week, a preliminary Reuters poll showed ahead of data by American Petroleum Institute (API). Gasoline stockpiles likely fell by 1 million barrels, while distillate inventories, which include heating oil and diesel fuel, were forecast to fall by 2.5 million barrels. The API is scheduled to release its weekly data at 4:30 p.m. EDT (2030 GMT). (Reporting by Osamu Tsukimori; Editing by Kenneth Maxwell and Christian Schmollinger) from https://capitalisthq.com/oil-rises-to-26-month-high-turkey-threatens-to-cut-kurdistan-oil-pipeline/ FILE PHOTO: A woman pauses as she shops at a wholesale market in Yiwu, Zhejiang province January 11, 2011. REUTERS/Carlos Barria/File Photo September 26, 2017 BEIJING (Reuters) – The Asian Development Bank raised its outlook for China’s economic growth this year on the back of strong domestic consumption, an export recovery and solid growth in services. ADB now expects China’s economy to grow 6.7 percent in 2017, up from a previous projection of 6.5 percent made in April. The 2018 growth forecast was also raised to 6.4 percent from 6.2 percent. China’s economy has grown at a faster than expected 6.9 percent pace in the first half of this year, on track to beat the government’s target of around 6.5 percent despite Beijing’s efforts to curtail risky forms of investments and rising debt. “The PRC economy remains resilient, solidifying its role as an engine of global growth,” said Yasuyuki Sawada, ADB Chief Economist. “Supply-side reform is moving forward, but eventual success hinges on a careful balancing of the role of the market and the state, particularly as the country continues its transition to a more market and services-driven economy.” ADB’s forecasts for China in 2017 and 2018 now match those of the International Monetary Fund, which upgraded its own China growth forecast in July. But 6.7 percent growth for the full year would still indicate a notable slowing over the second half of the year. A cooling property market due to strong government controls and weaker exports growth could impact overall economic output in the second half, analysts say. Indeed, August economic data suggested the world’s second-largest economy is finally starting to lose some momentum as borrowing costs rise. Rising debt in the economy and a reliance on credit to drive growth has also raised worries among groups including the IMF and led S&P Global Ratings last week to cut China’s sovereign credit rating. ADB said it expects China’s monetary and financial policies will remain unchanged this year, while exchange rate reform could include a widening of the trading band for the yuan. But the bank highlights risks that include liquidity shortages from regulatory tightening, global trade protectionism and renewed capital outflows if the dollar begins to strengthen. (Reporting by Elias Glenn; Editing by Shri Navaratnam) from https://capitalisthq.com/adb-raises-chinas-2017-growth-forecast-to-6-7-percent-on-consumption-exports-boost/ U.S. President Donald Trump steps off of Air Force One at Joint Base Andrews in Maryland, U.S. September 24, 2017. REUTERS/Aaron P. Bernstein September 25, 2017 By Scott Malone BOSTON (Reuters) – U.S. President Donald Trump kept up his verbal battle with the National Football League over players who drop to one knee during the national anthem, saying on Monday their acts of protest had nothing to do with racism. Dozens of NFL players, coaches and even some owners joined in silent protest at games on Sunday against Trump’s call for owners to fire players who do not stand during the “Star-Spangled Banner.” “The issue of kneeling has nothing to do with race. It is about respect for our Country, Flag and National Anthem. NFL must respect this!” Trump said on Twitter. Some black athletes disputed that statement. “It is about race. It is about inequalities in our communities,” Miami Dolphins player Michael Thomas told CNN. “People are going to continue to … voice their opinion.” Trump kicked off his battle with the largest-grossing U.S. professional sports league at a rally on Friday, when he said any protesting player was a “son of a bitch” who should be “fired.” White House spokeswoman Sarah Huckabee Sanders said that anti-racism protests should not be directed at the flag. “If the debate is really for them about police brutality, they should protest the officers on the field that are protecting them instead of the American flag,” she said. The controversy highlighted a deep political rift that Trump’s election has exposed across American society. Former San Francisco 49ers quarterback Colin Kaepernick began kneeling during the anthem in protest of police brutality and racial inequities last year. No NFL team has signed Kaepernick for this season. Not all players joined in Sunday’s protests. Notably, Pittsburgh Steelers lineman Alejandro Villanueva, a U.S. Army veteran, stood alone at the entrance to the stadium for the anthem on Sunday while his teammates waited in the locker room. Villanueva jerseys and other apparel have outsold those of all other players in the past 24 hours, said a spokesman for online retailer Fanatics, which operates NFLShop.com. Villanueva’s teammate, Ben Roethlisberger, on Monday said he regretted having missed the anthem. “I was unable to sleep last night,” Roethlisberger said in a statement. “I personally don’t believe the Anthem is ever the time to make any type of protest.” NEXT TEST The next test of NFL sentiment comes in Phoenix, Arizona, when the Cardinals host the Dallas Cowboys at 8:30 p.m. EDT (0030 GMT). Neither team has had a player conspicuously kneel during the anthem. Cowboys owner Jerry Jones has expressed pride that his team has not joined in anthem protests, last month calling other athletes’ actions “really disappointing.” Trump called for a boycott of games. Early reports from the major networks were mixed. CBS Corp said overall viewership of games it broadcast on Sunday was up 4 percent from last year and 1 percent from last week. NBC, owned by Comcast Corp, said viewership for its Sunday night game was down compared with the prior week. The debate attracted intense attention online, with the hashtag “#TakeAKnee” racking up 2.4 million mentions and “#TakeTheKnee” used 1.2 million times by Monday, while “#BoycottNFL” had 101,500 mentions. Prominent players continued to speak out against Trump on Monday. New England Patriots quarterback Tom Brady, who has said he considers Trump a friend, on Monday said he disagreed with Trump’s remarks. “I thought it was just divisive,” Brady told Boston’s WEEI radio. At the same time as he berated the NFL, Trump praised car-racing league NASCAR, which saw no protests at its Sunday race in New Hampshire. One of that league’s stars, Dale Earnhardt Jr., responded on Twitter. “All Americans R granted rights 2 peaceful protests,” Earnhardt wrote. He then quoted the late President John F. Kennedy: “Those who make peaceful revolution impossible will make violent revolution inevitable.” (Additional reporting by Susan Heavey and Doina Chiacu in Washington, Gene Cherry in Raleigh, North Carolina, Dave Ingram, Angela Moon and Sheila Dang in New York and Frank Pigue in Toronto; Editing by Lisa Shumaker and Jonathan Oatis) from https://capitalisthq.com/trump-blasts-nfl-for-anthem-protests-says-not-about-race/ Good morning, What’s in this week’s Report:
Futures are very slightly lower as European politics weighs slightly on sentiment. German election results are being viewed as a mild disappointment as Merkel won a 4th term as Chancellor, but her party did much worse than expected in the Bundestag, endangering any further EU integration. That result is weighing modestly on the euro (down -.4%). Economically, the German IfO Business Expectations Index slightly missed estimates at 107.4 vs. (E) 107.7 but that’s not moving markets. Financial Advisors and Business Owners: Your customers are talking about you. Make sure you you’re listening. Click here to receive a Free Snapshot Report. Today there are no notable economic reports but there are three Fed speakers, the most important of which is Dudley at 8:30 a.m. ET. Evans (12:40 p.m. ET) and Kashkari (6:30 p.m. ET) also speak today. Trending News:
From a trading standpoint, banks and “reflation” sectors remain the key. If banks can extend the rally (and tech holds in “ok,”) then this rally can continue. Sincerely, CapitalistHQ.com
Stocks
This Week Focus this week will be on politics and inflation. On Wednesday, Republicans are supposed to unveil a detailed tax cut proposal, so a lack of specifics will again disappoint markets. Additionally, the latest effort to repeal Obamacare faces a Sept. 30 deadline (this is unlikely to pass). From a data standpoint, the key this week is inflation, as we get the flash EU HICP (their CPI) and the US Core PCE Price Index (the Fed’s preferred measure of inflation) both on Friday. Last Week (Needed Context as We Start a New Week) The S&P 500 was virtually unchanged last week after the Fed provided a slightly more “hawkish” decision than expected. The S&P 500 rose 0.08% and is up 11.76% year to date. Stocks were up very small in quiet trade on Monday and Tuesday, as “pre-Fed paralysis” hit markets. The S&P 500 drifted slightly higher both days amidst little news. On Wednesday, the Fed decision caused a mid-afternoon decline in stocks as investors reacted to the more-hawkish-than-expected announcement. In reality, the Fed decision almost perfectly met reasonable expectations, and as such the S&P 500 recovered late in the session and closed flat. Thursday saw some mild selling that erased the marginal early week gains, as investors digested the reality of higher rates. That digestion continued Friday as the markets were again little changed following a slightly underwhelming flash composite PMI. But that number won’t change anyone’s outlook for growth or Fed policy, so it was largely ignored and stocks chopped sideways before closing basically flat on the week. Your Need to Know The key takeaway from the internals last week remains the outperformance of our “reflation basket” of cyclical ETFs. At the index level, small caps handily outperformed, rallying more than 1% while tech lagged (Nasdaq declined 0.33%). On the sector level, banks, industrials, consumer discretionary and energy (more on the potential contrarian opportunity in energy later this week) all outperformed. Conversely, tech (especially super-cap internet), utilities, healthcare and consumer staples (which got hit on the GIS earnings miss) all underperformed. So, it really was almost a perfect rotation from the sectors that had outperformed all year, and to the sectors that have lagged. Importantly, while last week’s performance did add to the momentum of cyclicals, there were no critical technical signals given that would imply a definitive end to the “defensive” uptrend and “cyclical” downtrend. For now, the dominant trend in defensives remains higher, and cyclicals lower, but again that could be changing soon… and that’s what we’re watching for. Bottom Line The major issue facing investors right now isn’t macro-oriented, it’s micro-oriented, and it is specifically whether we are seeing (after several head fakes) a lasting important shift in sector leadership, as cyclical sectors (those contained in our reflation basket) have outperformed over the last three weeks. Determining whether this sector shift is for real is important, because the key to outperforming the S&P 500 in 2017 has been sector selection. We are wary to declare this shift “for real” given the number of head fakes this year, and as such we’re looking at two key signals that will tell us that it is indeed time to book profits in defensive sectors and rotate into cyclicals. First, the KBW Bank Index needs to hit new 2017 high (basically close above 100). Second, the 10-year yield needs to close above 2.40%. Both of those signals will lead to us recommending medium- and longer-term investors shift exposure out of super-cap tech (FDN), healthcare (XLV/IHF/IBB) and defensive sectors (XLP/XLU) and into our reflation basket of banks (KRE), industrials (XLI), small caps (IWM) and inverse bond ETFs (TBT/TBF). As we also mentioned last week, for more aggressive/nimble advisors or investors, frankly this move higher in cyclicals looks for real (because it’s being driven by the data), so if you want to be a bit aggressive, rotating some allocations now can be justified—although again, that comes with risks. For shorter-term and more agile advisors and investors, I don’t think you necessarily have to wait for both signals to be elected. Looking at the macro, the general set up for stocks remains largely unchanged, at least in the near term. From an economic data standpoint, the numbers need to continue to thread a needle of showing 1) Stable-to-accelerating growth and firming inflation but 2) Not so much growth and acceleration in inflation that it causes global central banks to become materially more hawkish. So far, data has largely done that, and that’s stabilizing the macro outlook and allowing this sector rotation. From a “what could go wrong” standpoint, the main areas of focus need to be earnings and geopolitics. Earnings season is fast approaching, and the numbers need to stay firm and show continued earnings growth. As I have said consistently, impressive earnings growth in 2017 has been an unsung hero for this rally, and if earnings growth looks like it’s peaked, investors might begin to book profits, seeing as the S&P 500 is still trading at 18X 2018 earnings. On the geopolitical front, North Korea remains at the top of the news, but don’t sleep on Iran, either. President Trump needs to certify that Iran is in compliance with the nuclear deal every 90 days, and the next certification date is Oct. 15. If he does not certify, that will raise tensions (good for oil/energy stocks). Bottom line, while the geopolitical wildcards could cause short-term, risk-off moves, the bottom line is that the macro outlook remains generally “ok” near term. So, the key remains getting this potential sector rotation “right” to maintain 2017 outperformance, and that’s what we’re very focused on doing going forward. Economic Data (What You Need to Know in Plain English) Need to Know Econ from Last Week The most important occurrence last week was that the Fed clearly signaled it still intends to hike rates in December, as long as inflation and economic growth don’t decline further, and that declaration weighed on stocks modestly but boosted reflation-sensitive sectors. Looking at the Fed meeting, it wasn’t that it was surprisingly hawkish, it wasn’t. In virtually every way, the Fed met consensus expectations. It announced commencement of balance sheet reduction in October, it barely made any changes to the statement (other than referencing the hurricanes), and the “dots” were unchanged for both 2017 (median showing one more hike) and 2018 (median showing three hikes). Yet as we have cautioned, the market had a somewhat illogically dovish expectation of the Fed, and as such we saw the Fed decision push bond yields and the dollar higher, and weigh modestly on stocks. Now, that dovish expectation has been corrected, as Fed fund futures are pricing in a 70% chance of a rate hike (which is probably about right at this point). With the Fed confirming that rates are still moving higher, absent a roll over in inflation or growth data, that puts the onus on economic activity to accelerate and avoid a potentially “stagflationary” outcome, and unfortunately the lone piece of notable data last week wasn’t very good. The September flash manufacturing PMI met expectations at 53.0 (up from 52.5 in August), but the composite number (manufacturing and services) missed estimates at 54.6 vs. 54.9. Now, to be fair, these are all still strong readings on an absolute level, but the absolute level isn’t as important as the rate of change. Unfortunately, the rate of change in economic growth is not significantly positive (at least not hard economic data). That is a potential problem, because if the market is going to accept the Fed is hiking rates in December, then we need economic growth to accelerate and create the economic reflation that will push stocks higher. If that doesn’t happen, we’ve got the Fed hiking into a stagnant growth environment, and that’s not a great scenario for stocks. Important Economic Data This Week In many ways, this week is the relative “calm before the storm” of next week, which will contain the final global September PMIs and the September jobs report. That said, there are a few important numbers we need to watch, primary of which is Friday’s Personal Income and Outlays Report. The reason this report is important is because it contains the Core PCE Price Index, the Fed’s preferred measure of inflation. If it shows firming similar to what we saw in the recent CPI report, from a stock standpoint it will put more pressure on Treasury yields and the reflation trade, and from a macro standpoint it will put more pressure on economic growth to accelerate. Away from the Core PCE Price Index, the next notable number is Durable Goods (Wednesday). Remember, while regional PMIs have been very strong, actual hard economic data has not, and we’ve still got a big discrepancy between surveys and real activity. If durable goods bounces, that will be a good sign that actual economic growth is rising to meet the strong survey data. Outside of those two reports, the next most important event is the Chinese September PMIs, out Thursday and Friday night. Chinese data has been a touch underwhelming lately, but growth expectations haven’t changed. If they do start to be changed lower that could be a surprise headwind on stocks. Bottom line, this week we get more color on the state of inflation and growth, but really, it’s next week’s data that will be the next major economic influence on markets.
In Commodities, there was some notable movement in the space last week, as crude oil traded up to multi-month highs amid OPEC/Non-OPEC policy speculation while both gold and copper fell to multi-month lows in the wake of the Fed announcement midweek. The commodity ETF, DBC, rose 0.52%. Beginning with energy, there were several moving pieces affecting the oil market last week, but at Friday’s settlement, WTI futures had risen 1.67% for the week and closed above $50/barrel for the first time since May. Traders eyed the OPEC/Non-OPEC producer meeting in Vienna, which ended up being largely a non-event as there were no changes to current output caps. Despite the lack of development regarding the global production cap deal headed up by Saudi Arabia, the still-depressed US oil production figures since Hurricane Harvey, and slightly higher demand expectations (from the IEA) have been bullish developments. Until US production jumps to new highs (and the average weekly output increase tops 25K b/d per week again) the bid in the market will likely continue. Oil remains largely range-bound between the low $40s and low $50s. Gold drifted sideways ahead of the Fed before selling off and breaking down through psychological support at $1300 Thursday, as the mildly hawkish Fed was digested. Gold fell 1.74% on the week. In a similar move to copper, gold has retraced much of its early September rally, but the reason for the pullback was more fundamental as real interest rates have moved higher and made non-yielding safe havens like gold less attractive than something like a 2-year T-Note. The trend in gold is bullish thanks to the recent new highs, but the price action in 2017 is less convincing than industrial metals like copper. Specifically, the new “lower low” in July is a concern on the charts, and because of that we are very cautiously optimistic on gold. And if the reflation trade really takes hold (and rates rise significantly) then gold will decline in the weeks ahead. Looking at Currencies and Bonds, because the Fed was interpreted as hawkish, that helped push bond yields higher last week, although the Dollar Index was held back by a buoyant euro and strong pound. The Dollar Index rose 0.4% while the 10-year Treasury yield rose 6 basis points to resistance at 2.27%. The Fed meeting was obviously the key event last week, and it helped to push bond yields higher because, with a 10-year Treasury yield sub 2.20%, the market simply wasn’t pricing in a December rate hike. Now, with the 10-year yield in the upper 2.20s, that rate hike is at least partially priced in. However, it’s going to take better inflation data or growth data in the US or Europe to help yields move higher. As such, the Core PCE Price Index and the EU Flash HICP (Friday and Thursday, respectively) are the key numbers to watch this week for bond yields. Remember, though, that while we’ve seen an impressive bounce off the recent lows of 2.03%, we need a break of near-term resistance at 2.27%, and medium-term resistance at 2.40%, before we can declare this downtrend in yields over. Turning to the dollar, the fundamental news was positive for the greenback this week, but it’s not resulting in any material gains because, on the margin, the ECB and BOE are getting more hawkish too. To that point, despite the Fed, the euro rallied small last week while the pound saw very mild profit taking following the big run of two weeks ago both on expectations of less accommodative policies. The only major currency that fared badly vs. the dollar this week was the yen, which fell 2% on a risk-off move combined with some dovish comments at the BOJ meeting (this is potentially positive for DXJ). The bottom may be in for the dollar, but it’s going to take better inflation or growth data to get the dollar to break resistance (currently around the mid-94.00 level). For now, the near-term outlook for the dollar is at best neutral.
Special Reports and Editorial Is It Time to Allocate to Our “Reflation Basket”? There’s a simple question that we need to address following the Fed’s hawkishly interpreted announcement: Is it time to rotate out of defensives (super-cap internet, healthcare, utilities, staples) and into cyclicals/reflationary sectors? I bring that up because Wednesday we saw a classic “reflation rotation.” Tech, utilities and consumer staples (sectors that have outperformed YTD) all lagged the market while cyclical sectors (which have badly underperformed) rose. Banks surged 1.1%, energy rose 0.35% and industrials rose 0.73%, while consumer discretionary rose 0.34%. Additionally, small caps (which have been laggards YTD but are playing catch up in a hurry, rose 0.35% and the Russell 2000 was again the best-performing major index. To answer the question of whether we need to rotate, for medium- and longer-term investors, I continue to believe the answer is “no,” although for more aggressive, tactical investors legging into some reflation/cyclical sectors at these levels could make sense. For the less-nimble investors/advisors, I’m looking for two key indicators to tell me when to rotate into cyclicals. First, I want to see the bank index ($BKX) hit a new high for the year. That means trading above 99.77, and closing above 99.33 (so call it 100 to make it easy). Second, I want to see 10-year yields close above 2.40% (currently 2.28%). If those two signals are elected, then for medium- and longer-term advisors/investors, I would advocate booking (large) profits in healthcare (XLV/IHF/IBB), super-cap internet (FDN), consumer staples (XLP) and utilities (XLU). And, I would advocate allocating those dollars to our “reflation basket” we introduced earlier this summer: KRE/KBE (bank exposure), XLI (global industrials), IWM (small caps), TBT/TBF (short bonds). And though not for the faint of heart, I might even include XLE/XLB in that mix, although that’s more a strategy based on a wide-ranging bounce in cyclical sectors (energy and basic materials are facing fundamental headwinds). Again, for those investors who are nimble and can stand some pain, establishing positions now does make some sense. But, for the remainder (again medium– and longer-term investors) I’d wait until those two indicators (BKX and 10-year yield) have been elected. Regardless, we are witnessing a sea change in the outlook for central bank policy, and that’s going to require more vigilance on the part of advisors and investors, because if the global rate-hike cycle is underway, then the hourglass just got flipped and the sand is now running out on the eight-year bull market. When Will the Fed Kill the Bull Market? (Or, What is the Neutral Fed Funds Rate?) A lot of clichés on Wall Street aren’t worth the paper they’re printed on, but one saying I have found to be quite accurate is: Bull Markets Don’t Die From Old Age. It’s the Fed that Kills Them. At least over the last 20 years, that has largely proven true. The general script goes like this: First, the Fed starts raising rates because financial conditions have become too easy. In this cycle, rate hikes began in December 2015. Second, those rate hikes cause the yield curve to invert. That happens as bond investors sell short-term Treasuries and send short-term yields higher (because the Fed is raising short-term rates), and buy longer-dated Treasuries, pushing those yields lower because investors know the rate hikes will eventually cut off economic activity. In this cycle, this process has already started, as the 10s—2s yield spread has fallen from over 2% in late-2017 to fresh, multi-year lows recently at 0.77% (as of Sept. 5). Third, the inversion of the yield curve is a loud-and-clear “last call” on the bull market. The rally doesn’t end when the curve inverts, but it’s a clear sign that the end is much closer to the beginning. In this cycle, we are not at that inversion step yet, although we are getting uncomfortably close. Fourth, the Fed keeps hiking rates until economic momentum is halted. During the last two economic downturns (2001/2002 and 2008/2009) the Fed was able to hike rates to 6.5% and 5.25%, respectively, before effectively killing the bull market. But just as the Fed cuts rates after the economy has bottomed, it also hikes rates after economic growth has stalled. So, it’s reasonable to assume the actual rate which caused the slowdown/bear market is at least 25 to 50 basis points below those levels, so 6% or 6.25% in ’01/’02 and 4.75% or 5% in ’08/’09. In this cycle, the most important question we can ask is: At what level of rates does the Fed kill the expansion and the rally? That number, which the Fed calls the “neutral” rate (but it’s not really neutral, it’s negative), is thought to be somewhere between 2.5% and 3% this time around (at least according to Fed projections). However, we’ve never come out of a cycle where we’ve had: 1. Four separate rounds of QE 2. The maintaining of a multi-trillion-dollar balance sheet 3. Eight-plus years of basically 0% interest rates 4. Eight-plus years of sub-3% GDP growth So, common sense would tell us that this “neutral” Fed funds rate is going to be much, much lower than it’s been in the past. How much lower remains the critical question (2.5%? 2.0%? 1.5?) This is really important, because if the answer is 1.5%, we’re going to hit that early next year (it likely isn’t 1.5%, but it may not be much higher). And, what impact will balance sheet reduction have on this neutral rate? Again, common sense would tell us that balance sheet reduction makes the neutral rate lower than in the past, because balance sheet reduction is a form of policy tightening that will go on while rates are rising (so it’s a double tightening whammy). There are two important takeaways from this analysis. First, while clearly the tone of this analysis is cautious, it’s important to realize that the yield curve has not inverted yet, so we haven’t heard that definitive “last call” on the rally. But, just like at an actual last call, there’s still some time and momentum left afterwards, so an inverted curve is a signal to get ready to reduce exposure, not a signal to do so that minute. None of this analysis contradicts anything I’ve said about a reflation rebound, because we’re dealing with two different time frames. Second, on a longer-term basis, if the Fed really is serious about hiking rates, then this bull market is coming to an end, and the risk is for it happening sooner rather than later. Because the level at which rates cause a slowdown and kill the bull market is likely to be much, much lower than anything we’ve seen before (unless there is a big uptick in economic activity). That is why I’ve said we are at a fork in the road in this market, and that the “hourglass” may have finally been flipped on the bull run. Hitting that “Neutral” Fed funds rate Is likely at least a few quarters away (unless things are way worse than we think). So again, this isn’t a call to sell now, but it’s my job to watch for these types of tectonic shifts in the market so that we’re all prepared to act when the time is right. Are the Dollar and 10-Year Yield About to Diverge? For all of 2017, the Dollar Index and 10-year Treasury yields have been very highly correlated, as both have fallen together. But over the past few weeks, really starting with the surprise inflation stats from China, we’ve seen a mild divergence. That divergence could get worse over time, and be positive for stocks. More specifically, we could see yields rally while the dollar stays in the low 90s, and the reason is the ECB and BOE. With the ECB tapering QE and the Bank of England on the verge of a rate hike (whether it’s now or in the next few months), the market will treat every meeting as “live.” That will be a headwind on the Dollar Index, because those two currencies account for nearly 70% of the weighting. Under this scenario, it would take an uptick in growth and inflation data to power the Dollar Index materially higher. However, the fact that the ECB, BOE and Fed are all at or nearing rate hikes will be a tailwind on US Treasuries, because as German bund and British Gilt yields rise, it will cause European investors who “hid” in Treasuries for the higher yield to rotate back into their native bonds. That, in a nutshell, is why we saw Treasury yields flat yesterday while the Dollar Index gave back almost half of Wednesday’s gains. From a stock standpoint, this potential outcome could be positive, as rising yields imply accelerating reflation, but the dollar shouldn’t rally too much in the near term, and should not be a headwind on exports or foreign demand. The wild card for this set up remains data, both in the US and Europe. If US economic data accelerates, then the market will begin to price in more Fed rate hikes, and the dollar will rise. Conversely, if economic data falters in Europe, the euro and pound will drop. But, barring either one of those surprise events, the set up in the currency and bond market (from the viewpoint of stocks) is potentially turning more positive… at least near term. EIA Analysis and Oil Update Oil futures were range bound last week, with WTI largely stuck between $49.75 and $50.75. And while the US benchmark did make a new high above $51, futures failed to close above the upper end of that range at least partially thanks to the details of the EIA report (and partially thanks to the dollar). Beginning with the headlines, oil stockpiles rose 3.0M bbls, which was more than analysts’ expectations (+2.6M) and more than the API Report showed (+1.4M). In the products, gasoline remains the main focus in the wake of Harvey. The print showed an in line -2.1M bbl decline in inventories, yet that was much smaller than the API’s -6.1M bbl draw. On balance, the headlines were slightly bearish as oil rose more than expected and gasoline fell less than estimated. In the all-important details of the report, domestic oil production continued to rebound following the adverse effects of Hurricane Harvey. Lower 48 production rose 179K b/d, which brings the two-week total increase to 761K; almost all the 783K b/d knocked offline due to Harvey. At first glance, this seems bearish. Yet in reality the market views it as slightly bullish. That’s because, as far as markets are concerned, it is as though US production has been edging lower since late-August. Over the last month, the average weekly output increase fell from 25.5K b/d to 21.8K b/d. That doesn’t seem like much, but annualized, that is over 190,000 barrels per day less than the trend suggested as recently as mid-August. Looking ahead, it will continue to be important to see whether the rebound continues and if the weekly average increase edges back towards recent levels and total production makes new 2017 highs, or if things continue to level off in the US oil production complex. The former scenario would obviously have bearish implications while the latter would be supportive of a retest of the 2017 highs in the mid-$50s. Disclaimer: CapitalistHQ.com is protected by federal and international copyright laws. CapitalistHQ.com is the publisher of the newsletter and owner of all rights therein, and retains property rights to the newsletter. The Newsletter may not be forwarded, copied, downloaded, stored in a retrieval system or otherwise reproduced or used in any form or by any means without express written permission from CapitalistHQ.com. The information contained in CapitalistHQ.com is not necessarily complete and its accuracy is not guaranteed. Neither the information contained in CapitalistHQ.com or any opinion expressed in CapitalistHQ.com constitutes a solicitation for the purchase of any future or security referred to in the Newsletter. The Newsletter is strictly an informational publication and does not provide individual, customized investment or trading advice to its subscribers. SUBSCRIBERS SHOULD VERIFY ALL CLAIMS AND COMPLETE THEIR OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES, OPTIONS AND FUTURES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND SUBSCRIBERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS. from https://capitalisthq.com/market-economy-capitalisthqs-market-update/ FILE PHOTO: William Dudley, President of the New York Federal Reserve Bank, answers a question, after addressing the Indian businessmen at the Bombay Stock Exchange (BSE) in Mumbai, India May 11, 2017. REUTERS/Shailesh Andrade September 25, 2017 By Jonathan Spicer SYRACUSE, N.Y. (Reuters) – The Federal Reserve is on track to gradually raise interest rates given the recent inflation weakness is fading and the U.S. economy’s fundamentals are sound, an influential Fed policymaker said on Monday, reinforcing the central bank’s confident tone. New York Fed President William Dudley, among the first U.S. central bankers to speak publicly since a decision last week to hold rates steady for now, cited the soft dollar and strong overseas growth among the reasons he expects slightly above-average U.S. economic activity and a long-sought rise in wages. “With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the (Fed’s) 2 percent objective over the medium term,” he told students and professors at Onondaga Community College. “In response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually,” added Dudley, a close ally of Fed Chair Janet Yellen and a permanent voter on monetary policy. Dudley’s comments were similar to his speech earlier this month, and reinforced the growing expectation that the Fed is set to raise rates for a third time this year in December. That notion was driven home by Fed forecasts published last week, when the central bank held rates but announced the beginning of a long process of shedding bonds it accumulated to boost the economy. Still, others at the Fed are less anxious to tighten policy in the face of price readings that have sagged since February, despite strong jobs growth. Futures traders give a December rate hike about a 55-percent probability, according to Reuters data. Dudley nodded to the three devastating hurricanes that have struck parts of the U.S. south and the Caribbean, noting their effects will likely make it more difficult to interpret economic data in coming months. He said, though, that the effects would likely be short-lived and noted that such events tend to boost economic activity as rebuilding gets underway. In a speech focused on workforce development, he said the Fed, which is tasked with achieving maximum sustainable employment, “cannot declare success if we have people who want to work but lack the skills to fill available jobs.” Yet he noted that the Fed’s tool kit is limited and best works to provide incentives for firms to invest and grow. “There are greater incentives for businesses to invest in labor-saving technologies” and the labor market improves, he said. “Investment spending should also benefit from a better international outlook and improvement in U.S. trade competitiveness caused by the dollar’s recent weakness.” (Reporting by Jonathan Spicer; Editing by Chizu Nomiyama) from https://capitalisthq.com/dudley-sees-fed-rate-hikes-inflation-weakness-fading/ The German share price index, DAX board, is seen at the stock exchange in Frankfurt, Germany, September 25, 2017. REUTERS/Staff/Remote September 25, 2017 By Julien Ponthus LONDON (Reuters) – European shares edged higher in cautious trade on Monday after German Chancellor Angela Merkel secured a fourth term but saw her party weakened by a surge in support for the far-right. At 1027 GMT (5.27 am ET) both the pan-European STOXX 600 <.STOXX> and euro zone blue chips <.STOXX50E> were 0.1 percent higher – a more moderate reaction than the currency market where the euro took a hit. European bourses were mixed, with France’s CAC 40 <.FCHI> down 0.1 percent, Germany’s DAX <.GDAXI> up 0.3 percent and Milan <FTMIB> flat. Financials were the biggest drag on European stocks while healthcare, energy and industrials helped offset those losses. “We had a small negative surprise”, Lionel Melin, a senior cross asset strategist for Lyxor, said. Some traders said they were worried the vote might lead to a new coalition government less keen on pushing euro zone integration. French train maker Alstom <ALSO.PA> rose 1.5 percent to its highest level since March 2013 after confirming on Friday it was in talks with German engineering group Siemens on a possible tie-up. Switzerland’s ABB <ABBN.S> rose 0.6 percent on its announcement it was buying General Electric’s Industrial solutions unit in a deal worth $2.6 billion. Shares in ABB have risen around 12 percent so far this year, in line with the broader European industrials index. Unilever <ULVR.L>, which announced it would buy cosmetics firm Carver Korea for 2.27 billion euros ($2.71 billion), added 0.7 percent. Unicredit <CRDI.MI> slipped 0.1 percent after its deputy chairman said on Friday that the speculation about his bank wanting to take over Commerzbank <CBKG.DE> was nonsense. The German bank lost 1.2 percent. Swedish construction firm NCC <NCCb.ST> was the worst performer on the STOXX, falling 7.2 percent, after it said it expected third-quarter operating earnings to come in far below market forecasts. Politics continued to play spoilsport in Spain where Madrid’s IBEX <.IBEX> lagged its peers, off 0.7 percent. The mounting political crisis over Catalonia’s campaign for independence, which dragged stocks sharply lower last week, intensified over the weekend. Caixabank <CABK.MC> took the most points off the index, retreating 2.3 percent. (Reporting by Julien Ponthus, Editing by Vikram Subhedar and Andrew Heavens) from https://capitalisthq.com/european-shares-inch-higher-as-merkel-hangs-on-to-power/ Good morning, What’s in this week’s Report:
It’s green on the screen as futures and global markets are all modestly higher thanks to continued momentum from last week and following a quiet weekend. Economically, the only notable number overnight was the August China Home Price Index, which declined to 8.3% from 9.7% in July. But, it largely met analyst expectations. Financial Advisors and Business Owners: Your customers are talking about you. Make sure you you’re listening. Click here to receive a Free Snapshot Report. What is a Snapshot Report? The Snapshot report is a peek into what your business looks like online and how customers see you. Find out the answers to these questions:
Get Started on Your Free Snapshot Report! Politically, focus remains on tax cuts but there was no notable news over the weekend. Next Monday (Sept 25th) is now a key day as a detailed “blueprint” is expected. News Headlines:
Today there are no notable economic reports and no Fed speakers, so focus will remain on the “micro” economic. If Treasury yields can move higher and bank stocks can rally, that can extend last week’s “reflation rebound” ahead of the Fed meeting later this week. Sincerely, CapitalistHQ.com
Stocks
This Week The Fed is clearly the highlight this week, and while any surprise will move markets, the odds favor a potentially “hawkish” surprise. The global flash PMIs (out Friday) also will be a market mover if they miss expectations. Geopolitically, the UN General Assembly starts Wednesday, and while I don’t expect any decisions this week there’s a lot of “noise” regarding the Iran nuclear deal. If the US backs out that likely would be a short-term negative, but not a bearish game changer. Last Week (Needed Context as We Start a New Week) Stocks jumped to new record highs last week, claiming the 2500 level for the first time as reflationary money flows buoyed equities and bond yields while investors shrugged off renewed North Korean tensions. The S&P 500 finished the week up 1.58%. Stocks surged 1% to record territory on Monday as the damage from Hurricane Irma was not as bad as feared, and North Korea chose to put a new ICBM launch on hold (until later last week, of course). The rally continued on Tuesday as the S&P 500 extended the week’s gains by another 0.34% as a “reflation rebound” took hold in the markets in the wake of firmer inflation data in both China and Great Britain (and to a lesser extent, India). Stocks were basically flat on Wednesday and Thursday after an in line, but “healthy” CPI report. The S&P 500 closed down just 0.11% on the day after staying contained in a 5-point trading range. Friday, stocks opened cautiously thanks to a North Korean missile launch after the close on Thursday. Investors largely took the launch in stride relative to recent North Korean developments, but the latest uptick in geopolitical angst still created a headwind for stocks. A rebound in tech shares trumped soft economic data and stocks were able to close Friday with a slight gain on the day, but up solidly on the week. Your Need to Know It was a pretty standard reflation rally from an index and sector trading standpoint last week. Small caps and industrials both outperformed the S&P 500 (R2K and Dow both up over 2%). On a sector level, “cyclical” sectors outperformed: Banks (BKX) rose 4%, semiconductors (SOXX) rose 4.8%, energy rose 2.2% (helped by higher oil) and basic materials also surged. Meanwhile, defensive sectors lagged, as utilities fell 1.1%, consumer staples (XLP) rose just 0.24%, and healthcare rose 0.06% (kept down by profit taking in biotech). While that sector performance isn’t a surprise, there are two notable observations that, if they continue, could be meaningful for the remainder of the year. First, while cyclical sectors outperformed, tech held in relatively well, and we didn’t see the declines like back in late-June/early July. FDN rose 1.4% on the week and if the cyclical rally doesn’t mean tech declines, that’s positive for the market. Second, “value” handily outperformed “growth.” The Russell value index rose nearly 3% while the Russell growth index rose just 1.7%, again driven by financials (which due to underperformance are in the “value category”). If that trend continues (and to be fair, we’ve had several false starts this year), it will necessitate a rotation out of tech/growth and into financials/value. Bottom Line Stocks grinded to marginal new highs last week thanks to 1) Expectations of better economic growth/earnings and 2) Hopes of an economic “reflation.” But despite the optimism and higher prices, I’m sorry to say that the outlook for stocks didn’t really improve that much. First, keep in mind that virtually all of last week’s gains came on Monday following the not-as-bad-as-feared Hurricane hit on Florida by Irma. That outcome does remove a potential economic headwind, but it’s not like it’s an absolute positive, either. So, the gains there were more trading/momentum oriented than anything else (point being, not-as-bad-as-feared hurricane hits aren’t going to power stocks higher). Second, the uptick in global inflation via stronger-than-expected CPIs in China, Great Britain and the US is a potential positive, as we need stronger inflation to help fuel that reflation rebound and carry stocks materially higher. But, it breeds two key questions that remain unanswered. First, can economic growth also accelerate? If not, then we’re talking about 1) Global central banks that have to raise rates despite lower growth, and 2) A potential stagflation. Neither of those outcomes are positive for stocks. Second, do we need to rotate tactical sector exposure to cyclical sectors? The recipe for outperformance in 2017 has been defensive sector exposure (super-cap internet (FDN), healthcare (XLV), utilities (XLU)) and foreign exposure (Europe via HEDJ & EZU and emerging markets via IEMG). That’s been because of middling growth and low inflation. But, if inflation and growth accelerate, then we will need to switch to “reflation” exposed sectors, and that’s something I’ll be covering further this week. Finally, positive rhetoric on tax cuts was an underappreciated positive on markets last week. Lots of “happy talk” from Republicans (including their promise to reveal details of the tax plan on Sept. 25) raised expectations that a deal will get done. However, if 2017 has shown us anything it’s that nothing is easily done in Washington. Bottom line, it has paid to remain patient on two trends in 2017: Staying long stocks and staying long those sector outperformers. So, despite rising caution on this market over the medium and longer term, that’s what we will continue to do. From a new-money standpoint, from a 10,000-foot level I’d remain comfortable being “fully” allocated to stocks (meaning whatever your full equity allocation normally is). Tactically, I would continue to allocate new money to what’s “worked,” i.e. super-cap tech/internet, healthcare and defensive and international markets. At some point, it may be time to rotate into more cyclical sectors and/or reduce equity exposure, but at this point I don’t think we are there yet—although we are watching very, very closely for signs of trouble. Economic Data (What You Need to Know in Plain English) Need to Know Econ from Last Week Up until Friday, last week’s data looked like it was going to show “green shoots” of an economic reflation. But disappointing economic growth numbers on Friday offset better inflation readings from earlier in the week, and while Hurricane Harvey likely impacted the growth data, the bottom line is the data just isn’t good enough to spur a rising tide for stocks. From a Fed standpoint, the higher inflation data did increase the likelihood that we will get a December rate hike, although the market expectation of that remains below 50%. As such, increased expectations of a rate hike in the coming weeks could be a headwind on stocks, especially if economic data doesn’t improve. Looking at last week’s data, the most important takeaway was that inflation appears to be bottoming. Chinese, (1.8% yoy vs. (E) 1.7% yoy), British (2.7% vs. (E) 2.5%), and US CPI (0.4% m/m vs. (E) 0.3%) all firmed up and beat expectations, and while it’s just one month’s data, it’s still a break of a pretty consistent downtrend. That turn in inflation potentially matters, a lot, because it’s making central banks become more hawkish. The ECB is going to taper QE, the Bank of England is going to raise rates sooner rather than later (more on that in Currencies), the Fed may hike again in December and the Bank of Canada was the first major central bank to give us a surprise rate hike in nearly a decade. The times, so it seems, they are a changin’. That makes an acceleration in economic growth now even more important. Unfortunately, the growth data from last week was disappointing. July retail sales missed on the headline (-0.2% vs. (E) 0.1%) as did the more important “Control” group (retail sales minus autos, gas and building materials). The “control” group fell to -0.2% vs. (E) 0.3%. Additionally, Industrial Production also was a miss. Headline IP fell to -0.9% vs. (E) 0.1% while the manufacturing subcomponent declined to -0.3% vs. (E) 0.1%. Now, to be fair, Hurricane Harvey, which hit Southeast Texas, likely skewed the numbers negatively. But, the impact of that is unclear, and we can’t just dismiss these numbers because of the hurricane. Bottom line, the unknown impact of Hurricane Harvey keeps this week’s data from eliciting a “stagflation” scare, given firm inflation and soft growth. But if this is the start of a trend, and it can’t be blamed on Harvey or Irma, then that’s a problem for stocks down the road. We need both inflation and growth to accelerate (and at the same time) to lift stocks to material new highs. Important Economic Data This Week The two key events for markets this week will be the Fed meeting on Wednesday, and the global flash PMIs on Friday. Starting with the Fed, normally I’d assume this meeting will be anti-climactic, but it’s one of the meetings with the “dots” and economic projections, so there is the chance we get either a hawkish or dovish surprise. So, don’t be fooled into a false sense of security if people you read say this meeting is going to be a non-event. It very well could be, but there’s a better-than-expected chance for a surprise, too (and if I had to guess which way, I’d say it’d be a hawkish surprise… and that could hit stocks). Turning then to the upcoming data, given the new-found incremental hawkishness of global central banks, strong growth data is more important than ever to avoid stagflation. We’ll want to see firm global manufacturing PMIs to keep stagflation concerns at bay. Looking more specifically at the US, Philly Fed comes Thursday and that will give us anecdotal insight into manufacturing activity, although the national flash PMI out the next day will effectively steal the thunder from the Philly report. Commodities, Currencies & Bonds In Commodities, the segment was mixed last week as gold pulled back with bonds while the copper pullback continued. Meanwhile, oil futures rallied amid shifting dynamics in the energy markets. The commodity ETF, DBC, rose 1.46%. Oil was in focus last week as traders watched US inventory data closely to see if the adverse effects of Hurricane Harvey on the oil industry in the Gulf were short lived. On balance, they were, as 582K b/d of output came back online, a nearly 75% rebound from the previous week’s Harvey-related decline. If all things had stayed the same last week, this would have been bearish for prices, but there were other moving parts last week and US production took a back seat for the first time in months. WTI rallied 4.77% on the week. OPEC chatter was back in the headlines last week as the de facto leader of the cartel, Saudi Arabia, was apparently in talks with other major oil producers as well as industry experts regarding “why” the oil production cuts have not yet been effective. The short answer was exports did not fall enough to support prices, which is exactly what the Saudis are now pursuing from a policy standpoint. Looking ahead, if OPEC members can align themselves and reduce exports that would likely be a material positive for oil markets, especially given the IEA’s positively revised oil demand growth forecasts released last week, which was also a bullish tailwind for the week. For now, the market remains in a sideways range between the mid-$40s and mid-$50s, and that is expected to continue. Still, the fundamental backdrop, at the very least, got less bearish last week. Gold declined as a part of the reflation trade seen across assets last week, with futures falling 2.04%. The surge in equities reduced safe-haven demand and the swift rise in bond yields weighed on the real interest rate fundamentals (as real rates rise, demand for non-yielding gold declines). Bottom line, gold is in an uptrend right now with an upside target just shy of $1400, but if the reflation money flows continue, gold will decline and the rally will likely end. Looking at Currencies and Bonds, there was a reflation rebound in the Treasury market last week, although the Dollar Index gave back early gains on North Korea concerns and lackluster growth data. The Dollar Index rose 0.6%. The big moves last week were in the bond market, so I want to start there. The 10-year Treasury yield rose 15 basis points (which is a huge one-week move) to close at 2.21% (a one-month high) following stronger-than-expected inflation data from China, Great Britain and the US. Before we get too positive on yields/negative on bonds, 10-year Treasury yields remain in a downtrend on a short- and medium-term basis. A few closes above 2.27% would break a multi-month downtrend while a close above 2.40% would imply a medium-term trend change. So, despite the impressive move, we’re still far away from a sustained short/medium-term uptrend in bond yields. Turning to currencies, the Dollar Index was higher most of the week, but got hit on Thursday and Friday following the North Korea missile launch and soft Retail Sales and Industrial Production. The pound was by far the biggest mover vs. the dollar as it surged 2.5% following a stronger-than-expected CPI report, and hawkish commentary from the Bank of England. The BOE kept rates unchanged, but acknowledged that a rate hike would likely be appropriate in the “coming months,” which is sooner than expected. Looking elsewhere, the yen fell 2.5% vs. the dollar thanks to strong US CPI and a continuation of yen selling following an easing of global macro tensions (North Korea missile launches won’t boost the yen anymore unless it’s toward Guam). Bottom line, the inflation data was better last week, but it’ll take a hawkish turn from the Fed or additional strong economic data to break the dollar downtrend.
Special Reports and Editorial CPI Update and Takeaways The “reflation rebound” got another boost last week as headline CPI rose the most since January, and beat expectations. To boot, core CPI met expectations at 0.2%, but a closer look revealed a 2.485% rise, so 0.015% away from the number being rounded up to 0.3%. Point being, this was a firm inflation number. It wasn’t a hot inflation number (core CPI is still up 1.9% yoy, below the Fed 2.0% target), but it was a firm number and it should increase the chances of another rate hike in December (although it will not make it a consensus expectation). For that to happen, the Core PCE Price Index out later this month will need to also beat estimates. From a market standpoint, this was a pretty “Goldilocks” CPI report. It was good enough to imply we may still see a reflationary expansion, but not so strong that it makes the Fed materially more hawkish. From a short-term standpoint, clearly there was focus on the in-line “core” number meeting expectations, as there was a mild “sell-the-news” reaction as the dollar dipped slightly and Treasury yields were flat. But, beyond the short term, make no mistake—this is a “reflationary” number, and while one CPI report won’t cause me to make wholesale sector allocation changes, it’s safe to say we should all be on “alert” that we may need to rotate out of defensives and into more cyclical sectors (but, not yet).
Are there “green shoots” of inflation? I reference the Bernanke comments regarding economic growth here, because very quietly we’ve seen two better-than-expected inflation numbers in two big economies. The Chinese CPI beat (1.8% yoy vs. (E) 1.7% yoy) and the big uptick in core British CPI (2.7% vs. (E) 2.5% yoy) helped the market jump on Monday and Tuesday. So, the logical question given these two surprise beats is, “Will US CPI also surprise markets?” The inclination is to believe in the trend, but to be clear, higher Chinese and British CPIs have no real bearing on US CPI—so strong numbers in those two reports don’t increase the likelihood of a strong CPI number. Looking at the effects of the strong Chinese and British CPI, the clear winner there is EUFN, the European financials ETF. With the ECB committed to tapering, and British CPI putting upward pressure on yields, EUFN stands to get a potential tailwind given rising yields. So, if you’re looking for a way to play a global reflation, EUFN remains one of the best pure plays (we recommended EUFN several months ago, but have only sporadically mentioned it since because not much had changed). Yet with European bond yields potentially rising, this reinforces the opportunity in European banks/financials. Bottom line, I continue to believe that an economic reflation (better growth, higher inflation) remains the key to a sustained US and global stock rally. And while two numbers don’t make a trend, they were the first positive surprises we’ve had on inflation in months, and we think that’s potentially very important (if it continues).
Last week’s EIA report was mixed, and the market’s reaction was a bit confusing at first glance, as WTI rallied despite a larger-than-expected supply build while RBOB gasoline futures fell on the day despite a larger-than-expected draw. On the headlines, oil stocks rose +5.9M bbls last week vs. expectations of a +3.7M bbl rise (however, this was less than the API’s reported build of +6.2M bbls, which may have invited a slight bid). Meanwhile, the EIA reported that gasoline stocks fell -8.4M bbls vs. (E) -3.0M (and API: -7.9M) which should have been bullish; however, the extreme volatility related to Hurricane Harvey is still coming unwound from the market, and pressure remained on the products relative to oil prices. Production was the focus of the release, as more than 94% of the lower 48 production gains were reversed in the week that Harvey hit Texas, and the data swing yesterday was another sizeable one. Lower 48 production rebounded 582K b/d to 8.869M b/d, falling short of the psychological 9M b/d mark that had started to weigh on markets. The rebound was solid, but we will need to see a continued rebound back through 9M in the coming weeks for the “US output headwind” to return to its pre-Harvey strength. Bottom line, attention is turning from the EIA data, which has been the leading reason for suppressed price action in the oil market this year, to overseas policy development and international data. First, the International Energy Agency (IEA) said in their monthly report released yesterday that demand growth for 2017 would edge up 100K b/d to 1.6M b/d. Additionally, the IEA said that global supply, as well as OPEC production, fell in August, both tailwinds for oil near term. Second, the Saudis are back in the news as they are pressing not only for production cuts, but also export reduction from members. There are some hurdles to this concept, but if they were able to get oil exports down as much as they have lowered production among those countries that agreed to the global “cut,” that could be another oil-bullish development. Bottom line, there has been a subtle but noticeable bullish shift in global oil market dynamics over the last week, and the potential for a breakout is rising (but that has not yet been confirmed on the charts). In the very near term, OPEC headlines and global production and supply data will be more closely watched, but we cannot ignore US production statistics either, as the post-Harvey rebound could pour cold water on the bulls. Disclaimer: CapitalistHQ.com is protected by federal and international copyright laws. CapitalistHQ.com is the publisher of the newsletter and owner of all rights therein, and retains property rights to the newsletter. The Newsletter may not be forwarded, copied, downloaded, stored in a retrieval system or otherwise reproduced or used in any form or by any means without express written permission from CapitalistHQ. The information contained in CapitalistHQ.com is not necessarily complete and its accuracy is not guaranteed. Neither the information contained in CapitalistHQ.com or any opinion expressed in CapitalistHQ.com constitutes a solicitation for the purchase of any future or security referred to in the Newsletter. The Newsletter is strictly an informational publication and does not provide individual, customized investment or trading advice to its subscribers. SUBSCRIBERS SHOULD VERIFY ALL CLAIMS AND COMPLETE THEIR OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES, OPTIONS AND FUTURES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND SUBSCRIBERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS. from https://capitalisthq.com/two-key-questions-for-the-market-following-last-weeks-rally-weekly-market-report/ |
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December 2017
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