by Pinchas Cohen
Key Events
Yesterday US stocks were mixed. While both the Dow Jones Industrial Average and the S&P 500 extended their rallies after data showed signs of inflation in producer prices, both the NASDAQ Composite and the Russell 2000 declined. It was the fourth consecutive up day for the Dow and the fifth for the SPX; both also hit their third back-to-back new record highs, the 60th of the year for the S&P.
Conversely, the small-cap Russell saw its third straight day of losses.
US stocks have been sending a confusing message in terms of the market narrative. Perhaps that's because the headline risks are in and of themselves confusing.
Republican Senator Rand Paul yesterday tweeted his opposition to adding to the federal debt, increasing the chances of a government shutdown before year-end. Ironically, this comes after he voted 'yes' on the Senate's version of the Republican tax bill, even after official analyses demonstrated that it would increase the federal deficit by more than $1 trillion dollars.
The S&P 500 dipped but recovered after Paul's tweet, presumably because investors shrugged off the inconsistency. The Dow also climbed to a new record despite the Rand Paul news. Perhaps because the GOP have enough votes to carry the bill forward even if two Republican lawmakers decided to change their positions at the last minute. As well, the junior Senator from Kentucky could still be persuaded to vote his party's line.
As we've noted numerous times recently, investors have been rotating out of Technology shares and into Financials for two reasons:
- The tech sector gained the most this year, increasing the risk of a pullback and decreasing chances for continued gains
- Tech companies won't benefit from the tax cuts since their average effective tax rate is 18.5 percent, a percent and a half lower than the new, proposed 20 percent rate. Financial firms, on the other hand, pay the highest effective tax rate at 27.5 percent. Therefore, they have the most to gain.
No surprise then that Tech fell 0.03 percent on yesterday, while Financials outperformed, up an even 1.00 percent. That's an about face from Monday for no discernible reason. At the start of the week Technology shares led the advance, up 0.85 percent, while Financials were the worst performers on the day, down 0.25 percent.
That still leaves the Technology sector ahead for the year, up 31.51 percent YTD, with the Financial sector up by 20.47 percent YTD. For comparison sake, the S&P 500 benchmark is up 17.45 percent on the year.
Our confusion then, stems from this: on Monday Technology shares rose while Financials fell. That made no sense given the current macro perspective. But yesterday's about-face is puzzling, as are the continued decline in small caps since those companies stand to benefit from tax reform which would lower their effective rates.
Investor confusion doesn't bode well for a sustained rally. However, one interesting fact did stand out—defensive sectors are struggling, which would indicate that investor appetite for risk hasn't yet been sated.
The worst sector performer yesterday—and grossly so—was Utilities, down 1.71 percent. The other two sectors that fell were Energy which slid 0.29 percent and, as mentioned above, Technology's 0.03 percent loss.
Global Financial Affairs
In Asia this morning, Chinese shares rallied both on the mainland's Shanghai Composite, as well as on Hong Kong’s Hang Seng index. South Korea’s KOSPI and Australia’s S&P/ASX 200 both closed higher too, but the Nikkei 225 extended its retreat from a 26-year high, as a stronger yen weighed on shares of companies whose exports will suffer from a less favorable exchange rate for importers.
In Europe, the STOXX 600 Index slumped, as losses for utilities shares, an extension of yesterday’s US trade, offset retail sector gains. Yesterday, stocks in Europe pushed to a five-week high on the heels of a $5 billion tech sector deal which provided an upside breakout to its range. Europe’s leading equity index breaking out of its trading range signals another run higher, possibly to retest the November highs.
The dollar was steady this morning, after recovering most of its losses on news that Doug Jones, the Democratic candidate in Alabama’s hotly contested Senate race, managed to eke out a victory, cutting the Republican majority in the Senate to just one seat. The greenback rose yesterday for a fourth straight day and 10-year Treasury yields hit 2.4 percent after the PPI data released.
The Federal Reserve begins its two day meeting today, its final session for the year and Janet Yellen's last as Fed Chair. The US Central Bank is expected to raise rates later today. It’s anticipated that the European Central Bank will reveal details of plans to taper asset purchases tomorrow. The Bank of England and Swiss National Bank will also meet tomorrow. Comments on the economic policy outlook for 2018 will be the focus for investors as they weigh the impact of coming normalization on global asset prices.
Yesterday, WTI crude slid below $58 a barrel, ending a three-day advance after crossing the threshold on Monday. Today, crude oil extended gains on signs that U.S. stockpiles dropped for a fourth week.
Gold moved lower while industrial metals gained, led by nickel which technical signals indicate could still be poised to drop yet further.
Up Ahead
- Among this week's top U.S. economic reports are consumer inflation due out today and retail sales scheduled for release on Thursday.
- European lawmakers continue to debate the Brexit divorce terms and weigh moves regarding the next step, while North America Free Trade Agreement negotiators meet again.
Market Moves
Stocks
- The Stoxx Europe 600 Index fell 0.1 percent as of 8:21 London time (5:21 EDT).
- The U.K.’s FTSE 100 decreased less than 0.05 percent.
- Germany’s DAX declined 0.1 percent.
- Japan's TOPIX was down 0.2 percent at the close in Tokyo and the Nikkei 225 Stock average fell 0.5 percent.
- Australia’s S&P/ASX 200 Index ended 0.1 percent higher
- South Korea's KOSPI was up 0.8 percent in Seoul
- The MSCI Asia Pacific Index climbed 0.3 percent.
- S&P 500 Futures fell 0.1 percent, the first retreat in more than a week and the largest fall in a week as well.
Currencies
- The Dollar Index declined 0.10 percent, the second retreat within an eight-day advance
- The euro decreased less than 0.05 percent to $1.1741, reaching its weakest point in three weeks on its ninth consecutive decline.
- The British pound dipped less than 0.05 percent to $1.3316, the weakest in almost three weeks.
Bonds
- The yield on 10-year Treasuries dipped less than one basis point to 2.40 percent, the first retreat in a week.
- Germany’s 10-year yield dipped one basis point to 0.31 percent.
- Britain’s 10-year yield declined one basis point to 1.202 percent.
Commodities
- West Texas Intermediate crude rose 0.9 percent to $57.67 a barrel.
- Gold decreased 0.2 percent to $1,241.89 an ounce, the lowest in almost 21 weeks.
- Copper increased 0.4 percent to $3.03 a pound, hitting the highest in more than a week with its sixth consecutive advance.