Financial Markets Look Ahead: Week of December 10, 2018
I was expecting the market to maintain its uptrend on Friday, driven by payroll data, but was surprised to see the Dow losing ground. The 155K new jobs — in an already low unemployment environment — was not enough to cheer investors. The overall sentiment in the market is definitely negative; this was previously attributed to: 1) a rapid increase in interest rates, although the Fed has begun to mellow its stance in recent weeks, and 2) the ongoing US trade war with China. The general expectation after President Trump and President Xi met on the sidelines of the G-20 summit was that markets would move up in the coming 90 days — the cooling off period — as both sides aligned on finding a mutually agreeable solution, but these hopes were quickly dashed on Tuesday after conflicting messages from the Trump administration. The arrest of Huawei’s CFO, Meng Wanzhou — even if orthogonal to the trade war — only serves to complicate matters. As a result, I expect markets to remain volatile over the coming months, until the trade war is resolved in some form.
Meanwhile, the yield on the 10-year treasury note declined from the recent highs of 3.23 on November 8 to close at 2.86 on December 7 — a drop of 11% in a month — indicating lowered inflation expectations. The flattening of the yield curve between the 10 year and 30 year notes is also spooking investors. The yield curve for the 3 year and 5 year bonds inverted last week. Inverted yield curves have historically been associated with impending recessions, although it is interesting to note that this has generally been true in higher rate environments and in that regard, we’re in uncharted territory. Overall, economic indicators, though certainly good, are off their recent highs and the S&P 500 on Friday exhibited a death cross — the 50 day moving average crossed the 200 day moving average from above. A death cross is a technical market pattern signifying a bearish outlook.
The Brexit vote is scheduled in the British parliament on Tuesday. The day after the Brexit referendum, two years ago, the Dow fell more than 600 points. Any such outcome next week is likely to hurt both the Pound and the Euro (benefiting the Dollar) — this is another negative shock for the markets. A hard Brexit will create chaos for Britain for a longer period of time and Britain may lose its current position as the gateway for other countries doing business with Europe.
Last week the S&P 500 hit a weekly low of 2633, just above a major support around 2600. Since mid-October, the S&P 500 has traded within a band between 2610 and 2813. Considering the headwinds described above, it is likely the index will breach the 2610 support and may test lower support levels, such as the support at 2580 made in February and April 2018.
On the topic of oil, OPEC has finally decided to cut output by 1.2 million barrels per day, pushing oil prices up to the 55 level before finally closing at 52.13. The 55 price level is a major resistance for oil. Given the massive selloff since the beginning of October (roughly 33%), there is an opportunity now to go long on oil with 49.20 as support.
Gold started its uptrend along with the 10 year treasury bond starting in early November, providing a strong indication of money moving into safer assets. In the process, gold crossed a major resistance at the 1240 price level after several months. Given this strong up-movement, now may be a good opportunity to go long on Gold.
Disclaimer: Nothing in the above text constitutes advice or recommendations of any kind (financial, tax, legal or otherwise). An investment in any security is subject to a number of risks, and discussions of any security or basket of securities published above does not contain a list or description of relevant risk factors. Always conduct your own independent research and consider your risk apetite prior to making investments.
