Financial Markets Look Ahead: Week of February 4, 2019
The last month was the best January for the S&P 500 since 1987. The catalyst fo this move was undoubtedly the Federal Reserve’s reversal on monetary tightening and its recent dovish stance on future interest rate hikes. Strong earnings (except a few) throughout this most recent earnings season has further cemented investors’ trust in the market and helped the Dow Jones regain the 25000 level. According to Factset, 71% of companies in the S&P 500 reported higher than expected earnings, although it is important to note that some of these “beats” came from companies — such as Apple— that previously lowered their guidance in an out-of-band fashion. All that said, the much anticipated resolution to the ongoing US-China trade negotiations will certainly help the markets and I expect the Dow Jones to maintain strength above 25000 for the coming months.
Reopening the government — though for only three weeks — chipped in to further boost investor sentiment, adding to the growing hope that the ongoing United States — China trade negotiations will lead to mutually beneficial agreements by the February-end deadline. While this is all positive news, I continue to believe — in line with my prior comments on this issue — that any resolution will only be short-to-medium term as the ongoing trade war is a surface-level fight over supremacy in a new world order that China is driving for with the advent of 5G technology and artificial intelligence. Additionally, I do not believe that the trade dispute is the root cause of China’s current economic issues; it is at best a proximate cause.
The Chinese economy is still trying to find a bottom and I expect further monetary and fiscal easing by Chinese authorities in the coming week. This is not just a financial markets concern for China. China needs to achieve GDP growth above 6.5% to maintain full employment and job creation is a critical leg of the Communist Party’s strategy to maintain internal peace and order. As I’ve previously written, the Chinese government has taken several strong steps already to manage economic stability and I am optimistic that these measures will bear fruit by the second half of this year. As a reminder, here’s what I wrote last week:
The Chinese government has taken several measures to revive the economy — including cutting back on debt reduction, reducing bank reserve ratio requirement by 1%, announcing $200 billion of additional liquidity, increasing infrastructure spending, increasing fiscal deficit by 0.2%, and making overtures to resolve the ongoing trade dispute with the US — and I expect these combined measures will help stabilize the Chinese economy by the second half of 2019.
While I continue to be optimistic about the United States and hopeful about China, I continue to be negative on Europe. The Economist wrote last week that Italy’s recession might become deeper and prolonged. German manufacturer’s expectations for export growth has worsened again in January, according to the Ifo Institute for Economic Research.
The US Dollar index closed lower for the second consecutive week to close at 95.58, and after taking support at the 200-day moving average, closed higher on the last two trading days of the week. A strong US economy makes the Dollar strong whereas the dovish Fed outlook weakens the Dollar. As a result, I expect the Dollar to move sideways or trend lower in the coming weeks, and the long term trajectory is definitely downwards.
Gold moved higher by breaking an important resistance around 1290–1300 and closed at 1322. Gold has already gained 6% since I made my call back on December 10, 2018 that it will rise. I am tracking Gold very closely and am especially looking for clues regarding why central banks are accumulating Gold. From a technical standpoint, there is a very strong resistance at the 1350–1360 price levels.
Crude Oil made an impressive gain of 21.2% for the month of January. Strong gains in the US economy, a weakening Dollar, crises in Venezuela, declining rig counts in the US, OPEC+ countries holding to their production cut targets, and the possibility of the US’ withdrawal of waivers given to eight nations to import oil from Iran have all contributed to the recent spike in oil prices. I continue to be long on Crude Oil and reiterate my previous $75 price target on Crude Oil for 2019. In the near term, there is resistance at the 59 price level, but in the medium term, any improvement in Chinese economic activity will drive prices up.
The S&P 500 has already retraced 61.8% of the price drop from last year’s high. This level (2706) is above the important resistance (now support) level of 2691. Last week’s price action suggests momentum is strong and we can expect the S&P to retrace its way up to the next resistance of 2800–2810. A resolution on the US — China trade negotiation will take us well past 2800.
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 discussion 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.
