Financial Markets Look Ahead: Week of January 28, 2019
The number of Americans filing applications for unemployment benefits fell to a 49-year low last week (3.7%). This fact alone should have the bears rethinking their short to medium term strategy for the United States markets. Additionally, preliminary estimates indicate that the IHS Markit US Manufacturing Purchasing Managers’ Index (PMI) rose to 54.9 in January from 53.8 in December. This was the first increase since October 2018. Production was the highest since May 2018 and business optimism also increased sharply. There is also a growing expectation that the ongoing trade dispute between the US and China will be resolved soon enough, although US Secretary of Commerce Wilbur Ross sounded a word of caution by saying that the negotiation will require more time for resolution.
On Friday, the US Dollar plunged to its low for the week following reports that the Federal Reserve plans to wind down its mortgage and Treasury portfolio pruning — begun in 2017 — sooner than previously planned. Additionally, it is expected that the Fed will not raise interest rates at its next meeting on January 31. While all of the above are positive for the markets, trends related to Housing are concerning. US existing home sales tumbled to their lowest levels in three years in December, declining 6.4% year over year. The only consolation is a decline in the 30-year mortgage rate, which fell to an average of 4.64% in December from 4.87% in November. I expect a declining mortgage rate and record low unemployment rate will help slow down and even reverse the trend in home sales.
Frankly, I do not see any signs of recession in the US in the short to medium term. That said, there is risk looming on the horizon and I’m going to keep my eye on when the ballooning US debt will turn into a serious liability. This topic merits a separate discussion.
Beyond the US, last week brought some big news from China. China’s GDP growth hit a 30-year low (6.6%) and 2019 growth is projected at an even lower 6.0%. 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.
The picture in Europe, however, is grim. The German economy — the heart of the Eurozone economy — has stalled. Manufacturing PMI fell to 49.9 in January versus 51.5 in December. This reading points to the first contraction (reading less than 50) since November 2014. Weakness is seen across the auto industry and order books have been declining for the last four months at a rapid clip. The PMI for the Eurozone as a whole came in at 50.5 in January versus 51.4 in December. Given the confusion around Brexit and the general weakness of the Eurozone economy as a whole, divisions are beginning to emerge. I wrote about this previously in the context of France unilaterally taxing US technology firms and I expect this trend will continue to play out in the coming quarters.
Back in the US, the US Dollar index has been making an aggressive move since January 10. It moved into the channel I’ve previously written about (96.14 is the lower bound of this channel) and after hitting resistance at the 50-day moving average, it corrected down to close at 95.81. The dovish stance from the Fed on Friday was all that was required to drive some weakness into the Dollar. I expect the Dollar will lose strength in the coming weeks.
Crude Oil, which had been moving sideways — especially after consistent media coverage regarding a slowing global economy — made a comeback last week. It recovered from the weekly low of 51.8 to close at 53.55, helped partly by the ongoing political crisis in Venezuela. From a short-to-medium term perspective, I continue to remain long on Crude Oil. It is unlikely the White House — which had previously given waivers to eight countries to buy oil from Iran — will extend previously issued waivers to purchase oil from Iran when the second phase of the sanctions on Iran kick-in in May 2019. As of now, OPEC+ mandated production cuts are holding.
Gold — where I’ve been long for some time now — made a good up-move last week helped by a weakened Dollar and closed at 1302.50. On the weekly chart, Gold made a bullish outside bar and the price movement next week will determine its course in the coming months. There is strong resistance at 1350/1360 however.
S&P 500 showed bearish price action on the first three trading days of the week in response to the bearish economic data from China and following negative messaging out of Davos. On Tuesday and Wednesday, the S&P 500 breached an important support level at 2630 and took support at the 50-day moving average to bounce back on Friday and closed at 2664. Friday’s price action indicates the recent bullish trend will continue in the coming weeks. I expect resistance at the 200-day moving average around 2700, but other than that, I continue to reaffirm my call that the S&P will re-test its September highs in the coming months.
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.
