Financial Markets Look Ahead: Week of November 12, 2018
The US midterm elections are now behind us and the results came in generally as expected, with Republicans fortifying their numbers in the Senate and Democrates gaining control of Congress after a gap of eight years. In my previous post, I’d posited that the midterm elections will not have much of an imapct on the markets. That said, I hadn’t expected the Dow Jones to rise by the nearly 500 points it did after the elections. On Friday, the markets corrected while closing above the previous week’s close. Will the market now consolidate at current levels and then make higher highs, or will it test the lows it made on October 29?
Despite all the political tumult, the economy appears strong at a macro level, having added 250K jobs in the last month. US unemployment remains low at 3.7%, and wages are moving up, albeit slowly. Consumer confidence moved up to 137.9 in October from 135.3 the previous month. The Institute for Supply Management (ISM) PMI stood at 57.3 in October — and while down from 59.8 in September — the economy is still expanding. Nearly 75% of companies reporting Q3 earnings reported positive surprises, which also augers well for the market. Strong economic activity may lead to further rate hikes in the US; partly in anticipation of this, the dollar index has moved up to 96.90. In my October 29 post I raised a question that I think will become increasingly important in the coming months: how long will the US economy continue to grow while the rest of the world economy is in pain?
On November 9, the People’s Bank of China (PBOC) acknowledged this pain succinctly in this way:
“External conditions are undergoing profound changes, downward pressures are increasing, some companies are seeing more difficulties in their operations, risks accumulated over the long term are being exposed. The bank will preemptively adjust and fine-tune policies according to the changing conditions.”
This is the situation in most emerging economies. In India, the ongoing fight between the government and the central bank is a manifestation of the underlying weakness in the economy. The cash starved government wants to use the central bank’s reserves in a desperate attempt to shore up the economy ahead of elections in 2019. In Europe, Italy’s budget issue remains unresolved and there still isn’t a final resolution on Brexit.
For the coming week, assuming no developments on the US — China trade talks, I expect the US dollar — which closed at 97.02 last week — to continue its march up to 97.76, a negative development for emerging markets. Gold, which has been moving sideways for some weeks now, made a definitive low for the week, closing at 1210.30. In the process, it broke the channel high of 1216 and I expect it will take support at the channel low of 1193. The outlook for crude oil demad continues to be bearish as the global economy is weakening while at the same time the United States is producing more oil. The strengthening US dollar is further adding to the woes of oil prices. Crude oil prices declined to 60.86 — this is the 5th consecutive lower weekly close. The next support is at 59.33 followed by 54.18. In all likelihood, the 54.18 price point looks plausible as any action OPEC is contemplating will take time to materialize. And although the full sanction on Iran is now in place, we haven’t seen any precipitous action from Iran so far, partly because the US government gave waivers to eight of Tehran’s top oil importers.
As predicted in my post last week, the S&P touched the price level of 2811 and retracted to close at 2781. This week, I expect the S&P to break through the resistance at 2811 and test the levels at 2874. Sectors likely to display bullishness are consumer staples (XLP), Utilities (XLU) and healthcare (XLV).
