Equities continue to climb on weak economic data, Dow begins strong and debt looms over the US.

Throughout the week markets waited for more news out of China and the US, continuing to the upside off last weeks good news. However the news came at the end of the week, there was much deliberation if the news was good or not.

It was rumored that China and the US had agreed to the main issues at hand, however, they were in the midst of constructing a 6 point MOU pertaining to key structural issues. One good feature that came out of the prolonged talks was that China agreed to purchase $1.2 trillion in US goods. More news came out on Friday that the deal was not close to being reached. Due to disagreements in regard to intellectual property and structural differences.

As a result, the Chinese Yuan rose on news that the currency would not be used as a bargaining chip in the trade talks. The deadline for the tariff deal was discussed a lot, as Trump said he would be open to extending said deadline.

In US markets, the USD pushed down which was a main catalyst in the gold price jump. Gold futures nearly hit the $1350 level, falling just dimes shy of the strong resistance. Into the end of the week the commodity market proceeded to drop back into $1330 support. Oil prices on the other hand continued to make their way higher after breaking the $57.00 resistance this week, while production in the US hit the 12 million barrel per day mark for the first time since November 2018.

US equity markets continued to press this week as S&P futures nearly hit the 2800 level while the DOW futures pressed into and above the 26 000 level for the first time since early December 2018. Global Treasury yields pressed lower, as expected on strong equities. The 10-year moved below the 2.65% level.

The FOMC minutes in the middle of the week opened the flood gates for the Fed speakers later in the week. They all agreed on a patient narrative, surprisingly. The balance sheet unwind seems to be coming to an end in 2019. Economic data continued to slump throughout the week, promoting a dovish Fed which helped equities throughout the week.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks down 0.26%
  • Technology up 1.58%
  • Financials up 0.72%
  • Retail down 0.46%
  • Utilities up 2.59%

Overview of key markets last week (bottom chart):

  • Crude oil up 5.21%
  • S&P500 up 1.41%
  • Silver was up 1.99%
  • Gold up 1.18%
  • US dollar down 0.49%

Markets continue to surge higher, what can we make of this?

The bulls are in control, there is no surprise there. The S&P 500 futures are almost at the 2800 level, erasing all the losses from 2018. The all-time highs that were hit in September are not that far either! But what is driving this rally, what does this rally mean?

The Dow Jones is up, 9 consecutive weeks, finally coming back into and above the 26000 level from the pre year end crash. The index has also had its best start to a year since 1964, that’s a 55 year record!

But what is driving this bullishness? Why are markets up so much after all of this “bad” news. Economic data continues to come out weak, debt looms over Americans and funds are not long!

Starting off with debt, national debt in the US should be addressed and should be treated as the real threat. Instead there’s a intra-political war over the border wall that Trump insist on. It goes as far as the individual retail debt level has grown so much in emulation of that of the federal government.

The US government continues to spend, and increase taxes to pay for that spending but that is not the solution. This will help the emergence of a crisis, granted people are rejoicing after markets rallied after the December fall but that doesn’t mean that something even bigger is just around the corner, just look at this debt!

Just last week, US debt moved passed the $22 trillion mark, while Trump has reallocated $6.5 billion of government funds to pay for the border wall. Addressing the situation, Trump made it clear that he would veto a resolution if he did not get his way. Just to clarify, the $22 trillion in national debt only accounts for the liability that the US holds in respect to selling bonds to other countries. This does not include other liabilities (student loans, mortgages, social security).

To add to this, Trump has been adding to the national debt by building up the deficit by building up the size of the government. The nations debt should be taken more seriously, the bubble can’t grow forever.

The short squeeze rally is another topic of interest, the equity market rally is no joke and the bulls are loving it. What’s interesting is that to no secret, hedge funds have not been participating in the rally. The hedge fund equity exposure is extremely low, and to add to that their equity outflows have continued for the 12th week straight. In the meantime the S&P 500 futures are almost at the 2800 level.

The S&P 500 short position is at decade lows, at 1.7%, the last time we saw anything beneath that threshold was in 2006. The short squeeze was bound to happen, and stocks with the highest short interest ratio are outperforming the rest. Stops getting hit one after the other rocketing prices higher. Just take a look at the chart below. Outlining the recent sector gains since the 2018 December divet.

Sector return -Goldman Sachs.

The most shorted stocks on the S&P 500 are just running stops to the upside and have continued to outperform other stocks, even the Russell 2000 last week. If this covering continues, we might be in for a 3000 S&P 500.

Trade talks continue, are we close to a deal?

Xi and Trump have been moving markets like crazy over the past two weeks. Trade talks are going well! Wait, no they’re not, just kidding, they are! Make up your minds! Just last week when China came back to the markets, there was the talk of a deal. Trade talks were going good and the two nations were just hashing out some minor details before proceeding with an agreement. Markets LOVED that, to the moon, they went. With the deadline, March 1st, fast approaching, the euphoria was in the air.

This past week, however, a lot of news of disagreement hit the wire and so did markets. After boasting China’s recent worth in helping ease North Korea tensions, Trump addressed the MOU, in which he was not a fan and wants to develop something better and more durable with Xi.

The talks continued, Xi was adamant on praising recent developments and that he wishes the talks could continue in the same way so the two parties could eventually meet halfway. Trump, on the other hand, said that the two presidents would meet in the near future to hopefully come to a decision on a deal.. or not. That second of hesitation and non-commitment was what drove stocks lower into Friday’s close. Just take a look at the US equities below. The vertical blue rectangle represents the divet in the S&P 500 (green), Nasdaq (blood Orange) and Dow (Orange) that happend on the uncertainty of the trade deal. While the yellow graph represents the slight pop the Yuan experienced on the news.

The longer the trade talks go the more the uncertainty is lengthened in markets. Whenever, if ever the trade deal gets agreed upon, the bulls are going to take US equities a lot higher.

Weekly Economic Data

There will be a lot of economic data next week, on top of a more active US news release we expect Trump and Xi to continue trade talks into the proposed deadline on Friday, March 1st. There is a lot of focus on the US Fed chair, Jerome Powell this week, so he should add volatility to the slower US session.

Sunday, Retail Sales out of New Zealand.

Monday, Governor Carney speaks out of the UK.

Tuesday, more data out of the UK, inflation report hearings and larger data out of the US that will impact markets. CB consumer confidence, and Fed Chair Powell testifies at 10:00 AM.

Wednesday, CPI data out of Canada, Fed Chair Powell testifies again at 10:00 AM. In the evening New Zealand has ANZ business confidence, and Australia, private capital expenditure numbers.

Thursday, advanced GDP and Fed Chair Powell go on the wire pre market.

Friday, GDP numbers out of Canada and ISM manufacturing out of the US.

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