After a strong start to the week, US equities took a midweek slump only to test all-time highs into the Friday, April 26th close! Earnings reports this week were the main catalyst to the upside trip experienced in equity markets, but it’s not only equities that moved higher. Gold and other risk-off assets hit the upside.

Economic data out of the US strengthened and dovish notation came out of the Fed ahead of next weeks FOMC meeting. GDP reports released on Friday proposed mixed signals but overall added to the grim picture of the overall economy. The 3.2% number reported was lackluster, pushing equities lower directly off the news but did not manage to suffocate markets into the close. As a result, the 10-year yield out of the US dropped below the 2.5% level yet again.

Amazon, among other powerhouses, reported earnings this past week. The tech giant surged higher on a huge beat of analyst expectations. $7.09 per share v $4.68 per share expected and a beat in revenue. This saw the tech giant stay above the $1900 level and move into the $2000 level. As Nasdaq breaks and stays in all-time highs off this news, Amazon is still about $100 off its $2050.50 high. Among tech companies, Facebook managed to beat earnings as well which helped the stock move higher on the announcement. The beat was helped by an increase in US ad revenue. More news out of the tech world as Microsoft beat earnings temporarily helping the company gain a market cap above $1 trillion. A huge 75% increase in revenue from its Azure division helped the collective upside.

Otherwise, not every asset class across the board rejoiced this week with gains. Crude oil took a large spill into the Friday close, there was weakness throughout the latter end of the week after a nice rebound off Iranian production sanction early in the week. The 6-month high was battered down as we expected a $67.50 crude oil market. Price slipped into the $62.80 level after a Trump tweet that he was in contact with OPEC and oil prices fell. This may not however been the driving catalyst, rather the enormous amount of sell stops accumulated to the downside. Strength of the USD was suffocated late week as gold markets flew through resistance levels.

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 1.29%
  • Technology up 0.98%
  • Financials up 1.35%
  • Retail up 1.05%
  • Utilities up 1.43%

Overview of key markets last week (bottom chart):

  • Crude oil down 1.44%
  • S&P500 up 1.38%
  • Silver was up 0.43%
  • Gold up 0.90%
  • US dollar up 1.05%

Everything moved higher, except oil.

This past week we saw an unusual occurrence, pretty much all assets, despite the correlation factor moved lock-step, higher. The US dollar, net up, US equities up, gold higher, the VIX was up but moved lower on Friday, and even bonds. Sorry was this is a typo? NOPE! Check out the chart below. ES futures are in green, the USD in black, bonds in brown, GC futures in gold, the VIX in purple.

So what happened here? Economic data out this week was not the greatest, mainly the data out of China. Which was the worst we’ve seen in half a year, their currency problems continue to loom? Other global markets, such as those in Europe slumped on weaker data as well, but everything in the US enjoyed higher highs! There was a lot of data this week that should have resulted in mixed feelings out of markets, but a lot was shrugged off. Earnings reports were the center of attention all week. Dow experienced some downside and general weakness throughout the week as Transports did not do well. Some major Dow stocks missed on earnings hurting the index. On the other hand, Nasdaq printed highs all week long and small caps in the Russell outperformed.

S&P 500 and the VIX moved lockstep for a majority of the week until the high Friday press occurred and the VIX reverted back to the lows. Unfortunately, week volume continues to accompany the upside in equity markets, specifically the S&P 500. Again we have seen a net outflow in equities during this past weeks report. According to Lipper US Fund Flows, equity markets experienced outflows of just over $7 billion this past week. Considering we’re nearing all-time highs, this doesn’t seem optimal. The breadth of the S&P 500 continues to drop, nearing the 70 level as well.

Earnings overflowed the market this week, helping a lot of equities higher, Nasdaq and S&P 500 saw gains throughout the week thanks to big names like Amazon and Microsoft. The USD moved above the 98 level with an aggressive pop of the resistance level but could not sustain all its gains. Gold moved higher as well, unexpectedly above the $1280 resistance level as all other risk-on assets and DXY moved higher. It seems like big money is trying to bid up any market. Gold managed to move into the $1290 level before finding resistance to end the week, the commodity market managed to hold the 200 day moving average well on the move higher on strong volume. Buying forced all markets higher into Friday’s close.

The GDP number beat out of the US and expectations of growth overcrowded the market but markets initially slumped off the news. Surprisingly, which may be an early indication of the true story behind this bull side. Or was it just? The report was “low-quality” according to David Rosenburg. The report encompassed, lower imports and higher inventories along with real final private sales at 1.3% (insignificant). The cyclically-adjusted GDP was also deemed to be contracting at 2% annually, which is the lowest in almost 10 years. To add to this all, oil prices hit the fan and fell which is usually not the case in a strong economic GDP environment.

Finally, the bulls came out in oil. What looked like a promising bull week as the start for the oil market quickly turned on itself. Trump may have had the last laugh after all. After having tweeted that oil prices were going to drop after getting off the phone with OPEC, we saw sell stops getting triggered to the downside helping oil move from its weekly high of $66.60. Dropping 6.45% from that high into Friday’s low ($62.55) or 3.70% from Friday’s Globex open to the US cash close.

On Monday, pre-market a cease of sanction waivers for Iranian oil was announced which was speculated to remove just over 1 million barrels of oil from the supply side. Naturally, this helped oil spike through resistance like it was not even there. Less supply equals higher prices, simple economics. Further strictness on Iranian sanctions was described as well which affirmed production cuts in oil for the foreseeable futures. The discussion of a 2.27 million barrel per day drop for the rest of 2019 was announced by OPEC and the oil market loved it.

The rally was short lived as reports of deteriorating quality of Iranian oil resurfaced and the easy replacement of the production cut by many nations was announced. Saudi Arabia itself can produce more oil in a heartbeat and they plan on it. The sell side on crude oil quickly opened up reverting crude to its pre-rally level and then some.

Below we have an oil chart on the 1-hour with some technicals laid out for a potential forecast. After the large rally, out of the established range, mid-April. Crude oil formed new yearly highs and a strong support zone at $65.40 to $65.60 which was expected to hold should the bulls move price higher. However throughout the week, each high that was made on the rally was lower and the price moved steadily into the support zone, bouncing off a few times, but never really penetrating. Until Thursday’s cash close. That break was a pivotal driver for the sell stop downside. The target of the level was the previous range high at $64.60 but that zone was disrespected. So was the bottom of the range at $63.20 to an extent. Price bottomed out at around $62.40-50 and now has to break back above the current resistance at $63.20 for a play higher. We can see price getting attraction all the way back to the midpoint of the previously formed range where a lot of volume was accumulated at $64.00-$64.20 before either the buyers or sellers can make a decision based on price and production data.

 

We’ve said it before, but how high can we go?

The upside in equities has persisted for quite some time now off the lows and towards the moon. It’s no surprise that we might see all-times soon and dare I say the 3000 level on the S&P 500. Nothing surprises us now, but it is when the retail longs get into the market that will indicate the peak and potential reversal. This is a subset of what is really happening in the market. Don’t be fooled, the lately more dovish tone of the Fed could be giving the upside false hope. Economic data is coming out weak out of the main global drivers. There are some data points out of the US that contributes to the proposed long idea of the BTFD’ers but the data against the all-time highs might hold larger weight. At the center of the potential reversal was the GDP report this Friday.

As discussed above, there is more to the GDP than meets the eye, its not the best measure for expansion. Rather people should consider the figures in general households and even enterprises such as income, increases in income, prices and corporate profits. Speaking of which its earnings season and so far, its been a blast to the upside, but you have to ask yourself are corporate earnings higher because of accounting practices or actual increases in revenue. For the most part, the public companies who have reported earnings have been on par with the revenue growth.

Household income is not increasing across the board, especially those in the US while housing and other things are becoming more expensive, the cost of living in increase, inflation lower. The housing markets have boomed so much over the past decade. Key areas are experiencing price drops. New home sales data, however, has been improving since January 2019. The increase in prices can be seen as the late cycle “sign”.  Markets have been on the incline for the past 10 years or so, but the new all-time highs are slightly suspect, mainly because there is no large inflow of capital into the near all-time highs. An actual outflow this past week as mentioned above.

Not to mention increasing debt levels that we covered last week. Both household and government debt is increasing out of control. The Federal government continues its borrowing spree and its hit all-time highs. Kind of like US equities. The GDP number plays into this as well, if nominal GDP does not grow at an expected level, one that is sufficient for the production of taxes to finance debt will not be realistic or possible. Trade talks are also at the cornerstone of concerns. International trade is at such a vulnerable stage, it’s not doing well. The US is trying to secure deals with global players and so is everyone else for that matter, with little to no agreement. As a result, foreign entities are reducing US Treasuries and dollar holdings. This will cause the US government to be strapped for funds, the only funding they’ll have if this progresses is quantitative easing. Should this continue, bond yields rise, dollar fails and equities get hit… hard. Why? The Fed gets pinched in its own debt problem. What is the Fed’s next step to avoid this? A potential trade deal with China and the UK?

Weekly Economic Calendar

An eventful week ahead as we direct our attention to the monthly Federal Reserve meeting out of the United States. The reports out of the UK will be important as well as amidst all the Brexit negotiations. As we travel into a new month, we expect Non-Farm numbers to close out the week.
Sunday- Spanish Parliamentary Election
Monday- Manufacturing PMI out of China, and ANZ business confidence out of New Zealand.
Tuesday- pre market GDP out of Canada, watch the CAD. Consumer Confidence out of the US in the morning session and employment numbers out of New Zealand, keep an eye out on the Kiwi.
Wednesday, ISM numbers in the morning out of the US. The afternoon session brings us the FOMC statement and rate decision. We are expected unchanged rates throughout this monthly meeting which could help equity markets move higher. That also depends on what the Fed says during the press conference and their outlook for US monetary policies.
Thursday, Early morning data out of the UK. BOE inflation report, Official bank rate votes, monetary policy summary and a bank rate decision all pre market which could be an opportunistic event for equity traders.
Friday, Another anticipated report out of the US, non-farm numbers pre market that will move the USD and equities.

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