Our President’s Comments

02/23/18

Internal Markets Commentary

US Markets & Economy

  • Markets lacked a bit of leadership yesterday as the S&P 500 couldn’t hang onto 1% gains for the second day but just about ended higher (+0.1%). Within the S&P, gains were led by the real estate, energy and materials sectors with partial offsets from financials. The VIX fell for the second day to 18.72 (-6.5%).

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  • The US treasury sold $29bn of 7 year notes at a yield of 2.839% with a bid-to-cover ratio of 2.49x (vs. 2.73x previous).
  • Staying with inflation, the US Treasury Secretary Mnuchin has discussed prices overnight and believes rising US wage gains may not cause broader inflation. He noted that “you can have wage inflation and not necessarily have inflation concerns in general”.
  • The Fed’s Bostic said “things continue to look up” for the US economy and that there has been “a manageable” increase in US auto loan problems. The Fed’s Kaplan reiterated that three rate hikes seems appropriate but his views could change if there was greater evidence of rising inflation or employment. He noted “the Fed’s policy is accommodative, but the path to neutral may be flatter and not as far away as some think”. Finally, the Fed’s Quarles noted “with a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized.”

European Markets & ECB Minutes

  • The ECB broadly reiterated a wait and see approach. On rates, the minutes indicated “changes in communication were generally seen to be premature” and that “monetary policy would continue to develop….with a view to avoiding abruptly or disorderly adjustments at a later stage”. On QE, “some members expressed a preference for dropping the easing bias…but it was concluded that such adjustment was premature”. On FX, “there was broad agreement among members that the recent volatility in…..the Euro was a source of uncertainty that required monitoring”. Looking ahead, “the language pertaining to the monetary policy stance could be revisited early this year as part of the regular assessment at the forthcoming policy meetings”.
  • In government bonds, core 10y bonds yields were 1-3bp lower while peripherals modestly underperformed (1-3bp higher), in part reversing the prior day’s gains. 10y Bunds and Gilts yields fell 1.6bp and 0.9bp respectively while UST 10y also fell 2.9bp.
  • Key European bourses weakened modestly, with the Stoxx 600 (-0.20%), DAX (-0.07%) and FTSE (-0.40%) all lower.
  • Regarding the Italian election on 4thMarch, the EC President Juncker warned “we have to brace ourselves for the worst scenario….(which) could be no operational government” and that he was “more worried by the result of Italian election than the result of the vote by SPD members” in Germany. Later on in a statement, he did softened his message and noted “whatever the outcome, I’m confident that we’ll have a government that makes sure that Italy remains a central player in Europe”.
  • The Times reported that the UK may allow EU citizens who arrives during the Brexit transition period to stay permanently. Before PM May outlines her vision for a post-Brexit trade deal, a presentation on the European Commission website has reiterated the potential difficulties she faces with the stance her cabinet seem to be moving towards. It noted the “UK’s views on regulatory issues in the future relationship including the three basket approach are not compatible with the principles in the EC guidelines”.

Asian Markets

  • Markets were in positive territory with the Kospi (+1.23%), Hang Seng (+0.89%), Nikkei (+0.71%) and China’s CSI 300 (+0.02%) all up. Japan’s January core CPI (ex-food) was above expectations at 0.9% yoy (vs. 0.8%) but flat for the third consecutive month.

FX Exchange & Commodities

  • The US dollar index fell for the first time in five days (-0.28%), while the Euro and Sterling gained 0.37% and 0.27% respectively.
  • WTI oil was up 1.77% following the latest EIA report that showed an unexpected drop in US crude inventories last week.
  • Precious metals strengthened 0.6% (Gold 0.56%; Silver 0.60%) while the Shanghai base metals indices rallied after trading resumed post holidays (Copper +1.72%; Zinc +1.06%; Aluminum +0.99%).

Economic Calendar Releases

  • Market Focus: No important data releases are on the calendar but there will be a host of Fed speakers including NY Fed President William Dudley, Boston Fed President Eric Rosengren, Cleveland Fed President Loretta Mester and San Francisco Fed President John Williams.
  • 2-Yr FRN Note Settlement
  • William Dudley, Eric Rosengren, Loretta Mester, and John Williams Speak
  • Baker-Hughes Rig Count: The Baker Hughes North American rig count tracks weekly changes in the number of active operating oil & gas rigs. Used for drilling wellbores for wells that may eventually produce oil or gas, active rigs are essential for the exploration and development of oil and gas fields. Rigs that are not active are not counted. Components in the data are the United States and Canada with a separate count for the Gulf of Mexico (which is a subset of the U.S. total). The count includes only rigs that are significant users of oilfield services and supplies.

 

Our Technical Analysts’ Commentary

SPX Daily Chart

  • The S&P 500 gave up all its intraday gains to close at 2703.96, with a marginal gain of 0.1%. The total intraday range was 33.49 points.
  • For the past four days, there were attempts to extend the pullback18 on the upside, however, the intraday gains did not sustain till the end of the day. This shows selling pressure at higher levels. If there is not a breakout7 of 2760 levels within the next few days, the chances of a leg down increase.
  • On the downside, the first support22 is at 2670 and below it at 2643 levels.
  • We have been buying in small quantities in the downturn, yet we do not want to risk large amounts of cash as uncertainty remains high. However, we also do not believe that the markets will enter a prolonged downward phase, so we continue to look for buying opportunities in strong names.

Market Data

  • 1564 stocks advanced on the NYSE; 1418 stocks declined. 32 stocks made new 52-week highs; 80 stocks made new 52-week lows.
  • 1213 stocks advanced on the Nasdaq; 1711 stocks declined. 64 stocks made new 52-week highs; 54 stocks made new 52-week lows.

SPX Intraday Chart

  • Participants have been attempting to push the index higher but are facing strong selling pressure at the higher levels.
  • Currently, the index is facing resistance20 at the downtrend line. If the index breaks out of this, a move to 2730 and thereafter to 2745 is likely.
  • On the downside, support exists at 2690 and 2670 levels.

Glossary 

  1. Ascending Channel – An ascending channel is the price action contained between upward sloping parallel lines. Higher pivot highs and higher pivot lows are technical signals of an uptrend. Trendlines frame out the price channel by drawing the lower line on pivot lows, and the upper line is the channel line drawn on pivot highs. Price is not always perfectly contained but the channel lines show areas of support and resistance for price targets. A higher high above an ascending channel can signal continuation. A lower low below the low of an ascending channel can signal trend change.
  2. Ascending triangle pattern – is a bullish formation that usually forms during an uptrend as a continuation pattern.
  3. Bearish Engulfing pattern – chart pattern that consists of a small white candlestick with short shadows or tails followed by a large black candlestick that eclipses or “engulfs” the small white one.
  4. Bottom- the lowest price reached by a financial security, commodity, index or economic cycle in a given time period. A specific time span is usually used to determine a bottom, and that timeframe can be a year, month or even intraday.
  5. Break – a rapid and sharp price decline
  6. Breakdown – price movement through an identified level of support, which is usually followed by heavy volume and sharp declines
  7. Breakout- a price movement of a security through an identified level of resistance, which is usually followed by heavy volume and an increased amount of volatility.
  8. Candlestick – a chart that displays the high, low, opening and closing prices of a security for a specific period. The wide part of the candlestick is called the “real body” and tells investors whether the closing price was higher or lower than the opening price.
  9. Consolidation- is used in technical analysis to describe the movement of a stock’s price within a well-defined pattern of trading levels. Consolidation is generally regarded as a period of indecision, which ends when the price of the asset moves above or below the prices in the trading pattern
  10. Correction – a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation; generally temporary price declines interrupting an uptrend in the market or an asset; shorter duration than a bear market or a recession, but it can be a precursor to either.
  11. Descending Triangle pattern – A bearish chart pattern that is created by drawing one trendline that connects a series of lower highs and a second trendline that has historically proven to be a strong level of support.
  12. Doji – candlesticks that look like a cross, inverted cross or plus sign; forms when a security’s open and close are virtually equal for the given time period and generally signals a reversal pattern for technical analysts
  13. Double top – technical analysis to describe the rise of a stock, a drop, another rise to the same level as the original rise, and finally another drop.
  14. Gravestone doji – a type of candlestick pattern that is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day.
  15. Head and Shoulders pattern – a chart formations that predicts a bullish-to-bearish trend reversal; believed to be one of the most reliable trend reversal appears. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end.
  16. Inside Day formation – A candlestick formation that occurs when the entire daily price range for a given security falls within the price range of the previous day. Inside day often refers to all versions of the harami pattern and can be very useful for spotting changes in the direction of a trend.
  17. Long legged doji – a type of candlestick formation where the opening and closing prices are nearly equal despite a lot of price movement throughout the trading day. This candlestick is often used to signal indecision about the future direction of the underlying asset.
  18. Pullback – the falling back of a security’s price from its peak. These price movements might be seen as a brief reversal of the prevailing trend higher, signaling a temporary pause in upward momentum. Also referred to as a retracement or consolidation
  19. Relative Strength Index – (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally RSI is considered overbought when above 70 and oversold when below 30.
  20. Resistance – a price point on a bar chart for a security in which upward price movement is impeded by an overwhelming level of supply for the security that accumulates at a particular price level.
  21. Rounding Top pattern – is identified by price movements that, when graphed, form the shape of an upside down “U”; may form at the end of an extended upward trend and indicates a reversal in the long-term price movement; considered a rare occurrence.
  22. Support Level – refers to the price level below which, historically, a stock has had difficulty falling. It is the level at which buyers tend to enter the stock.
  23. Wedge – a security price pattern where trend lines drawn above and below a price chart converge into an arrow shape.

 

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02/22/18

Internal Markets Commentary

US Economy, Central Bank’s Minutes & Markets

  • Not long after the release of the FOMC minutes yields were actually flat and the S&P 500 up around 1%. However then 10 yr US yields reacted and rose 6bps to 2.951% and the S&P 500 closed -0.55% – the lowest level in a week.

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  • The minutes indicated that “a majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate”. On the economy, it noted that “a number of participants indicated that they had marked up their forecasts for economic growth in the near term relative to …the December meeting” and that “several others suggested that the upside risks to the near-term outlook for economic activity may have increased.” On inflation, “almost all participants who commented agreed that a Phillips curve type inflation framework remained useful…”. Elsewhere, some participants said that they saw an appreciable risk that inflation would continue to fall short of the Fed’s objective, but overall inflation is expected to “move up” this year and stabilize around 2% over the medium term. On wage gains, “a number of participants judged that the continued tightening in labor markets was likely to translate into faster wage increases at some point”. Notably, the relatively hawkish minutes was before the January wage growth and CPI / PPI prints, so it seems reasonable to assume that if the Fed was getting more confident in their growth and inflation outlook at their meeting, the subsequent data releases would have only added to their views.
  • The flash February PMIs were all above market, with the composite PMI at 55.9 (vs. 53.8 previous), services at 55.9 (vs. 53.7 expected) and manufacturing PMI at 55.9 (vs. 55.5 expected).
  • US bourses reversed earlier gains to close modestly lower (S&P -0.55%; Dow -0.67%; Nasdaq -0.22%). Within the S&P, all sectors fell with losses led by the real estate, energy and telco stocks. The VIX fell for the first time in three days to 20.02 (-2.8%).
  • The treasury sold $35bn of five year notes at a yield of 2.658% with a bid-to-cover ratio of 2.44x (vs. 2.48x previous). UST 2y, 5y, 10y yields rose 4.7bp, 4.1bp and 6bp respectively.

Brexit News, European Economy & Markets

  • In regards to the transition period, the EU had previously suggested an end date of December 2020. However, according to a draft UK government legal proposal obtained by Bloomberg, it suggests the actual date may be up for some debate. The document indicated “the UK believes the period’s duration should be determined simply by how long it will take to prepare and implement the new processes….that will underpin the future partnership” and that “the UK agrees this points to…around two years, but wishes to discuss with the EU the assessment that supports its prosed end date”. Later on, the Chief of Staff for Brexit Secretary Jackson noted the UK has not changed its transition plans, which is “around two years”. The EC’s Juncker “still believes that (both sides) should be able to agree (on the withdrawal agreement) by October and agree on the final terms…”
  • December unemployment rate in the UK edged up from its 42 year low and rose for the first time since July last year to 4.4% (vs. 4.3% expected), while the average weekly earnings growth was in line and steady mom at 2.5% yoy. Speaking in front of the Treasury Committee, the BOE’s Haldane noted “…the pick-up in wages is starting to take root” and that “intelligence from our agents suggests wage settlements this year were going to pick up, perhaps with a number with a three in front of it….” Further, he added risks for the UK economy were “to the upside”. The BOE Governor Carney reiterated that cash rates need to rise in the “coming months” but it would be ‘gradual and limited” and refrained from providing guidance on potential timing. The implied Bloomberg odds of a May rate hike rose 4ppt to 61.5%.
  • The Stoxx 600 edged up 0.16% while the FTSE rose 0.48% but the DAX dipped 0.14%.
  • Core European 10y bond yields fell 1-3bp (Bunds & OATs -1.3bp; Gilts -3.1bp), with the latter partly impacted by the unemployment print.

Asian Markets

  • Markets were broadly lower with the Nikkei (-1.25%), Hang Seng (-0.98%) and Kospi (-0.58%) all down. Elsewhere, UST 10y yield was down 1bp while the three key Chinese bourses were up 1.8%-2.1% after trading resumed following the New Year holidays.

Foreign Exchange & Commodities

  • The US dollar index rose for the third trading day (+0.47%), while the Euro and Sterling fell 0.43% and 0.56% respectively. WTI oil rose 0.39% to $61.79/bbl while precious metals were little changed (Gold -0.34%; Silver +0.36%).

 

Economic Calendar Releases

  • Market Focus: The European Central Bank published minutes from its January 25 governing council meeting. In the U.S., weekly data for jobless claims and petroleum and natural gas along with January leading indicators and February Kansas City Fed manufacturing index was released.
  • Weekly Bill Settlement
  • Randal Quaries, William Dudley, Raphael Bostic, and Robert Kaplan Speak
  • Jobless Claims: Initial jobless claims continue to post very favorable readings that remain near historical lows, at 222,000 in the February 17 week down 7,000 from the previous week’s downward revised level, taking the 4-week average to 226,000, just shy of the 45-year low seen two weeks ago. The average is down about 13,500 from this time last month. Further pointing to strength in the February employment report, continuing claims, in lagging data for the February 10 week, fell by 73,000 from the previous week to 1.875 million. The 4-week average is down 16,250 to 1.927 million, with the unemployment rate for insured workers falling 0.1 percentage points to just 1.3 percent. There are no special factors in today’s report.
  • Bloomberg Consumer Comfort Index: The Bloomberg Consumer Comfort Index is a weekly, random-sample survey tracking Americans’ views on the condition of the U.S. economy, their personal finances and the buying climate. Details are available only to subscribers. In May 2014, the series range was changed to zero to 100 from minus 100 to plus 100.
  • Leading Indicators: Despite all the turbulence, January was still a positive for the stock market which looks to contribute solidly to the month’s index of leading economic indicators. Extraordinary strength in ISM new orders will be a key positive as will the month’s decline in jobless claims. January’s call for the LEI is a very strong 0.6 percent gain.
  • EIA Natural Gas Report:  The Energy Information Administration (EIA) provides weekly information on natural gas stocks in underground storage for the U.S. and five regions of the country. The level of inventories helps determine prices for natural gas products.
  • Kansas City Fed Manufacturing Index: The Kansas City manufacturing report, like other regional reports, has held steady and strong, at a composite score of 16 in January with February’s consensus at 16.5. New orders and backlogs were both very strong in January.
  • EIA Petroleum Status Report: The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products.
  • 3-Month Bill, 6-Month Bill, and 52-Week Bill Announcements,7-Yr Note Auction
  • Fed Balance Sheet: The Fed’s balance sheet is a weekly report presenting a consolidated balance sheet for all 12 Reserve Banks that lists factors supplying reserves into the banking system and factors absorbing reserves from the system. The report is officially named Factors Affecting Reserve Balances, otherwise known as the “H.4.1” report. In September 2017, the Fed announced a program to reduce its balance sheet by the gradual reduction of both its Treasury and mortgage-backed security holdings. The monthly reductions, executed by reinvesting a decreasing amount of maturing securities, began in October 2017 and will gradually increase in size before hitting a plateau in October 2018 where they will hold until the FOMC judges that the Fed is holding no more securities than necessary. Under the schedule for 2018, the Fed’s Treasury holdings will be reduced by $270 billion while holdings of mortgage-backed securities will be reduced by $180 billion.
  • Money Supply: The monetary aggregates are alternative measures of the money supply by degree of liquidity. Changes in the monetary aggregates indicate the thrust of monetary policy as well as the outlook for economic activity and inflationary pressures. Money supply is in terms of two components—M1 and M2 (the Fed formerly produced a version called M3 but no longer does so). M1 and M2 are progressively more inclusive measures of money: M1 is included in M2. M1, the more narrowly defined measure, consists of the most liquid forms of money, namely currency and checkable deposits. The non-M1 components of M2 are primarily household holdings of savings deposits, small time deposits, and retail money market mutual funds.

 

Our Technical Analysts’ Commentary

SPX Daily Chart

  • The S&P 500 gave up all its earlier gains following the release of the Fed minutes of the meeting. This shows that participants are still focused on interest rates, which dictates the direction of trading. The index fell 0.55% to end the day at 2701.33. The total intraday range was 46.46 points.
  • The moving averages are providing a strong resistance20 to any rally. For the past two days, the index above the averages but could not sustain the higher levels. In the short-term, the downward momentum has an upper hand. Today, there are likely to be attempts to sink the index towards 2669, corresponding to 38.2% Fibonacci retracement levels of the recent pullback18.
  • On the upside any sustained move above the 2740 levels is an optimistic sign.
  • The broader markets and the number of stocks at new 52-week highs and new 52-week lows are also in equilibrium. This points to a possible range bound action for the next few days.

 

Market Data

  • 1382 stocks advanced on the NYSE; 1610 stocks declined. 81 stocks made new 52-week highs; 73 stocks made new 52-week lows.
  • 1628 stocks advanced on the Nasdaq; 1310 stocks declined. 104 stocks made new 52-week highs; 55 stocks made new 52-week lows.

 

SPX Intraday Chart

  • The failure of the index to break out of 2751 and the possibility of faster interest rate tightening cycle, led to a sharp bout of selling in the second-half of the trading session.
  • Today, a decline below 2690 is likely to push the index down to 2670 levels. On the other hand, the overhead resistance zone lies between 2747 to 2751.

 

Glossary

  1. Ascending Channel – An ascending channel is the price action contained between upward sloping parallel lines. Higher pivot highs and higher pivot lows are technical signals of an uptrend. Trendlines frame out the price channel by drawing the lower line on pivot lows, and the upper line is the channel line drawn on pivot highs. Price is not always perfectly contained but the channel lines show areas of support and resistance for price targets. A higher high above an ascending channel can signal continuation. A lower low below the low of an ascending channel can signal trend change.
  2. Ascending triangle pattern – is a bullish formation that usually forms during an uptrend as a continuation pattern.
  3. Bearish Engulfing pattern – chart pattern that consists of a small white candlestick with short shadows or tails followed by a large black candlestick that eclipses or “engulfs” the small white one.
  4. Bottom- the lowest price reached by a financial security, commodity, index or economic cycle in a given time period. A specific time span is usually used to determine a bottom, and that timeframe can be a year, month or even intraday.
  5. Break – a rapid and sharp price decline
  6. Breakdown – price movement through an identified level of support, which is usually followed by heavy volume and sharp declines
  7. Breakout- a price movement of a security through an identified level of resistance, which is usually followed by heavy volume and an increased amount of volatility.
  8. Candlestick – a chart that displays the high, low, opening and closing prices of a security for a specific period. The wide part of the candlestick is called the “real body” and tells investors whether the closing price was higher or lower than the opening price.
  9. Consolidation- is used in technical analysis to describe the movement of a stock’s price within a well-defined pattern of trading levels. Consolidation is generally regarded as a period of indecision, which ends when the price of the asset moves above or below the prices in the trading pattern
  10. Correction – a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation; generally temporary price declines interrupting an uptrend in the market or an asset; shorter duration than a bear market or a recession, but it can be a precursor to either.
  11. Descending Triangle pattern – A bearish chart pattern that is created by drawing one trendline that connects a series of lower highs and a second trendline that has historically proven to be a strong level of support.
  12. Doji – candlesticks that look like a cross, inverted cross or plus sign; forms when a security’s open and close are virtually equal for the given time period and generally signals a reversal pattern for technical analysts
  13. Double top – technical analysis to describe the rise of a stock, a drop, another rise to the same level as the original rise, and finally another drop.
  14. Gravestone doji – a type of candlestick pattern that is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day.
  15. Head and Shoulders pattern – a chart formations that predicts a bullish-to-bearish trend reversal; believed to be one of the most reliable trend reversal appears. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end.
  16. Inside Day formation – A candlestick formation that occurs when the entire daily price range for a given security falls within the price range of the previous day. Inside day often refers to all versions of the harami pattern and can be very useful for spotting changes in the direction of a trend.
  17. Long legged doji – a type of candlestick formation where the opening and closing prices are nearly equal despite a lot of price movement throughout the trading day. This candlestick is often used to signal indecision about the future direction of the underlying asset.
  18. Pullback – the falling back of a security’s price from its peak. These price movements might be seen as a brief reversal of the prevailing trend higher, signaling a temporary pause in upward momentum. Also referred to as a retracement or consolidation
  19. Relative Strength Index – (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally RSI is considered overbought when above 70 and oversold when below 30.
  20. Resistance – a price point on a bar chart for a security in which upward price movement is impeded by an overwhelming level of supply for the security that accumulates at a particular price level.
  21. Rounding Top pattern – is identified by price movements that, when graphed, form the shape of an upside down “U”; may form at the end of an extended upward trend and indicates a reversal in the long-term price movement; considered a rare occurrence.
  22. Support Level – refers to the price level below which, historically, a stock has had difficulty falling. It is the level at which buyers tend to enter the stock.
  23. Wedge – a security price pattern where trend lines drawn above and below a price chart converge into an arrow shape.

 

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