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Black and Green: Crude Oil, Dollar Taking Center Stage Early in Session

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November 29, 2016

(Tuesday Market Open) Black gold and the greenback could be dominant forces on Wall Street today.

Tumbling crude oil prices and a pause in the dollar rally came into focus early Tuesday, and both factors remain strong influences on the broader market. Crude is playing defense, down 3% amid continued doubts about whether OPEC members can reach a production cut agreement at their meeting tomorrow. Meanwhile, the dollar paused after its rally to 13-year highs, and strength in the dollar index is raising some concerns about its possible effect on quarterly earnings for some export-dominated companies.

Stocks opened slightly lower despite a better than expected government estimate for Q3 Gross Domestic Product of 3.2%. That topped the 3% many analysts had expected, and was above the previous estimate of 2.9%. It’s also the best quarterly growth in two years.

But keep a close eye on crude oil. Although the correlation between the stock market and crude isn’t as high as it was earlier this year, it has surged at times and could continue to be a major factor, especially around tomorrow’s OPEC meeting. When it comes to crude prices, this meeting arguably shapes everything, putting the energy sector in the spotlight.

Tuesday’s slightly lower stock market open followed what appeared to be some profit-taking Monday after nearly a month-long post-election rally. Some of the sectors that had really exploded since the vote, including industrials and financials, were among those that took it on the chin. And the Russell 2000 index of smaller companies fell for the first time in 16 sessions after posting its longest winning streak since 1996.

There are high expectations for holiday shopping, and in one possible early signal, Tiffany’s (TIF) beat Wall Street analysts’ consensus for profit, earning 76 cents a share. That was 6 cents higher than a year earlier and above consensus of 67 cents, and revenue beat consensus as well. Same-store sales performance also beat estimates, though it was still lower year-over-year. TIF shares rose nearly 4% in pre-market trading.

More evidence of robust holiday demand came in from Wal-Mart (WMT) early Tuesday, as the company said it saw record visits to its online business from the start of Black Friday through to Cyber Monday. In general, Black Friday shopping looked decent, but keep in mind that the strong dollar could have an impact on overseas results for some of these big American companies. We could start getting a sense of the dollar’s impact as Q1 earnings begin in January.

S&P 500

FIGURE 1: PROFIT-TAKING CLIPS MARKET'S WINGS

The S&P 500 (SPX), plotted through Monday on the TD Ameritrade thinkorswim® platform, took a step back as profit taking seemed to slow down the post-election rally. Concerns about crude oil prices and events in Europe could keep things volatile over the next few days.Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

What Could Jobs Data Show? As Friday’s jobs data approach, Wall Street analysts’ consensus is for 175,000 jobs added in November and a steady unemployment rate of 4.9%, according to Reuters. Jobs numbers have been growing lately, albeit not at the rate seen through most of 2015. For October, jobs growth of 161,000 came in a bit below estimates, but projections had been wide amid some concern about possible slower hiring ahead of the election. And the government upwardly revised job growth for the prior two months, another good sign. Could October jobs growth be subject to a revision in this coming Friday’s report? We shall see.

Italy Back in the News: A couple years ago, economic turbulence in Italy was a frequent topic. Now the country is back in the news as Italians prepare to vote this Sunday on a referendum that would give more power to the central government. Current polls indicate the referendum might fail, and Prime Minister Matteo Renzi has said he’ll resign if it doesn’t succeed. That scenario, some analysts say, could bring turbulence back to the Italian economy and perhaps make investors less likely to help recapitalize Italy’s banks, which remain troubled. Italy isn’t a huge economy on its own, but since it’s part of the European Union, any issues there could conceivably get magnified. Does this mean investors need to worry? Perhaps not, but it’s still worth keeping an eye on, because it could get some attention as the week continues.

Europe Calling: Once the Italian referendum is out of the way, investors may want to stay tuned for more news from Europe next week, as the European Central Bank’s (ECB) governing council is scheduled to meet Dec. 7-8 to discuss the future direction of ECB asset purchases. On Monday, the media reported ECB Chief Mario Draghi praising the asset purchase program, saying, "Inflation has gradually edged up, and the ECB's monetary stimulus has been a key ingredient of the ongoing recovery.” The euro area economy continues to expand at a moderate, but steady pace and this gradual upward trend is expected to continue, Draghi added.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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