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Market Update

Looking for Mystery? Read a Novel, as Markets See 99% Chance of Rate Hike

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June 13, 2017

(Tuesday Market Open) As info tech stocks lick their wounds after their biggest two-day drop since last autumn, attention shifts to the Fed today. There’s not much sense of mystery there, however, with chances of a rate hike standing near 99%, according to Fed funds futures.

U.S. stocks rebounded a bit in pre-market futures trading, and most European and Asian stocks rose earlier Tuesday. The story today is waiting for the Fed, but don’t forget that two other central banks, the Bank of England and the Bank of Japan, also hold meetings this week. Analysts expect both to keep their low interest rate policies intact, but it’s always worth listening to what central bank leaders say about their countries’ economies, particularly in the United Kingdom after the recent election turmoil. Watch for possible impact on currency trading.

Info tech seemed to be on its own waterslide Friday and Monday while the rest of the market hardly showed signs of getting wet. Look at Monday’s action, for instance. Info tech stocks fell 0.8%, but the only other sector to fall even 0.5% was materials. Other so-called cyclical sectors like industrials and financials rose moderately.

Additionally, there’s little indication that Friday and Monday’s tech washout caused anyone to run for the hills, at least not judging from market safe havens like bonds and gold. Both fell Monday, and volatility pulled back from big early gains (see below). If gold falls again today, it would be the fifth-consecutive day of losses, and that seems significant. On the other hand, some of the defensive stock sectors like telecom and real estate did move higher Monday. Volatility, as measured by VIX, continued to retreat early Tuesday but remained above 11.

Remember some points about info tech. While it’s true that the five big names, including Amazon (AMZN), Facebook (FB), Microsoft (MSFT), Alphabet (GOOG), and Apple (AAPL) together compose a decent percentage of the market’s overall rally so far this year, those gains came as the sector sported strong fundamentals. Additionally, while some analysts were out with notes last week calling fundamentals into question, a lot of that is based on speculation. In about a month, earnings start drifting in, giving everyone a better sense of the true picture. Also, it’s important to keep things in perspective, as these stocks remain sharply higher for the year even after the last two sessions.

Granted, it’s not too surprising to see some profit taking after the run these stocks have had, and the sell-off also reminds everyone of the importance of not going “all in” to a market when it’s at or near record highs. That wisdom applies equally to the market as a whole, meaning this might be a good time for investors to check their allocations and make sure their portfolios have the right balance. Just because the kids are off from school doesn’t mean you can take a summer vacation from your financial planning.

Crude oil — another indicator that’s taken it on the chin lately — made slight gains Monday but slid Tuesday after reports of heavier-than-expected OPEC production. Keep an eye on the $44.50 a barrel level for U.S. crude futures, as a drop below that might quickly set up a test of the $40 level and cause more widespread concern about crude’s possible impact on the stock market. Though crude isn’t a drag on the stock market yet, it was last year, so the possibility exists.

On the data front, the May Producer Price Index (PPI) came in unchanged, as a Briefing.com survey of analysts had forecast. That compared with a 0.5% rise the previous month. Consumer prices for May, out early tomorrow, are also expected to be unchanged. The Fed has been looking for signs of inflation, but Tuesday’s data didn’t provide any.

Ten-Year Yield

FIGURE 1: HILLS NOT BECKONING

Ten-year bond yields, plotted through Monday on the thinkorswim® platform from TD Ameritrade, rose slightly despite concern in the stock market about the tech sector. Gold (purple line), another so-called "safe haven," fell along with bonds. So far there's no "running for the hills," it appears. Data Source: CME Group. For illustrative purposes only. Past performance does not guarantee future results. 

How Long is “Transitory?” Investors would be wise to check if Fed Chair Janet Yellen has anything new to say in her press conference tomorrow about what the Fed has called “transitory” economic weakness in Q1. Inflation, job growth, and overall gross domestic product (GDP) often failed to impress in the first three months of the year, and that appeared to extend into April and even May, judging from some recent numbers. It’s going to be interesting to see if the Fed has any new insight on what’s causing this and how soon it might end.

Data Deluge: The quarter is nearly over, but a lot of May data remain to be unveiled, including tomorrow’s consumer price index (CPI) and Thursday’s industrial production. These data could send signals about Q2 GDP, after Q1 GDP rose just 1.2% according to the government’s last estimate. Research firm CFRA sees May CPI falling from April, bringing the year-over-year rise to just 1.9%. On the other hand, CFRA added in a research note, low inflation has traditionally served as a support to higher price-to-earnings (P/E) ratios for the stock market.

Does Tech Have the “Dollar” Flu? When you consider the info tech meltdown Friday and Monday, don’t discount the effect of the stronger dollar, which, according to CFRA, might have triggered a rotation out of info tech and into other sectors. Info tech relies a good deal on overseas sales and a stronger dollar tends to make U.S. products more expensive in foreign markets. The dollar was mixed vs. the euro and yen early Tuesday, but the U.S. dollar index remains up a little from the eight-month lows it posted earlier this month, trading right at 97.

Good Trading,
JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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