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Scoring a Safety: Geopolitics Has Defensive Unit On Field

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September 22, 2017

(Friday Market Open) Aside from renewed geopolitical queasiness as North Korean and U.S. leaders trade barbs and threats, catalysts seem hard to find early Friday. The international situation remains front and center, and that means some investors might have their defensive helmets on as they seek “safe havens” ahead of the weekend.

Both gold and bond prices edged up slightly early Friday amid worries over the North Korean situation, and the dollar fell vs. the yen and euro. In the stock market, futures moved lower in pre-market trading while European and Asian stocks had a mixed tone.

Since the Fed’s announcement Wednesday afternoon, stocks haven’t moved a great deal. That may be in part because the Fed’s statement and Fed Chair Janet Yellen’s post-meeting press conference mainly came across in generalities, without specific plans. As details start to become more clarified, there may be a bigger reaction from the market. Basically, many investors and traders still hunger for more detail.

At this point, the bigger move hasn’t been in stocks, but in the futures market. Mainly, CME Fed funds futures now point to a higher than 70% chance of a third rate hike by the end of the year, up from less than 35% earlier this month. That’s a major turn-around in just a few weeks, and likely reflects the fact that 12 of 16 Fed members favor a third hike this year, according to the Fed’s dot map.

It’s kind of quiet this morning aside from the geopolitical situation, so let’s take a look at sector performance for a minute. Industrials are only the fifth-best performing sector year-to-date, but they’ve had a decent run lately, easily surpassing the broader market’s performance over the last week and the last month. Industrials are one of those sectors that often do a bit better amid solid economic growth, and in that sense can be seen as something of a derivative for economic conditions. That’s why it’s constructive to see their recent gains.

While industrials forged ahead Thursday, technology shares took a step back. Info tech is trailing the S&P 500 Index (SPX) over the last few days, and that’s putting some pressure on the tech-heavy Nasdaq (COMP). Apple (AAPL), one of the more widely held names, is one major tech stock that’s been moving lower, likely due in part to reports of a connectivity issue with the company’s watch. 

Healthcare and telecom also slid on Thursday, and consumer staples — one of the laggards so far this year — was the worst performer of all. Only two sectors posted gains.

The oil market looked relatively quiet early Friday. Investors might want to be on the watch later today for the weekly U.S. oil rig count, which fell a touch last week but is up 430 from a year ago as U.S. production gains ground.

Industrials

FIGURE 1: INDUSTRIALS ON THE MOVE

The industrial sector, sometimes seen as a bellwether for the broader economy, has been moving steadily higher over the last month. Info tech (purple line) had been keeping up, but has lost some of its momentum over the last few days. Data source: Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

What’s There to Trade Today? Not a Lot: The Fed meeting is in the rear-view mirror, earnings are a few weeks away, and today’s economic calendar is mostly empty. With no major data on the way until next week and the Fed’s announcement two days ago pretty much fully absorbed, today could be one of those sessions that we slog through looking for a catalyst. Volume might be light, which sometimes can cause sharper moves, so anyone participating in today’s action might want to consider exercising even more prudence than usual.

Tax Cut Still Has Hoops: Some of the recent rally stems from newfound hopes of a Republican tax reform plan gaining ground in the final months of the year. Keep in mind, though, that any tax plan still has a long way to go. Republicans are talking about a $1.5 trillion tax cut, but that’s just a number and doesn’t specify how to get there. Along the way, politicians would have to agree on specific rate cuts and policy changes, The Wall Street Journal noted.

Another question is whether Republicans could pass the tax plan as part of a budget, in which case they could “fast-track” it through with a simple majority vote. If not, they’d have to get support from Democrats to arrive at 60 votes— a tougher hurdle.  Republicans themselves are divided between deficit hawks who want any tax plan to be “revenue neutral” and those who want as big a tax cut as possible. It could be an interesting few months on Capitol Hill as all this gets sorted out, so the market’s eyes might continue turning toward D.C.

Tech Slide Continues: The tech sector, under pressure over the last few sessions, remained that way in pre-market trading early Friday. Apple (AAPL) was down more than 1% heading into the opening bell, and Alphabet (GOOG) also declined. Time will tell if this sudden slide in the market’s leading 2017 sector is a trend or a blip. What might be interesting is to see if any other sectors come in to pick up the load, which might be a sign of investors shifting bullish bets from techs to other parts of the market after the strong info tech run year-to-date.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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