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As Hurricane Irma Barrels Toward Florida, Weekend Waiting Game Begins

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September 8, 2017

(Friday Market Open) It’s a waiting game today as the weekend approaches and Hurricane Irma barrels toward the Florida coast. Futures turned lower in pre-market trading following weakness overnight in Asian and European stock markets.

Besides the hurricane, geopolitical fears remain in play. The North Korean situation has quieted down a bit, but traders might be taking protection ahead of the weekend just in case anything flares up over the next days. Defensive investments like gold remain elevated.

A number of sectors could conceivably be hurt by the hurricane, and we saw evidence of that in Thursday’s trading. Hotels, airlines, and restaurants that do business in south Florida all stand in the line of fire. Airline names like United Continental (UAL), Delta (DAL), and American Airlines (AAL) fell to varying degrees Thursday, though hotels held up pretty well.

Timeshare companies like Marriott Vacations (VAC) and Hilton Grand Vacations (HGV) also retreated. Timesharing is big business in southern Florida. So is taking a cruise, and cruise ship stocks also fell.

Another company taking a hit was Disney (DIS), which isn’t too big a surprise considering Florida’s geography and location of Walt Disney World right in the middle of the peninsula. Insurance companies, part of the financial sector, also fell sharply in some cases and helped make financials the second-worst performing sector in the S&P 500 on the day.

On the other side of the coin, rental car companies like Avis Budget (CAR) and Hertz (HTZ) got a boost, in part from the hurricane. It’s possible all those CNN videos of cars lined up on freeways to escape Florida played into this trade.

At the same time, investors once again gravitated Thursday toward defensive holdings like gold, the Japanese yen, and bonds. Yields on the benchmark 10-year U.S. Treasury note fell to new 10-month lows below 2.05%, and the dollar fell to its lowest level overnight in nearly two years. This type of flight to safety also weighed on financials. Additionally, investors got back into some of the less cyclical sectors like healthcare, consumer staples, and utilities, though telecom plunged.

Oil prices stayed steady much of the day Thursday and are on pace to post a positive week for the first time in more than a month. Crude inventories jumped 4.5 million barrels last week, the government said, but that could be something of an outlier that simply reflects lack of demand from Texas refineries that were shut down due to Hurricane Harvey. The pattern over the last month or two has been falling inventories, which is common this time of year.

If there’s anything good one can say about Hurricane Irma (and there isn’t, really), it’s that the storm doesn’t appear headed toward Gulf of Mexico oil production areas — at least not at the moment. But as meteorologists tell us, there’s no easy way to make any exact predictions about a storm’s path. Best wishes to everyone in Florida and the eastern seaboard for a safe weekend.

Russell 2000

FIGURE 1: DOLLAR WEIGHS ON SMALLER NAMES.

The Russell 2000 (RUT), which consists of smaller stocks, has been outperformed this week by the S&P 500 Index (SPX), denoted by the purple line. This could be partly due to a decline in the dollar, which often weighs on the shares of companies that sell their products mostly within the U.S. and have less chance to benefit from a weak U.S. currency. Data sources: FTSE Russell, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Can Trade Deficit Slide Help GDP? The U.S. July trade deficit came in at $43.7 billion, the government reported this week, below Wall Street’s consensus estimate of $44.7 billion. This might compute favorably into Q3 gross domestic product (GDP) forecasts, Briefing.com pointed out. However, the Atlanta Fed’s GDP Now indicator recently took its estimate for Q3 growth down a notch to 2.9%, citing signs of lighter consumer spending. 

“Fed Speak,” Draghi Style: The U.S. Federal Reserve is known for its vague language, sometimes referred to as “Fed Speak.” On Thursday, European Central Bank (ECB) President Mario Draghi borrowed a page from the Fed’s book when he tried to address questions about the timing of the ECB’s possible stimulus pullback. Here’s how he was quoted by theguardian.com: “We will announce when we are ready. We think we are going to be ready for much of what we have to decide in October ... if we are not then we postpone.” Clear enough? Anyway, many analysts interpreted Draghi’s words to mean that the ECB is committed to at least making some sort of announcement next month about whatever intentions it might have to draw back its stimulus.

Europe Beyond the ECB: Like Draghi, European markets are sending mixed signals. The euro showed strength vs. the dollar as it crossed the $1.20 threshold Thursday for the first time since January 2015. A lot of economic water has gone under the bridge since then, including a slight revival in European gross domestic product (GDP) and a decline in the dollar that stems partly from weak U.S. inflation data. Consumer confidence also improved in Europe recently, though inflation remains low. On the other hand, European stocks have sputtered since their spring highs, down about 5% since May. Earlier this year, many investors began looking to Europe for possible growth opportunities, and they might continue to, but it should be interesting to see what happens if the ECB does get around to removing some stimulus this fall. The slide in European stocks might have some connection to concerns about the ECB’s next move.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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