- Stocks end a string of weekly gains on EM and China trade risk
- Dollar still favorite trade haven but not for EM
- Jobs, Wage and Growth support continued rallies
US stocks dropped for a fourth consecutive day on Friday, this time fueled by US President Donald Trump’s newest ultimatum to China on trade, provoking a selloff of technology and multinational company shares. All four major US indices ended both Friday and the week lower, despite a positive jobs report that included the fastest wage growth for the US since 2009.
Ongoing fears of emerging market contagion and trade headline risks were the catalysts for the losses. Nevertheless we consider these declines temporary. We believe investors will shrug off the headlines, and will instead continue to trade on the fundamentals and technicals. The dollar ended a three-week retreat, as yields jumped for the second week.
Multinationals Outperform As EM Risk Highlighted
The S&P 500 edged down 0.22 percent on Friday, with all sectors in the red except for Communication Services (+0.21 percent) and Health Care (+0.15 percent). Friday's retreat was led by Real Estate (-1.27 percent) and Utilities (-1.22 percent) shares.
On a weekly basis, the benchmark trimmed 1.03 percent, the most since June, with 8 of 11 sectors underperforming. Communication Services (-3.05 percent) and Technology (-2.67 percent) stocks were the hardest hit. The decline ended a 3-week advance, the second weekly advance over the last 11 weeks.
The Dow Jones Industrial Average fell 0.3 percent on Friday, led by declines in Boeing (NYSE:BA), ending three days worth of gains. The mega-cap multinationals index was the only primary US index to see any sustained upward moves, a result of the US trade deal with Mexico and ongoing negotiations with Canada, as the US-Sino trade dispute returned to the fore.
The different approaches to how traders have been handling each of the US indices, and indeed the dollar, demonstrate again that until Trump reintroduced global trade risk with China, markets were being driven by emerging markets. That's why the Dow Jones outperformed last week, as mega caps are the most stable during speculative selloffs. The dollar's bounce on Friday, regained almost two-days worth of losses.
We noted last week that the dollar had become the go-to haven asset throughout the trade war. At the same time the yen reclaimed its former glory when investors sought a haven from the emerging market meltdown.
Technically, except for the Dow, all gauges are in an uptrend both in the midterm and long-term, after having registered new records. While the Dow Jones is still below its January record, and therefore trendless in the long-term, it is in an uptrend since its February low.
The NASDAQ Composite pared Friday’s losses to 0.25 percent from 0.55 percent. Like the S&P 500, it was the fourth consecutive daily loss for the tech-heavy index. On a weekly basis, however, the gauge underperformed among the major US averages, plunging 2.55 percent, capping its worst week since March, when the trade war became the primary market theme, driving selloffs.
The small-cap Russell 2000 edged down 0.07 percent for a fourth day, in a mirror image of the mega-caps, which have regained that superior performance that was denied them throughout the trade war. On a weekly basis, small caps retreated 1.29 percent, ending a five week winning streak.
Macro Fundamentals, Market Technicals Will Support Markets
The solid US employment report showed that 201,000 jobs had been added to the economy in August, beating the 191K forecast, with the jobless rate unchanged at 3.9 percent, near the lowest point for this measure since 1969. Wages increased 2.9 percent YoY, handily beating estimates, to climb by the most since the recession ended in 2009.
In August, consumer confidence rose to its highest level since October 2000, fueled by the buoyant labor market. The surge in confidence suggests that trade jitters are not having a material impact on US consumers, whose spending remains robust. Consumer spending was a solid contributor to this past week's upward revision in US Q2 GDP which grew to 4.2% from an earlier 4.1% estimate.
While there will likely be periodic selloffs on geopolitics, both macro fundamentals and market technicals support continued rising prices for US stocks in the mid- to long-term.
The Week Ahead
All times listed are EDT
Monday
4:30: UK – Trade Balance (July), GDP (July): trade deficit forecast to widen to £11.75 billion from £11.38 billion. GDP to rise 0.1% MoM.
21:30: Australia – NAB Business Confidence (August): expected to rise to 10 from 7.
Tuesday
4:30: UK – Employment Data: Claimant Count to fall by 6200 in August, from a rise of 6200 a month earlier. Unemployment rate to remain steady at 4.0% for July, while July average earnings to rise 2.5%, from a June gain of 2.4%.
5:00: Germany – ZEW Index (September): index to fall to -14.1 from -13.7.
Wednesday
8:30: US – PPI (August): producer prices to rise 0.2% MoM from 0%, and core PPI to rise 0.2% MoM from 0.1%.
The dollar is struggling to climb back above the uptrend line, for a second time, after falling beneath it on August 27. A climb above Tuesday's 95.74 high would increase the probability of the dollar challenging the 97.00 peak posted on August 15. Conversely, a fall below 94.50 would likely result in a reversal.
10:30: US – EIA Crude Inventories (w/e 7 September): stockpiles expected to fall by 3.1 million barrels to -1.294 million barrels from a 4.302 million drop a week earlier.
The price of oil has been driven down by risk-off sentiment, but it could spike if there's a future supply-demand imbalance. Technically, the price is struggling to overcome the July, $75 peak but it remains above its uptrend line since November.
21:30: Australia – Employment Data (August): the number of jobs is expected to rise by 15,000, from a 3900 fall, while the unemployment rate is forecast to remain steady at 5.3%.
Thursday
7:00: UK – BoE Rate Decision and Statement: rates are expected to stay at 0.75 percent but keep an eye on the voting patterns.
7:45: Eurozone – ECB Rate Decision (Press Conference 1.30pm): interest rates expected to continue unchanged at 0.00 percent, but hints of further policy direction will influence EUR and European indices.
8:30: US – Initial Jobless Claims (w/e 8 September), CPI (August): claims to rise to 210K from 203K, and CPI to be 2.8% YoY and 0.3% MoM, from 2.9% and 0.2%. Core CPI to be 2.4% YoY and 0.2% MoM, both in line with July.
Friday
8:30: US – Retail Sales (August): forecast to rise 0.4% MoM from 0.5%, and 0.5% from 0.6% excluding car sales.
10:00: US – Michigan Consumer Confidence (September, preliminary): forecast to be 96.6 from 96.2 a month earlier.