Weekly Outlook

By David Morrison  |  16/02/2018 16:02

This article looks at the week ahead for US stock indices, FX and precious metals

Stock indices

Global stock indices fought back last week after the tumultuous sell-off and volatility spike at the start of the month. The upside moves were most pronounced in the US indices. Going into Friday’s open the Dow, S&P 500, NASDAQ 100 and Russell 2000 had all posted five consecutive positive trading sessions.

In the uproar of the previous week the S&P had slumped below, and subsequently soared back above, its 200-day simple moving average (SMA) on two separate occasions. Twice the index traded down to the area around 2,530 before bouncing back sharply. Going into last week it was uncertain whether the index was on course to recover further or had just experienced a corrective bounce before a fresh round of selling was unleashed. But US equities then undertook a sharp rally which saw the major indices push up through some major technical levels. The S&P broke back above both its 100-day SMA and significant resistance around 2,700. Ahead of Friday’s open the futures nosed above the 50-day SMA around 2,740 even as the yield on the US 10-year Treasury note hovered around 2.90% and within striking distance of the key 3.0% level.

All this suggested that investors had shrugged off the stock market correction from earlier in the month. However, going into Friday’s session some traders were concerned that the bounce-back was a touch overdone and there was some nervousness ahead of the weekend. Consequently, many market participants were holding back to see where the S&P would close out for the week. A positive close would bode well for equities going forward, with many traders then looking for US stock indices to retest January’s record highs. But the area around 2,700 is particularly significant as it has served previously as resistance. A close below here would be a disappointment and could be enough to see sentiment turn negative.
 
FX

Last week the dollar reversed direction once again having put in a sharp countertrend rally the week before. The Dollar Index failed to break above resistance around 90.00, then proceeded to dip below 88.00 and went on to hit its lowest level since mid-December 2014. The area around 88.00 has some significance as it roughly marks resistance from late 2008, early 2009 and the summer of 2010. Meanwhile the EURUSD made a fresh three-year high as it closed in on 1.2600. These moves came even as US Treasury yields held onto recent gains which have left the key 10-year within striking distance of 3.0%. A break above here is now considered definitive evidence that the 35-year bull market in bonds is over, heralding higher interest rates going forward.

But perhaps the most significant FX move, at least technically, was seen in the USDJPY. This broke below 108.00 – a level of support marking the bottom of a trading range which developed from March last year. The USDJPY went on to break below 106.00 in a move which in the past would have triggered a slump in US equities and an exodus from risk assets in general.

However, in this new age where volatility is the focus, equity investors ignored the rally in the yen. Partly this was because the move was blamed on dollar weakness and stops being taken out around the 108.00 level rather than a flight to safety. The move also came despite some weak Japanese data. Annualised GDP grew just 0.5% in the fourth quarter – well below the +0.9% expected. Then Core Machinery Orders slumped 11.9% in December, down from an increase of 5.7% in the prior month. At the end of the week Haruhiko Kuroda was confirmed as Governor of the Bank of Japan, giving him a second term and ensuring continuity.

The current mindset remains that a weaker dollar is positive for US corporations as it makes their products more affordable overseas. Of course, this completely ignores the fact that currency weakness helps to boost inflation, feeding through into higher bond yields, and that one of the main reasons for the current round of dollar selling is concerns over the growing US budget deficit and national debt due to unfunded tax cuts and proposed infrastructure spending.
 
Precious Metals

Gold recovered a lot of lost ground last week, reversing losses from the previous fortnight and closing back in on 18-month highs hit towards the end of January. On Friday afternoon it was on course to post its biggest weekly rise since April 2016. Gold got a lift from the turnaround in the dollar. The Dollar Index failed to break above resistance around 90.00 and reversed sharply to hit a fresh 3-year low, resuming the decline which began just over a year ago. Gold’s move came despite the rally across global equity markets, suggesting that investors weren’t seeking it out as a safe-haven play. Instead the move was linked to further evidence that inflation is picking up in the US. On Wednesday Headline CPI (including food and energy) rose 0.5% compared to the previous month. This was well above both the consensus forecast of +0.3% and the prior reading of +0.1%. Gold typically performs well when investors worry about a pick-up in inflation, particularly when interest rates are low. This is because rising inflation means that real interest rates decline, all else being equal, which means that interest-bearing assets lose their appeal when compared to hard assets like gold.

Silver also rallied following the CPI release. However, the latter remains well below recent highs and continues to be broadly out of favour with investors. But this could quickly change if gold continues to push higher and the gold : silver ratio (the price of one ounce of gold divided by one ounce of silver) continues to rise. It’s currently trading around 80 which is close to a 10-year high. This suggests that it should correct lower, although this could come as easily from a fall in gold as a rally in silver.
 
Key events

Monday -             Chinese Spring Festival; German Bundesbank Monthly Report; US Presidents’ Day - partial holiday

Tuesday -             Chinese Spring Festival; Reserve Bank of Australia Monetary Policy Minutes; German/Euro zone ZEW Economic Sentiment survey; Bank of England Inflation Report Hearings; Eurogroup meetings

Wednesday -     Chinese Spring Festival; French, German and Euro zone Flash Manufacturing and Services PMIs; UK Average Earnings, Unemployment Rate, Claimant Count and Public Sector Net Borrowing; ECOFIN meetings; US Existing Home Sales, FOMC Meeting Minutes

Thursday -           German Ifo Business Climate survey; UK Second Estimate GDP; ECB Monetary Policy Meeting Accounts; Canadian Retail Sales; US Crude Oil Inventories

Friday -                 German Final GDP; Euro zone Final CPI; Chinese CB Leading Index.   

Corporate earnings releases include Anglo American, Barclays, BAE, BHP Billiton, Centrica, Glencore, Home Depot, HSBC, Lloyds, Reckitt Benckiser, Royal Bank of Scotland and Wal-Mart.  

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