Weekly look-ahead

By David Morrison  |  23/02/2018 16:58

This article looks at the week ahead for US stock indices, FX and crude oil

Summary

Last week saw the major US indices oscillate between significant support and resistance levels, but unable to break out convincingly in either direction. The minutes of the Fed’s January FOMC meeting hinted that the central bank could be more hawkish than previously forecast and this led to a sell-off in bonds and equities as the yield on the 10-year Treasury closed in on the key 3.0% level.

This week Jerome Powell, the new Federal Reserve Chairman, will testify on monetary policy in Washington. This testimony, together with his answers to questions from policymakers, should give market participants greater insight into what may give the Fed reason to either pause or continue its current programme of monetary tightening. Once again, traders will focus on US bond yields. Any pull-back in borrowing costs should spark another stock market rally. However, investors will be ready to offload equities should yields spike higher again. 

Stock indices

US stock index futures were pushing higher ahead of Friday’s US open. Yet the only thing which anyone could say with certainty about the next move for global indices was that the jury’s still out. The US majors were on course to post modest losses for the week with prices oscillating between a few significant levels. Stock indices had failed to break conclusively either to the up or downside, reflecting uncertainty amongst investors. This suggested that there was a new-found wariness of following the old tried and tested strategy of buying every dip, however modest. But by the same token, traders were not yet ready to cut their long-side exposure to equities to any appreciable degree.
But one interesting feature of last week’s trading was the number of times that rallies were curtailed by aggressive selling. This was particularly apparent on Wednesday evening following the release of minutes from the Fed’s last FOMC meeting. US equities initially shot higher as the instant takeaway suggested that the Committee was erring on the dovish side. The headline-grabbing algorithms focused in on comments from Fed members saying rates were set to rise gradually as growth picked up as there was no evidence that inflation was set to spike higher.

But this move subsequently reversed as a more in-depth parsing of the minutes suggested that the FOMC expected an acceleration in GDP growth thanks to the Trump administration’s fiscal stimulus through tax cuts and regulatory reform. Bond yields shot higher in a move which saw the 10-year Treasury yield hit a fresh four-year high above 2.95%. Analysts priced in the possibility of four 25 basis-point rate hikes this year, up from the three hikes forecast in December’s Summary of Economic Projections. This reassessment saw the Dow drop over 500 points in 90 minutes with the S&P 500 dropping by 2% over the same period.

The key levels on the S&P remain unchanged from last week. The first area of significant resistance is marked by the 50-day moving average (MA) around 2,745 while the 100-day MA offers support at 2,680. It’s also apparent that 2,700 has become a key level as bulls and bears have battled it out to engineer close above or below here for most of last week. In the current situation it would be foolhardy to make predictions about where global equities are heading based on where one index closes out at the end of a volatile week. It would also be an oversimplification which is likely to prove incorrect. Nevertheless, positive sentiment would be boosted by a weekly close above 2,700 while bears would be emboldened by a close below here and a move back towards that 100-day MA at 2,680.

FX

The US dollar managed to rally last week but, along with many other major markets, failed to break out of a recently-established trading range. The Dollar Index remained capped by resistance around 90.00 and failed to challenge support which comes in around 88.00. Similarly, the EURUSD was unable to hold above 1.2400 and the area around 1.2200 is holding as support for now. It could be that we’re in for further consolidation now given the extent of the run-up in the euro (and fall in the dollar) over the past 13 months. Certainly, investors may be wary of adding to their long euro positions ahead of the Italian general election on 4^th March 2018 and a vote amongst members of Germany’s SPD party over going into coalition with Angela Merkel’s CDU. At the same time, we could see a pick-up in volatility this week as Jerome Powell, the new Chairman of the Federal Reserve, testifies before the House of Representatives’ Financial Services Committee. Last week the dollar rallied sharply after commentators interpreted minutes from the Fed’s last FOMC meeting as being more hawkish than anticipated.

Meanwhile, the USDJPY staged a recovery last week after crashing below long-time support at 108.00 the week before. The pair rallied back up towards 108.00 (which should now be considered resistance) but was unable to break above here. The dollar subsequently retreated and another attempt to push below 106.00 can’t be ruled out.

Crude oil

Crude rallied for a second successive week in a move which saw WTI push back convincingly above $60 per barrel. Prices bounced off $58 in early February and last week they received an additional boost from the shutdown of the El Feel oilfield in Libya and an unexpectedly large drawdown in US inventories.

A look at the weekly chart (which is particularly helpful in eliminating noise) going back to 2015 helps illuminate some significant technical levels which should prove useful going forward. The area between $60 and $62 acted as resistance from April to June 2015. If WTI can now dig in above $62 then its next upside target is $66 – a level which capped oil’s advance at the end of January and the beginning of this month. Extending the weekly chart back to early 2010 highlights the technical significance of $70 which will be in buyers’ sights if they can push WTI above $66. However, US production continues to top 10 million barrels per day – its highest level in nearly forty years – while the US rig count is also on the rise. This suggests that US output could weigh on prices going forward particularly if there’s any further hint that Russia is ready to ditch the OPEC/non-OPEC output cut agreement as global oil inventories once again approach their five-year average.

Key events

Monday -             US New Home Sales
Tuesday -             Japan BOJ Core CPI; German Preliminary CPI; US Durable Goods, Wholesale Inventories, S&P Case Shiller House Price Index, Consumer Confidence
Wednesday -     Chinese Manufacturing/Non-Manufacturing PMIs; Euro zone Flash CPI; US Preliminary GDP, Chicago PMI, Pending Home Sales, Crude Oil Inventories, Fed Chairman Jerome Powell testifies before the House of Representatives’ Financial Services Committee.
Thursday -           Chinese Caixin Manufacturing PMI; Spanish, Italian, French, German, Euro zone and
UK Manufacturing PMIs, UK Net Lending; US Core PCE Price Index, Personal Spending, Unemployment Claims, Personal Income, ISM Manufacturing PMI, Total Vehicle Sales
Friday -                 German Retail Sales; UK Construction PMI; Canadian GDP; US Consumer Sentiment and Inflation Expectations.
Corporate earnings releases include Associated British Foods, Bayer AG, Best Buy, Ford Motor Co, JC Penney, London Stock Exchange, Lowe’s, Macy’s, Office Depot, priceline.com, Salesforce, Standard Chartered, Tenet Healthcare, WPP.
 
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