Ups and Downs. Markets relented some of their gains on Friday as renewed fears of global trade and interest rates overtook Wednesday’s euphoria. Despite the drops, equities still posted a positive week. With the midterm elections out of the way (well mostly) and one of the three major unknowns off the table, traders began to focus on the likelihood and implication of higher interest rates and a drawn-out trade war with China. Both of these pose very real headwinds to earnings and economic growth. The Federal Reserve seems determined to continue their rate hikes as there was no sign in Thursday’s policy statement of any change in direction. Additionally, the Fed speaking circuit, in which Fed governors ramp up their speaking engagements in the weeks after a policy decision, has so far featured no hints that the Fed will relent. Mortgage rates are around 4.94% versus 3.9% a year ago and the increase has already shown signs of impacting sales of homes. It is not only consumers that are impacted by the higher rates, as developers and institutional owners are also highly reliant on debt finance. The auto industry, which is also highly reliant on consumer loans, has not shown signs of a slowdown but is expected to be the next to see impacts of higher rates. Regarding global Trade, all eyes will be on the G20 summit later this month. The President and his officials have confirmed that he will be meeting China’s President Xi to discuss the ongoing tariff battle. In recent weeks, the Chinese President has expressed some interest in seeking a resolution, which is a good sign. A positive or negative result from the meeting will certainly impact the markets significantly so we can expect market volatility to continue leading up to the event.
All of the major indices gave up technical ground on Friday with the tech heavy NASDAQ 100 faring the worst in the session. For its part the NASDAQ closed below its support level at Fibonacci 7107 and its 200 day moving average. The index will get support at its round 7000 and its 6924 Fibonacci line (see chart 8 in my attached daily chartbook). The S&P500 bounced off of its 200 day moving average closing off of its session lows but below its Fibonacci support at 2793. It is in a small but critical vacuum between those two levels and breeches above or below will be critical in determining the health of the index in the short term (see chart 4 in my attached daily chartbook). The Dow Jones, despite closing below its 26110 support line, remains the technically healthiest of the indices. The Dow will continue to get support from its round 26000 level and 25754 below (see chart 6 in my attached daily chartbook). The Russell 2000 suffered a setback in its bid to regain solid footing on Friday as the index slipped -1.82% and closed below its 1567 Fibonacci support line (see chart 7 in my attached daily chartbook). The S&P, NASDAQ 100, and Russel 2000 remain risk off and the Dow is constructive. Crude oil continued its slip in Friday’s session closing below $60 a barrel. Over the weekend Saudi Arabia called for a reduction in output to provide support to the rapidly declining price of the commodity. Though OPEC did not officially change its policy, the proclamation by the world’s largest producer of crude should provide some support to crude. Bonds traded up slightly in Friday’s session causing yields to ease back a bit. Ten year yields closed at 3.18% on Friday and the bond market is closed today for Veteran’s Day.
The week ahead will feature a number of economic releases and among them will be retail sales, CPI and a number of regional Fed indicators. Earnings season is winding down but there is still plenty in store in the week ahead. This week we get a number of retail heavyweights in Walmart, Macy’s, Home Depot, and Nordstrom to name a few. See attached earnings and economic release calendars for specifics. Fed talk will continue to dominate this week’s news cycle as vice Chairman Randal Quarles will give testimony to the House Financial Services Committee and Senate Banking Committee on Wednesday and Thursday, so we can count on some more ups and downs in sessions ahead. Please call me if you have any questions.
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