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New Earnings Risks

What’s in Today’s Report:

  • Why the Stronger Dollar and Commodity Prices Matter to Stocks
  • Housing Market Data Update
  • More Evidence a Rate Cut Might Be Coming

S&P futures have turned negative in pre-market trading as bond yields continue to bleed lower with the benchmark 10-yr yield hitting fresh lows in the mid-2.30% range overnight.

Economically, Chinese Industrial Profits were down -14.0% YTD, falling from -1.9% in December.

The Reserve Bank of New Zealand was the latest central bank to turn decidedly dovish overnight citing concerns about the global economy while Brexit angst also persists amid new votes in Parliament today.

The list of catalysts in the Wall Street session is a short one today with only one economic report due out: International Trade (E: -$57.4B) and just one Fed speaker later in the evening: George (7:00 p.m. ET).

That will again leave the market primarily focused on the bond market and to a lesser degree the dollar. Recession fears are front and center right now with Fed funds futures pricing in more than 80% odds of a rate cut in the next 10 months as of this writing.

Bottom line, without a rebound in yields and at least a steady dollar (a pullback would be more favorable) then it will be very difficult for stocks to mount any sort of rally today.

Tyler Richey, co-editor of Sevens Report Quoted in MarketWatch

Tyler Richey, co-editor of Sevens Report Quoted in MarketWatch on February 4, 2019.

“There have been a lot of shifting pieces in the oil market to start 2019 as a dovish [Federal Reserve], and subsequently weaker dollar, sanctions on Venezuela, and…” Read the full article here.

Weekly Market Outlook

What’s in Today’s Report:

  • Weekly Market Outlook

Futures are marginally higher this morning and global markets were mostly flat overnight after a very quiet and uneventful holiday weekend as focus turns to data this week.

Economically, Eurozone PPI was solid at 4.0% YoY, but most of the rise was due to energy prices and core inflation levels remain slow but steady in the EU.

Energy prices are notably higher this morning due to Tropical Storm Gordon’s near term threat to Gulf oil operations.

Today, focus will be on economic data early: ISM Manufacturing Index (E: 57.6) and Construction Spending (E: 0.4%) while there are no Fed speakers scheduled to speak.

Beyond data, investors will largely be focused on trade relations this week, more so with China but negotiations with Canada will also be important.

The dollar has been a good, inverse indicator for investor sentiment towards trade and it is handily higher this morning. If the dollar strength continues, it will be hard for stocks to continue last week’s gains this week.

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Valuation Update (New Target)

What’s in Today’s Report:

  • Valuation Update

Futures are slightly higher this morning after a very quiet night as global shares are edging higher after yesterday’s run to new all-time highs in several major US indexes.

Trade concerns continue to ease after yesterday’s favorable developments between the US and Mexico, leading to a further pullback in the dollar which has been the most significant tailwind for stocks over the last week.

Looking ahead to today’s session, there are a few notable economic reports due out: International Trade in Goods (E: -$69.4B), S&P Case-Shiller HPI (E: 0.2%), and Consumer Confidence (E: 126.8) but there are no Fed officials scheduled to speak.

Economic data aside, progress on trade and the subsequent decline in the dollar index have been the primary bullish influences on stocks right now, so as long as the trade situation doesn’t deteriorate today, and the dollar doesn’t materially rally, stocks should be able to continue towards new highs.

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New Highs

What’s in Today’s Report:

  • Why Stocks Hit New Highs
  • Weekly Market Preview
  • Weekly Economic Cheat Sheet

Futures are extending Friday’s gains following efforts by Chinese authorities to further strengthen the yuan.

The yuan strengthened to a one month high vs. the dollar as Chinese officials re-introduced the “Counter Cyclical Factor” in setting the daily value of the yuan.  That “factor” is widely seen as an intent to ensure yuan strength and avoid a potential breach of 7.00.  And, that support of the yuan is a potential macro positive.

The only notable econ report was German IFO Business sentiment, which beat estimates at 106.4 vs. (E) 105.4.

Today there are no notable economic reports and no important Fed speakers, so focus will remain on any trade headlines (a new trade deal with NAFTA seems imminent and that should be a mild positive on sentiment and stocks).

To read the full report Go Here

The Key to a Weaker Dollar (And Higher Stock Prices)

What’s in Today’s Report:

  • The Key to a Weaker Dollar (And Higher Stock Prices)

Futures are modestly higher following a generally quiet night of news.

U.S./China trade talks ended with no specific future date to resume negotiations, but the tone from the meeting was constructive and that’s helping sentiment.

Economically it was a quiet night as Japanese CPI slightly missed estimates while German GDP met expectations.

Today the key event to watch is the Powell speech from Jackson Hole (10:00 a.m.).  But, while that clearly has the potential to move markets, it’s widely expected that Powell will stick to the script and repeat much of what the Fed has said recently (pointing to a September rate hike and then quarterly hikes thereafter).

In addition to Powell, we also get Durable Goods Orders (E: -0.8%), but barring major surprises from either one, we can expect typically slow Friday in August trading.

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Contrarian View: Emerging Markets

Pre 7:00 Look

• Stock futures are cautiously higher today as the dollar continues to pullback on Trump’s comments about the Fed while investors have doubts about the new round of trade talks between the US and China.

• The dollar is down another 30 basis points+ this morning, extending its multi-session downtrend which should continue to act as a modest tailwind for stocks this week.

• British CBI Industrial Trends Survey was a mild miss at 7 vs. (E) 10 as Brexit concerns continues to weigh on sentiment.

• There are no economic reports or Fed speakers today.

To read the full report Go Here

Earnings Season Post Mortem & Valuation Update, May 9, 2017

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The S&P 500 has been largely “stuck” in the 2300-2400 trading range for nearly 10 weeks, despite a big non-confirmation from 10-year yields, modestly slowing economic data and political disappointment. Given that less-than-ideal context, the market has been downright resilient as the S&P 500 only fell to around 2320ish. The main reason for that resilience is earnings and valuation.

While it’s true that stocks are at a valuation “ceiling” right now, and need a new macro catalyst to materially breakout, it’s also true that given the current macro environment the downside risk on a valuation basis for the market is somewhat limited. That’s why we’re seeing such aggressive buying on dips.

Here’s the reason I say that. The Q1 earnings season was better than expected, and it’s resulted in 2018 S&P 500 EPS bumping up $1 from $135-$137 to $136-$138. At the higher end of that range, the S&P 500 is trading at 17.4X next year’s earnings. That’s high historically to be sure, but it’s not crazy given Treasury yield levels and expected macro-economic fundamentals.

However, if the S&P 500 were to drop to 2300 on a macro surprise, then the market would be trading at 16.67X 2018 earnings. In this environment (low yields, stable macro environment), that could easily be considered fairly valued.

Additionally, most analysts pencil in any help from Washington (including even a small corporate tax cut and/or a foreign profit repatriation holiday) adding a minimum of $5 to 2018 S&P 500 EPS. So, if they pass the bare minimum of expectations, it’s likely worth about $5 in earnings, and that puts 2018 earnings at $143.

At 2400, and with $143 expected earnings, the S&P 500 is trading at 16.8X 2018 earnings. Again, that is high historically, but for this market anything sub 17X will elicit buying in equities (whether it should is an open question, but that is the reality).

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Are British Elections a Bullish Gamechanger for the Pound? April 19, 2017

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The pound was the big mover on Tuesday as it surged 2.2% following PM May’s call for elections in June. (As a bit of background, May calling for snap elections means that in the next few days Parliament will be dissolved, and then there will be national elections for all Parliamentary seats over the next six weeks).

The news took markets by surprise, but it is a politically savvy move by Ms. May. Right now, in part because a swell in national pride following the official start of Brexit, PM May is very popular. Calling for elections now will capitalize on that popularity, and help her Tories (Conservatives) increase their majority in Parliament.

From an economic standpoint, however, this isn’t likely to have much of an actual effect. Like the Republicans in the US, the Tories are viewed as the “pro-business” par-ty, so there was a knee-jerk positive reaction. However, Brexit will be the major influence on the value of the pound and the British economy over the next few years, not internal politics. Besides, as we’ve seen with Republicans here in the US, just because a party has power doesn’t mean it can actually get anything done!

Bottom line, the pound has surged to multi-month highs and clearly broken resistance at 1.25, and there’s more short covering to come. But, I do not view Tuesday’s events as a bullish gamechanger for the pound or British stocks, and if anything I’d be inclined to sell the pound if it approached 1.30 vs. the dollar.

For now, though, standing on the sidelines is warranted.

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