TRADING THE WEEK: Geopolitics Looms Large
All eyes will be looking towards Washington this week as tensions continue to grow as the US and China move military assets towards North Korea to dissuade the ‘hermit kingdom’ from further developing its nuclear arms program.
These developments likely will only add to investors and consumers’ confusion regarding the market’s direction as the U.S. equities market has seen a decrease in volatility.
“With healthcare reform not in sight and tax reform not even on the agenda, we will turn our focus on earnings,” said Larry Peruzzi, managing director, international equities sales/trading at Mischler Financial Group.”The stalled Trump rally has left many equities at lofty valuations, and we will need to see first quarter earnings justify the valuations.”
As the earnings season begins next week, the questions come down to whether companies have faith in the economic environment, he added.
From a global perspective, Richard Turnill, Global Chief Investment Strategist at BlackRock Investment Institute believes that reflation trade— overweighting cyclical equities— has room to run, especially outside the U.S.
“We see global yields rising further but within limits: The U.S. Federal Reserve is likely to raise interest rates only gradually, and structural dynamics such as aging populations keep us in a low-return world,” he noted in a recent research bulletin. “We believe investors need to go beyond broad equity and bond exposures to diversify portfolios in this environment and include factor-based allocations and alternatives.”
Turnill also cautioned that sharp increases in sentiment-based indicators might fail to translate into hard data such as corporate investment.
“In the U.S., the anti-growth part of President Donald Trump’s agenda (protectionism) could win out over the pro-growth part (deregulation and tax cuts),” he wrote. “Any shift in expectations toward a faster pace of Fed rate rises could spook markets.”
The weaker March employment report may have the Fed willing to pause its plans to raise interest rates, according to Peruzzi.
“We will need more data points, so CPI and PPI numbers will take on more importance,” he said. “The Fed’s beige book, which the Fed is releasing on Wednesday, will give us a glimpse. If we get inflationary CPI and PPI data together with a weaker beige book, the earning the market will face tremendous pressure.”
Although the market has been resilient, Peruzzi suggested that investors keep their eyes on the price of gold for the near future.
“The recent rally has undertones of a flight to safety,” he explained.
This Week’s U.S. Economic Indicators of Interest:
|Monday||3-Year Note, 10-Year Note, and 30-Year Bond Settlement
Empire State Manufacturing
Housing Market Index
4-Week, 3-Month, and 6-Month Bill Announcement
Ester George Speaks
4-Week Bill Auction
|Wednesday||MBA Mortgage Applications
Eric Rosengren Speaks
|Thursday||Weekly Bill Settlement
Jerome Powell Speaks
Philadelphia Fed Business Outlook Survey
EIA Natural Gas Report
3-Month, 6-Month, and 52-Week Bill Announcement
2-Year FRN Note Announcement
2-Year Note Announcement
5-Year and 7-Year Note Announcement
5-Year TIPS Auction
Fed Balance Sheet
|Friday||Neel Kashkari Speaks
PMI Composite Flash
Existing Home Sales
Baker-Hughes Rig Count
August brings more senior level changes on the sell side.
Traders say the Fed has limited ability to raise interest rates now.
Strong economic and earning reports keep investors re-investing.
Traders look towards employment data to goose interest in placid markets.
Traders watch for FOMC and profit reports to break summer doldrums.