U.S. markets were weak throughout Wednesday’s session following Turkey’s implementation of taxes on American goods from cars to tobacco.
Turkey continues to blame the U.S. for its economic woes and imposed retaliatory tariffs on U.S. products after the White House had increased its own tariff levels last week.
Gold and silver stabilized after tapping fresh 18-month lows while copper fell and is approaching late July lows.
Potential for contagion in other emerging markets along with possible currency wars push volatility to new heights.
The Russell 2000 sank 1.3% following the backtest to 1,663 and close below the 50-day moving average. July support is at 1,660-1,650 on continued weakness.
The Nasdaq stumbled 1.2% after testing an intraday low of 7,732. Fresh support at 7,750-7,700 and the 50-day moving average held with a close below the latter being a continued bearish development.
The S&P 500 tanked 0.8% after trading to a low of 2,802.
The index held major and mid-July support at 2,800 with a close below 2,790 and the 50-day moving average being a bearish development.
The Dow dropped 0.5% after tumbling a low of 24,965.
The blue-chips held major and early July support at 25,000 and the 50-day moving average with risk to 24,800-24,600 and the 200-day moving average on a close below this level.
Utilities and Real Estate were sector leaders after rising 0.9%. Consumer Staples added 0.4% to round out the winners.
Energy got hammered after falling 3.5% and was easily the weakest sector. Materials and Communication Services were hit with losses of 1.6% and 1.4%.
Global Economy – European markets were weak on worries the financial turmoil in Turkey will lead to slower economic growth throughout the world.
France’s CAC 40 fell 1.8% and Germany’s DAX 30 declined 1.6%. UK’s FTSE 100 dropped 1.5% and the Stoxx 600 Europe sank 1.4%.
The Belgium20 gave back 1.3%.
UK July CPI was unchanged and rose 2.5% year-over-year, matching expectations. The July core CPI rose 1.9% year-over-year, also matching forecasts.
Asian markets were mostly lower with South Korea’s Kospi closed for a holiday.
China’s Shanghai plummeted 2.1% and Hong Kong’s Hang Seng dropped 1.6%.
Japan’s Nikkei fell 0.7% while Australia’s S&P/ASX 200 gained 0.5%.
China July home prices rose 1.21%, the largest increase in 22 months.
MBA Mortgage Applications were down 2% for the week ending August 10th, in addition to a 3.3% drop in the purchase index and a flat reading on the refinancing index.
The average 30-year fixed mortgage rate sank 3 basis points to 4.81%.
Retail Sales rose 0.5% in July, with the ex-auto component up 0.6%, easily topping estimates of 0.1% and 0.4% for the month. Specifically, auto sales climbed 0.2% while gas station sales were up 0.8%.
Building materials were flat. Non-store retailer sales were up 0.8%. Furniture sales fell 0.5%. Clothing sales jumped 1.3% and miscellaneous sales rose 0.7%.
Sporting goods sales sank 1.7% while health and personal care sales declined 0.4%.
Productivity grew at a 2.9% pace in Q2, topping estimates of 2.5%. Unit labor costs were down 0.9% versus expectations for a dip of 0.2%.
A deeper look at the numbers revealed output rose at a 4.8% Q2 rate versus 2.6%, with employee hours up 1.9% from 2.3%.
Compensation per hour rose 2% from 3.7%. Real compensation increased 0.3% from 0.2%. The price deflator jumped 3.5% from 1.8%.
On a 12-month basis, productivity was up 1.3% year-over-year versus 1%, with Q2 unit labor costs running at a 1.9% year-over-year clip versus 2%.
The Empire State Manufacturing Survey for August checked in at 25.6, topping forecasts of 20.
The employment component fell to 13.1 from 17.2 while the workweek improved to 8.9 from 5.6. New orders fell to 17.1 from 18.2. Prices paid grew to 45.2 from 42.7, with prices received falling to 20 from 22.2.
The 6-month activity index rose to 34.8 from 31.1, with employment dropping to 18 from 24.2, new orders at 36 from 37.2, and capital spending jumping to 26.7 from 17.1.
The 6-month outlook on prices paid was higher at 53.3 from 48.7, with prices received falling to 26.7 from 28.2.
Industrial Production rose 0.1% in July, with the capacity utilization rate steady at 78.1%. Estimates were for a gain of 0.3% with the latter at 78.2%.
Manufacturing production rose 0.3%, with motor vehicles up 0.9%.
Machinery production rose 0.6% while computer and electronics production were up 1.3%. Utility production declined 0.5% and mining slid 0.3%.
The August Housing Market Index came in at 67, just below forecasts of 68.
Declines were posted in all three components with the single family sales index sliding to 73; the future sales index declining to 72; and the index of prospective buyer traffic off 2 points to 49.
Despite strong demand, builders are worried over affordability issues stemming from building costs, labor shortages and a lack of building sites.
August Atlantic Fed Business Inflation Expectations were up 2.1%, year-over-year.
June Business Inventories were up 0.1%, matching expectations, with shipments rising 0.7%.
Market Sentiment – St Louis Fed James Bullard doesn’t see systemic fallout from Turkey, adding there are special factors in Turkey, but he doesn’t believe they will lead to generalized contagion at this point.
Bullard is not a voter on the Fed this year.
The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 2-session slide after trading to a high of $121.13. Fresh resistance at $121-$121.25 held with a close above $121.50 being a continued bullish development.
Prior support is at $120.25-$120 on the close back above the 50/200-day moving averages.
Market Analysis – The Spider S&P 500 ETF (SPY) fell for the 5th-time in 6 sessions with Wednesday’s low tapping $280.16.
Upper support at $280-$279.50 held with a move below the latter getting $278.50-$278 and the 50-day moving average in play.
Lowered resistance is at $282-$282.50 with a move back above the latter signaling a possible short-term bottom.
RSI has been in a downtrend and is approaching support at 50.
A move below this level would get 45-40 and June lows in play. Resistance is at 55-60.
The Utilities Select Spider (XLU) extended its winning streak to 3-straight sessions after trading to a high of $53.98. Fresh resistance at $54-$54.50 with a close above the latter being a continued bullish development.
The 52-week peak is at $57.23.
The 50-day moving average cleared the 200-day moving average earlier this month and a development we said to watch for in mid-July.
This formed a golden cross and is typically a bullish technical pattern for higher highs.
Near-term support is at $53.25-$52.75. A close below $52.50 would signal a short-term top.
RSI is back in a slight uptrend with resistance at 65-70. A move above the latter could lead to a run towards 75-80 and early July highs.
Existing Position Update
Health care stocks are slightly lower – closing near highs.
Real Estate rallied in wake of Dow losing more than 100 points.
Info tech lost less than 1% of value.
Don’t forget roll over is tomorrow.
We are allocating the portfolio as follows:
33% in XLV closed on Wednesday at 89.93
33% in XLRE closed on Wednesday at 33.34
33% in XLK closed on Wednesday at 72.84
Option Traders… the following regular MONTHLY options meet our criteria:
XLV – DEC 85 CALLS (Expiration Date December 21, 2018)
XLRE – NOV 32 CALLS (Expiration Date November 16, 2018)
XLK – DEC 70 CALLS (Expiration Date December 21, 2018)
All the best,
Roger Scott.