Hello [MM_Member_Data name=’firstName’],
Banks led U.S. stock indexes, but trading action was mixed on Thursday. Utilities and consumer goods companies were among the biggest decliners.
Investors had their eye on Washington, where former FBI Director James Comey was testifying as part of a congressional investigation into Russia’s possible election meddling.
Global Economy – Moves in equity prices were constrained ahead of Thursday’s UK general election and the congressional testimony from former FBI director Comey. European stocks traded higher after the ECB was said to cut its inflation outlook through 2019 and boost its GDP forecast.
The 10-year German bund yield dropped to a 6-week low of 0.245% after Eurozone officials familiar with the matter said the ECB on Thursday will forecast CPI growth of 1.5% for 2017, 2018 and 2019, lower than a Mar forecast of 1.7% for 2017, 1.6% for 2018 and 1.7% for 2019.
German Apr factory orders fell -2.1% m/m, weaker than expectations of -0.3% m/m.
The ECB will also raise its GDP forecasts by +0.1 of a point from 2017 through 2019, according to the officials.
The Japan Apr leading index CI fell -1.2 to 104.5, stronger than expectations of -1.2 to 104.3.
The Apr coincident index rose +3.3 to 117.7, stronger than expectations of +3.1 to 117.5 and the highest in 9-1/2 years.
U.S. Economy – After spiking in the prior week, initial jobless claims came back down in the June 3 week falling 10,000 to 245,000 which is very near Econoday’s consensus for 241,000.
The 4-week average is up but only slightly, at 242,000 which is right in line with trend. Continuing claims are slightly lower, at 1.917 million in lagging data for the June 3 week with the 4-week average at 1.915 million and a new low going back to the early 1970s.
The unemployment rate for insured workers remains at 1.4 percent. There are no special factors in the report which continues to signal unusually strong demand for labor.
Market Sentiment – The Federal Open Market Committee is widely expected to raise interest rates at its June 14 meeting. The probability of a rate hike is 96%, which compares to 93% yesterday.
Technically, bonds are no longer overbought but technically appear to be heading down towards the 50 day line as expected.
The downside target is actually substantially below the 50 day line, but I believe it will take a bit of time for the long bond to revert back to the long term trend and the more likely scenario is range bound trading action, near the 50 day line.
Market Analysis – Over the last week key blue chip sectors appear to be losing the most value as investors and institutional traders focus on tech, specifically chip stocks.
Retail continues to see selling pressure and we are seeing similar selling pressure moving into the utilities and energy sector, which has massive market share and influence over the NYSE Index, which in turn has major influence over the SP 500.
Last week and first part of this week tech was distorting the overall market by moving higher while blue chips were stagnating and now tech appears to be losing momentum as well.
Without seeing major upside from the QQQ and the semiconductor sector, the overall market becomes increasingly vulnerable to downside selling pressure, which is going to cause increased selling pressure in the broader SP 500 in the coming days.
Semiconductors remain the biggest vulnerability in the overall market and I’m expecting minor corrective pressure, since 10 day RSI is now reading above 80, which tells us that chips remain overbought and the most likely scenario is a pullback agains the main trend.
If chips begin weakening, it will spill over into the NASDAQ, which will impact the overall market, since the market share in both the semiconductors and overall tech sectors is very strong in relationship to the overall market.
Don’t expect strong upside momentum from the market, since there’s too much overhead pressure, which will negatively impact the market and cause further congestion or alternatively minor corrective pressure.
Look for volatility [VIX Index] to spike over the next few weeks, which is likely scenario during minor selling pressure from the overall stock market.
I will update you on Sunday as usual and don’t expect stocks to rally too much before seeing some degree of consolidation or downside pressure, especially if Geo Political pressure heats up in the next few weeks, which is likely.
All the best,
Roger Scott