Weekly Financial Market Recap and Outlook
We had very little economic data during the week of January 7, 2008, but the news pointed to the need for the Federal Reserve to cut rates further. I'll take a look at financial market dynamics, and what I see ahead. I'll also my technical outlook for the S&P 500, gold and crude oil futures.
Market participants were pricing in larger rate-cut prospects at the January 30 Fed policy meeting due to potential fallout from depressed housing and from credit markets that still are having problems functioning smoothly. While we had some bad news from financial firms in the form of depressed earnings due to subprime problems, it looks like we are getting closer to full disclosure on subprime losses. I think this transparency can only help the economy move forward. The Fed's recent and pending rate cuts will eventually boost the economy, but for the near-term, growth is likely to be flat.
A number of Fed officials spoke last week, including Fed Chairman Ben Bernanke. While Fed officials appeared to acknowledge that further interest rate cuts would actually take place, the markets reacted negatively by the end of the week, thinking that the economy must be worse than believed. The key remarks came from Bernanke, who said additional policy easing may be necessary and that FOMC members "stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks." The use of "substantive" caused markets to lock in a belief that the next rate cut will be at least 50 basis points.
Stock Indexes
Stocks fell for the third straight week last week, hung over from recession talk and more subprime losses. Most stock indexes fell sharply on Tuesday, January 8, resulting in cumulative declines of more than 10 percent since cycle highs, indicating markets are in a true correction. A number of factors were behind the sell-off, including Treasury Secretary Henry Paulson's remarks that housing problems are not yet improving, announcements of management shake-ups at financial firms, and comments from the Boston Fed president on the severity of the housing recession. The markets did get some mid-week lift. On Thursday, Bernanke stated the Fed is ready to act "substantively" if needed, although by Friday, investors had second thoughts, focusing more on the implication that the economy is weak. The week ended down sharply on Friday, with bearish announcements from American Express and Merrill Lynch adding weakness.
Stock market woes have put upward pressure on the yen as investors pare carry trades where they use low cost funds from Japan to buy higher yielding assets. The moves were prompted by renewed subprime credit market losses by the major financial companies. Markets do not like uncertainty and nobody knows how much the banks really lost on subprime mortgages.
Looking at futures, the March S&P 500 contract managed to closed higher on Friday, ending a two-day correction. However, the contract closed below December's low at 1446. Momentum indicators, the stochastics and the relative strength index (RSI) have turned bullish, hinting that a short-term low might be in or is near. Closes above the 20-day moving average at 1460 could confirm that a low has been posted. If March renews this month's decline, the 75 percent retracement level of the 2006-2007 rally at 1374 would be my next downside target.
Interest Rates
Treasury yields fell last week, except for the long bond. For the week, the 30-year Treasury bond yield actually edged up two basis points amid growing concerns about stagflation. Traders see the Fed cutting rates to help boost economic growth, but with the result that inflation does not come down as expected. Since year-end, the 2-year Treasury note has fallen 47 basis points, while the 10-year Treasury note has slid 23 basis points. Flight to quality has been a factor for both but fears of recession have weighed more on the shorter maturity.
Projections are currently for interest rate cuts in the U.S., with rates remaining on hold and perhaps increasing in the eurozone. That led to a decline in the U.S. dollar last week. The Fed funds target rate is currently 4.25 percent, while the key rate for the European Central bank is 4 percent. Should the FOMC acquiesce to market clamor for a 50 basis- point cut, the Fed funds rate will be under that of the ECB for the first time since October 2004, when both banks had their key rates set at 2 percent.
Crude Oil
Forecasts for mild winter weather and for weak economic growth pulled crude oil prices down last week. The price for February crude oil fell $2.82 a barrel Monday, January 7, on reports this will prove to be a mild winter in the Northeast and Midwest – heavy users of heating oil. There was a mild rebound on Tuesday, and adding to upward pressure were reports of a planned attack on Nigerian oil facilities by armed militants. Despite a report on Wednesday of a sharp drawdown in inventories, prices edged down net for the day on fears of recession. Recession concerns weighed on prices on Thursday and Friday with declines of about $2 and $1 per barrel, respectively.
February crude oil futures closed lower on Friday, extending Thursday's breakout below the 20-day moving average at $94.50. From a technical point of view, that suggests a short-term top has been posted. Stochastics and the RSI remain bearish, signaling sideways to lower prices are possible. If February extends last week's decline, I see the reaction low at $89.20 as the next downside target. Closes above last Wednesday's high at $97.97 could temper the near-term bearish outlook in the market. First resistance is at $94.65, and second resistance is the 10-day moving average at $96.22. First support is at $92.31, and second support is the reaction low at $89.15.
Gold
February gold futures closed higher on Friday, extending this winter's rally. Stochastics and the RSI are overbought but remain neutral, signaling that sideways to higher prices are possible near-term. If February extends this winter's rally, Monthly resistance at $915 an ounce is the next upside target. Closes below the 10-day moving average at $869 could signal that a short-term top has been posted. First resistance is at $900, and monthly resistance is at $915. First support is the 10-day moving average at $869, followed by November's high at $855.
Financial Fundamental Reports: Week of Jan 14 – Jan 18, 2008
| Date |
CT |
Release |
For |
Actual |
|
Consensus |
Prior |
Revised |
| Jan 15 |
07:30 |
Retail Sales |
Dec |
|
|
0.1% |
1.2% |
|
| Jan 15 | 07:30 | Retail Sales ex-auto | Dec |
|
| 0.1% | 1.8% |
|
| Jan 15 | 07:30 | PPI | Dec |
|
| 0.2% | 3.2% |
|
| Jan 15 | 07:30 | Core PPI | Dec |
|
| 0.2% | 0.4% |
|
| Jan 15 | 07:30 | NY Empire State Index | Jan |
|
| 10.0 | 10.3 |
|
| Jan 15 | 09:00 | Business Inventories | Nov |
|
| 0.4% | 0.1% |
|
| Jan 16 | 07:30 | CPI | Dec |
|
| 0.2% | 0.8% |
|
| Jan 16 | 07:30 | Core CPI | Dec |
|
| 0.2% | 0.3% |
|
| Jan 16 | 08:00 | Net Foreign Purchases | Nov |
|
| NA | $114.0B |
|
| Jan 16 | 08:15 | Industrial Production | Dec |
|
| -0.1% | 0.3% |
|
| Jan 16 | 08:15 | Capacity Utilization | Dec |
|
| 81.3% | 81.5% |
|
| Jan 16 | 13:00 | Fed's Beige Book |
|
|
|
|
|
|
| Jan 17 | 07:30 | Housing Starts | Dec |
|
| 1150K | 1187K |
|
| Jan 17 | 07:30 | Building Permits | Dec |
|
| 1140K | 1162K |
|
| Jan 17 | 07:30 | Initial Claims | 01/12 |
|
| 335K | 322K |
|
| Jan 17 | 09:30 | Crude Inventories | 01/12 |
|
| NA | -6736K |
|
| Jan 17 | 11:00 | Philadelphia Fed | Jan |
|
| -1.5 | -1.6 |
|
| Jan 18 | 09:00 | Leading Indicators | Dec |
|
| -0.1% | -0.4% |
|
| Jan 18 | 09:00 | Mich Sentiment-Prel. | Jan |
|
| 74.5 | 75.5 |
|
Good luck and good trading!
Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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