The Week In Review

4/13/18

Stocks slipped on Friday, ending a positive week on a disappointing note, as some geopolitical angst prompted investors to take some money off the table ahead of the weekend. The S&P 500 declined 0.3%, the Nasdaq Composite lost 0.5%, and the Dow Jones Industrial Average dropped 0.5% -- trimming their gains for the week to 1.8%-2.8%.

The major averages started the session modestly higher following better-than-expected first quarter earnings results from financial giants JPMorgan Chase (JPM 110.30, -3.07, -2.7%), Wells Fargo (WFC 50.89, -1.81, -3.4%), and Citigroup (C 71.01, -1.12, -1.6%). However, after a short stint in the green, the financial sector moved lower, bringing the broader market with it. Volatility picked up in the final stretch, with the major averages dropping to new lows before bouncing back, as investors contemplated the likelihood of a U.S.-led strike on Syria over the weekend.

President Trump has promised that the U.S. will be striking the Syrian government, which is accused of carrying out a chemical attack against the rebel-held town of Douma last Saturday, but the president has intentionally made the timing of the attack unclear. Adding to the uncertainty, an attack would likely put the U.S. at odds with Russia, who supports Syrian President Bashar al-Assad and has vowed to shoot down any missiles fired at Syria.

The energy sector (+1.1%) helped keep losses in check on Friday, extending its weekly gain to 6.0%, as oil prices rallied for the fifth day in a row. West Texas Intermediate crude futures jumped 0.3% to $67.26 per barrel -- their best level in more than three years -- benefiting, once again, from the uncertainty surrounding the oil-rich Middle East. The utilities (+0.7%), consumer staples (+0.5%), and real estate (+0.5%) sectors also advanced, but the seven remaining groups finished in the red.

Unsurprisingly, the financial sector (-1.6%) finished at the bottom of the sector standings following the negative reaction to the big bank earnings. The consumer discretionary space (-0.6%) also underperformed, but no other group lost more than 0.3%. Within the top-weighted technology space (-0.3%), chipmaker Broadcom (AVGO 246.94, +7.51) outperformed, adding 3.1%, following news that the company's board has authorized the repurchase of up to $12 billion of common stock.

In the bond market, U.S. Treasuries finished Friday mixed, flattening the 2s10s spread to 45 basis points -- its lowest level since 2007. The yield on the benchmark 10-yr Treasury note slipped one basis point to 2.82%, while the yield on the 2-yr Treasury note climbed two basis points to 2.37%.

Reviewing Friday's economic data, which was limited to the preliminary reading of the University of Michigan Consumer Sentiment Index for April and the Job Openings and Labor Turnover Survey for February:

  • The preliminary reading of the University of Michigan Consumer Sentiment Index for April declined to 97.8 (Briefing.com consensus 100.6) from 101.4 in March.
    • The key takeaway from the report is that the monthly drop was due to worries about trade policies and expectations for rising interest rates.
  • The February Job Openings and Labor Turnover Survey showed that job openings decreased to 6.052 million from a revised 6.228 million (from 6.312 million) in January.

On Monday, investors will receive Retail Sales for March, the Empire State Manufacturing Survey for April, Business Inventories for February, and the NAHB Housing Market Index for April.

  • Nasdaq Composite: +2.9% YTD
  • Russell 2000: +0.9% YTD
  • S&P 500: -0.7% YTD
  • Dow Jones Industrial Average: -1.5% YTD

Week In Review: Light Volume Overshadows Gains

Wall Street had a good week in terms of gains, but volume was light, pointing to a lack of conviction among investors -- who spent the week digesting a steady stream of headlines. The tech-heavy Nasdaq Composite led the major indices higher, adding 2.8%, while the S&P 500 and the Dow Jones Industrial Average advanced 2.0% and 1.8%, respectively.

The stock market began the week on a positive note following weekend interviews from several White House officials, including Treasury Secretary Steven Mnuchin, that helped to alleviate fears that the U.S. is barreling towards a tit-for-tat trade war with China. Chinese President Xi Jinping helped further improve investor sentiment with a speech at the Boao Forum on Tuesday, saying that he plans to "significantly" cut tariffs on imported automobiles, reduce duties on other imported goods, and improve the intellectual property rights of foreign firms.

Moving to the Middle East, geopolitical tensions were heightened following a suspected chemical attack from the Syrian government on the rebel-held town of Douma that killed at least 40 people over the weekend. The situation escalated even further on Wednesday morning when Russia, which supports Syrian President Bashar al-Assad, warned that it would shoot down any missiles fired at Syria -- to which U.S. President Donald Trump replied "get ready Russia, because they will be coming."

As of this writing, the U.S. has yet to strike the Syrian government, but it could happen at any moment. The attack was first thought to be imminent, but President Trump muddled that belief on Thursday by tweeting that it could happen "very soon or not so soon at all!"

In addition to the situation in Syria, a missile attack aimed at Saudi Arabia by pro-Iranian rebels in Yemen served to further escalate tensions in the region. Saudi air defense forces intercepted one missile over the capital Riyadh on Wednesday, while two others were intercepted over the southern areas of Jazan and Najran.

With all the concerning headlines out of the oil-rich Middle East, traders pushed oil prices substantially higher this week, betting that the tensions will eventually lead to a slowdown in production. West Texas Intermediate crude futures surged 8.4% to $67.26 per barrel, closing Friday at their highest level in more than three years. The S&P 500's energy sector benefited from the jump in oil prices, finishing at the top of the week's sector standings by a comfortable margin; the group added 6.0%.

In Washington, Facebook (FB) CEO Mark Zuckerberg testified on Capitol Hill this week, answering questions regarding the company's Cambridge Analytica data scandal and Russia's alleged use of Facebook to influence the 2016 U.S. presidential election. Mr. Zuckerberg was grilled for 10 hours by nearly 100 lawmakers, but the market seemed satisfied with his answers. Facebook shares climbed 5.3% over the two days of testimony, eventually finishing the week with a gain of 4.7%.

On Friday, big banks kicked off the first quarter earnings season, with JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) all beating profit estimates on in-line revenues. However, shares of the three lenders, and the broader financial sector, sold off in the wake of the reports. The financial sector settled the week with a gain of 1.0%, which placed it in the middle of the sector standings. The lightly-weighted utilities and real estate groups finished at the back of the pack, losing a little more than 1.0% apiece.

Investors received the minutes from the March FOMC meeting this week, but the report contained few surprises. Some key inflationary data was also released this week -- namely the CPI readings for March -- but was met with a largely muted response from the market. In short, the consumer prices report showed a firming (though not scary) inflation trend that will keep the Federal Reserve wedded to its tightening bias and its belief that at least two more rate hikes are warranted this year.

The CME FedWatch Tool still anticipates that the next rate hike will occur at the June FOMC meeting with an implied probability of 95.0% (up from 85.2% last week). The market also still believes there will be a total of three rate hikes in 2018, but the chances for a fourth hike increased to 36.8% (from 26.3% last week).

 

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