1. Running of the Bulls
Last week’s chop in equity markets can easily discourage buyers as memory of the prior week’s 2.5% gain fades. But we believe the fundamentals and technicals are aligning for a push higher. Volume was light as traders and investors awaited news from the U.S and China trade talks in Washington. There is no confirmation behind Thursday’s rumor that China will slash the trade surplus by $200 billion, but the White House said this morning they will not impose tariffs on China. Treasury Secretary Mnuchin added, “the trade war is on hold for now”, and most importantly, China said they will ramp up imports of agricultural and energy products. The S&P held ground well while it consolidated last week in the face of rising Treasury yields. One wild card from the trade talks is a potential agreement on Treasury purchases. Though there have not been any rumors of such with China, 2’s 5’s and 7-year Notes will be auctioned this week. A relief from rising yields would surely become another bullish catalyst. One small headwind tonight will be the story 60 Minutes plans to run on Google, however, we believe this is likely fluff.
On a technical basis, it was only two and a half weeks ago when the S&P held its third battle with the 200-day moving average. Each one incurred less volume, signaling less selling. The sharp move higher through May 14th broke out above trend line resistance from the all-time highs. This move has also laid the ground work for a bull-flag and last week’s quiet consolidation is playing that out. Lastly, the Russell 2000 not only reached a record last week, it closed upon such. The broader market is signaling it wants to move higher and considering the fundamental developments over the weekend coupled with such constructive technicals, this week is go-time.
2. The Fed
This is yet another week jam-packed with Fed speak. The usual suspects are on the docket. For instance, Monday brings Atlanta, Philadelphia and then Minneapolis Fed Presidents Bostic (11:15 am CT), Harker (1:05) and Kashkari (4:30 pm CT). On Wednesday, the Minutes from the Fed meeting earlier this month are released at 1:00 pm CT. However, the week really culminates with Friday’s speech from Fed Chair Powell. The treasury and currency markets find themselves at an important crossroad despite slacking economic data. While the Minutes will be key, Powell might help answer some of the most pressing questions; what recent misses on Wage Growth, CPI and arguably Retail Sales this month mean for the path of hikes this year. PMI data is due Wednesday and Durable Goods on Friday ahead of Powell. A June rate hike is essentially 100% priced in.
3. The Euro
The Euro closed last week at the lowest level since the week of December 4. Poor data, demand for the dollar and uncertainty surrounding Italy have all weighed on the single currency. On Friday night, the Five Star Movement and the League struck a German-style deal to bring a populist government to Italy. The deal should bring some calm to Italian stocks and the euro. This week we look to regional and Eurozone PMIs on Wednesday and German GDP. Additionally, the Minutes from the April ECB Meeting will be released on Thursday morning. German Ifo Business Climate data is due on Friday, April’s read was the worst since November 2012. All in all, the euro is reaching heightened negativity. In fact, according to the CFTC Commitment of Traders, Leveraged money has now gone net-short the Euro. There have been three instances in the last year that Leveraged money has done this; leading up to the May/June 2017 breakout, the low of the October pull back and in December just before the euro broke out to new swing highs. All things considered, this is not a crowded trade that one wants to join; the risk is to the upside and our next major three-star support comes in at 1.1735.