Market Direction Week of February 3, 2019©

Market Direction:BULLISH alert issued 1/10/2019

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Last Week Review: The first month of the year finished on a high note, with stocks advancing for the week and the S&P 500 recording the strongest January gain since 1987. The main catalysts for the rally were stronger-than-expected earnings reports from a number of companies and a dovish stance from the Federal Reserve. The Federal Open Market Committee (FOMC) kept rates steady, as anticipated, but removed language from its statement about further gradual rate increases in light of the global economic slowdown and muted inflation pressures. The willingness to be patient while assessing economic conditions, in combination with the flexibility highlighted in adjusting the Fed's balance-sheet policy, was perceived by investors as a policy shift, and resulted in the U.S. dollar selling off and bonds rising. The action-packed week ended with January's jobs report, which points to a robust labor market and wage growth that can support continued consumer spending without driving a spike in inflation. While news and data last week were broadly positive, we expect a more balanced mix as we progress through the latter stage of this expansion.

This week in Brexit news: responding to pressures from Parliament, UK Prime Minister Theresa May issued a modest threat to EU leaders saying that chaos would unfold in the event of a no-deal (hard) Brexit. Success on this new ploy would give credence to the idea that the EU has as much to lose in this scenario as the UK does. But EU leaders seem to be calling her bluff, stating emphatically that the current proposal is “non-negotiable”. So while time is running out and the two sides are not getting any closer together, an extension of Article 50 (the section of the Treaty of Lisbon that gives a country 2 years to exit the European Union) is still a 3rd possibility.

On Wednesday (1/30) & Thursday (1/31) Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer met with Chinese trade officials in Washington. Secretary Mnuchin said the US could drop proposed tariff increases (scheduled for 3/1) if China offers sufficient concessions. This is a seemingly contradictory perspective from within the Trump organization, since last week when Commerce Secretary Wilbur Ross said Washington and Beijing were “miles and miles apart on a new deal”. President Trump also said this week’s negotiations made “tremendous progress”, but despite mounting pressure from more than 200 trade associations, also said no deal would be made until he and Chinese President Xi meet again in the near future.

How the market finished last week, the S&P 500 up 1.6%, the Nasdaq up 1.4%, and the Dow up 1.3%.

This Week: As expected, the Federal Open Market Committee (FOMC) voted to leave interest rates unchanged this month. Changes in the policy statement took on a more dovish tone and implied that we may not get any more rate hikes this year; essentially what the futures markets have been telling us all along.

The SPX gaining nearly 8% in just the month of January, bullishness may be reaching near-term exhaustion, as there is significant disagreement in the indicators this week. Next week brings a relatively light economic calendar but with earnings season only about half over, a festering border wall battle and geopolitical risks, next week looks like another news/earnings driven market.

In the UK, investors have a flurry of trading statements, plus quarterly earnings from corporate giants BP and GlaxoSmithKline. Key economic events include a US non-manufacturing purchasing managers index (PMI), the UK services PMI and an Reserve Bank of Australia (RBA) policy statement.

Economic Calendar: Factor Orders (2/4), ISM Services Index (2/5), Productivity and Cost Report (2/6), Consumer Credit (2/7), Wholesale Inventory Report (2/8)

Some of the major earnings announcements on deck: GOOGL, GILD, SNAP, DIS, GM.

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