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The S&P 500 started the week on Tuesday with a 1.65% gain, following a report that Saudi Arabia and Russia ministers agreed on an oil production freeze at the January levels if they are joined by other large producers. Qatar, Kuwait and Venezuela said later that they would join the production freeze. According to the Financial Times, Bijan
Zanganeh, Iran’s oil minister, didn’t say that the country would join the freeze but signaled that they would not give up its share of the market. The headline news first sent the WTI crude spot price skyrocketing 8.65% to an intraday high of $31.53 a barrel on Tuesday. Traders started selling after they realized that the agreement was for a production freeze, not a cut.
Comments and remarks from top U.S. Federal Reserve officials usually move financial markets and crude prices one way or the other. The Fed is now in damage-control mode as Patrick
Harker, Federal Reserve Bank of Philadelphia President, said in a speech on Tuesday at the University of Delaware that inflation could be negative in the first-quarter and Fed policy should be able to “truly normalize” in the second-half of the year, with steady growth, a low unemployment rate and price pressures starting “to assert themselves”, according to
MarketWatch.
One of the U.S. Federal Reserve's most prominent advocates of higher interest rates, James Bullard, the president of the Federal Reserve Bank of St. Louis, declared on Wednesday that it was "unwise" to move any further in light of weak inflation and global volatility, suggesting the Fed is stepping further away from plans to continue to hike rates, said Reuters.
The minutes from the Federal Open Market Committee (FOMC) meeting in January, released on Wednesday, revealed that the Fed considered changing their planned path of interest rate hikes in 2016, as tighter global financial conditions could hit the U.S. economy. Nearly 68% of economists surveyed by Bloomberg now say that the Fed’s next rate hike will be at the FOMC meeting in June. In January, only 30% of those surveyed had thought that the Fed would increase in June, with the majority believing in a March rate hike.
The Fed minutes and remarks from top Fed officials sent the yield spread between the 10-year and 2-year U.S. Treasury Notes to register at 1 percentage point on Friday, and the WTI crude price surging 10.13% for the week to close at $31.96 a barrel on Friday. The yield of the 10-year U.S. Treasury Note was down just 0.17% for the week, to close at 1.743%.
The U.S. dollar index (DXY), a weighted index of the value of the U.S. dollar relative to a basket of six major currencies, gained 0.66% for the week, to close at 96.62 on Friday. A weak Japanese yen and euro provided support to the U.S. dollar. Earlier in the week on Monday, European Central Bank (ECB) president Mario Draghi said during a hearing in front of the European Parliament’s Economic and Monetary Affairs Committee in Brussels, that the ECB wouldn’t hesitate to boost its stimulus in March if it believes recent financial-market turmoil or lower oil prices could further weigh on eurozone inflation.
Separately, the Cabinet Office of Japan said on Monday that Japan's GDP shrank an annualized 1.4% in the fourth-quarter ending December 31, following a revised 1.3% gain in the third-quarter as weakness in private consumption persists. The median estimate of 33 economists surveyed by Bloomberg was for a 0.8% decline.
According to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) for the week ended February 16, there are 146,777 short positions of S&P 500 consolidated futures, traded on the Chicago Mercantile Exchange (CME) by leveraged funds, an increase of 7,209 short positions from the previous week. This is compared to about 71,050 long positions, an increase of 3,747 from the previous week.
The data suggests that hedge funds are undecided and added both short and long positions to their holdings, resulting in an increase in net short positions of S&P 500 consolidated futures by about 3,462 contracts, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index.
The S&P 500 closed at 1,917.78 on Friday, up 2.84% for the week. The best performing S&P 500 sectors for the week were Consumer discretionary and Information technology, which were up 4.27% and 3.80%, respectively. The worst performing sectors for the week were Telecommunication services and Utilities, up 1.07% and 1.38%, respectively.
Technically, the S&P 500 closed above the 1,870 level, or the neckline of the head and shoulders chart pattern, but was unable to break out the upper trendline resistance of the symmetrical triangle chart pattern. The bearish sentiment has increased significantly, as some hawkish Fed members seem to be maintaining their plans for rate hikes. One of those is Loretta Mester, president of the Cleveland Federal Reserve, who said on Friday that economic fundamentals remain strong despite the recent tumult in financial markets that has led to rising expectations of a recession. She, however, expects the Fed to continue on a "gradual" pace of rate increases, according to CNBC.
From our technical viewpoint, the near-term head resistance for the S&P 500 is at 1,940, or the closing price on January 29 and February 1. One should be aware that there are also walls of trendline resistances between 1,940 and 1,950. A breakout of the 1,940 and 1,950 levels will confirm the double bottom, which could send the S&P 500 upward to retest the 2,000 levels.
On the other hand, the index could pull back to around the 1,775 level, or the lower trendline support of the descending broadening wedge chart, if the breakout fails. As crude oil prices continue to be coupled with the S&P 500, there could be additional selling pressure on the index as we don’t see a WTI crude oil bottom until crude prices can close and stay above $37.75 per barrel.
S&P 500 Summary: –6.17% YTD as of 02/19/16
Barclay Hedge Fund Index: –2.78% YTD
Outperforming Sectors: Telecommunication services +7.5% YTD, Utilities +6.27% YTD, Consumer staples +0.48% YTD, Industrials –3.78% YTD, and Energy –4.83% YTD.
Underperforming Sectors: Materials –6.37% YTD, Information technology –7.09% YTD, Consumer discretionary –7.1% YTD, Healthcare –8.68% YTD, and Financials –12.22%
YTD. |
