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The S&P 500 gained a solid 2.03% on Friday, to close at 1,906.90, after Bank of Japan Governor Haruhiko Kuroda told Bloomberg in Davos that the Bank of Japan
(BOJ) is prepared to expand bond purchases if necessary to achieve its 2% inflation target. Kuroda’s comment, along with similar comments from European Central Bank
(ECB) President Mario Draghi on Thursday, sent the WTI crude oil price soaring 8.04% on Friday on short-covering, to close above $32 per barrel in New York.
According to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission
(CFTC) for the week ended January 19, hedge funds increased their net long positions of light sweet crude oil futures, traded on the New York Mercantile Exchange (NYSE), by about 20,291 contracts, the largest weekly increase since November 3.
Separately, the Markit Flash U.S. Manufacturing Purchasing Managers' Index
(PMI) for January released on Friday morning came in at 52.7, beating the forecast of 51. The better-than-expected reading suggested that the manufacturing sentiment rebounded after hitting a 38-month low of 51.2 in December. A reading above 50 indicates expansion in the manufacturing sector.
Earlier on Thursday, the S&P 500 rallied 1.64%, to an intraday high of 1,889.85, after ECB President Mario Draghi signaled at the press conference following their Governing Council meeting in Frankfurt that the bank may provide more stimulus in March, citing the outlook for inflation had weakened “significantly.” The rally however, failed as the U.S. financial market got spooked by comments from hedge fund manager George
Soros, who runs $5.8 billion Soros Fund Management, during an interview with Bloomberg at the World Economic Forum in
Davos.
Soros claims that China’s economy is headed for a hard landing, a slump that will worsen global deflationary pressures, drag down stocks and boost U.S. government bonds. China’s economic downturn will have spillover effects on the rest of the world, he added. Soros said he is shorting the S&P 500 Index, commodity-producing countries and Asian currencies. In 1997, Soros shorted the Thai baht and triggered the Asian financial crisis, after the Thai government was forced to float the baht due to lack of foreign currency to support its currency peg to the U.S. dollar.
Earlier in the week on Tuesday, China’s National Bureau of Statistics
(NBS) said the Chinese economy grew at a 6.8% pace in the fourth-quarter, in-line with analysts' expectations. China's fourth-quarter GDP is their lowest quarterly expansion since the global financial crisis in 2009. Full-year economic growth for 2015 came in at 6.9%, the lowest since 1990. Separately, the NBS said China’s industrial production in December rose 5.9% from a year ago, while retail sales increased 11.1%, compared with forecasts of increases of 6.0% and 11.3%, respectively.
China bears were out in full force to weigh in after the release of the NBS data. According to CNBC, "Nobody knows for sure, but when we look at things that are harder numbers to fudge... our estimate is growth probably about 3.5% versus roughly 7," said Gary Shilling, president of economic research firm A. Gary Shilling and Co. Shilling models his possible GDP growth for China on measures such as rail traffic, electricity consumption, coal consumption and debt. The question now becomes whether investors should believe China’s hard data, or data from sell-side economic research boutiques.
The International Monetary Fund (IMF) added fuel to the market turmoil on Tuesday, as the fund cut its world economic growth forecasts to 3.4% in 2016 and 3.6% in 2017, down 0.2 percentage points for both years from the previous estimates made last October. The IMF said it expects China's economy to slow down to 6.3% in 2016.
According to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) for the week ended January 19, there are 142,642 short positions of S&P 500 consolidated futures, traded on the Chicago Mercantile Exchange (CME) by leveraged funds, an increase of 23,374 short positions from the previous week. This is compared to about 63,655 long positions, down 1,111 from the previous week. The data suggested that hedge funds increased their net short positions of S&P 500 consolidated futures by about 24,485 contracts, the largest weekly increase since September 1, where contracts of S&P 500 futures are traded in units of $250.00 x S&P 500 index.
The market uncertainty sent the yield of the 10-year U.S. Treasury Note up 3.58% to close at 2.057% on Friday, while the U.S. 2-Year Treasury Note inched up 2.71% to close at 0.873%. The yield spread between the 10-year and 2-year Treasury Notes printed at 1.18 percentage points, a level not seen since early 2008. The S&P 500 Financials sector closed down another 0.52% this week, as the yield spread narrowed and the net interest margins declined. 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, inched up 0.57% for the week, to close at 99.585 on Friday.
The S&P 500 closed at 1,906.90 on Friday, up 1.41% for the week. The best performing S&P 500 sectors for the week were Telecommunication services and Consumer discretionary, which were up 4.38% and 2.52%, respectively. The worst performing sectors for the week were Industrials and Financials, down 0.04% and 0.52%, respectively.
Technically on Wednesday, the S&P 500 retested the trendline support line of the 1,737.92 February 2014 low and bounced off at 1,812.29 in a heavy volume. The MACD line was at a 7-year low of –47.639 on Thursday, signaling a possible bottom. The S&P 500 could still be under selling pressure as long as the crude oil prices can’t break out of the lower-low chart pattern, meaning a close above $37.75 per barrel.
S&P 500 Summary: –6.7% YTD as of 01/22/16
Outperforming Sectors: Utilities +1.2% YTD, Telecommunication services +1.11% YTD, Consumer staples –2.65% YTD, Healthcare –5.9% YTD, and Consumer discretionary –6.32% YTD.
Underperforming Sectors: Information technology –6.81% YTD, Energy –7.00% YTD, Industrials –8.39% YTD, Financials –10.76% YTD, and Materials –11.23
YTD. |
