Global Market Analysis May 20, 2016 – Weekly Outlook
It was another exciting week in the financial markets, as investors absorbed information from the previous FOMC meeting to gauge when the next potential rate hike would take place. The S&P 500 tested lower levels at 2,025.3, closing the week slightly higher than Monday’s open at 2,056.1. Oil rallied over $2 mid-week to close at $48.56 despite trading as high as $49.29. The dollar on the other hand traded higher for most of the week (ie. EUR/USD as proxy traded lower), with Gold down about $38/ounce for the week, and 10-year Treasury Yields finishing the week up 12 basis points to 1.84%.
US Economic Data
This week the market was mainly focused on what went on behind the scenes in last month’s FOMC meeting, and ended up being largely surprised by the hawkish tone from the Fed. Despite a relatively slow first quarter, the committee noted that consumer strength resulting from a strong labour market, and low energy prices will be a key driver for growth during the latter half of 2016. Although the Fed left rates unchanged at the last meeting, certain members sensed April to be suitable for a rate hike due to lower financial market volatility, and improving economic conditions. However, the majority of the participants stated that waiting to raise the rates in June would be ideal if economic data warranted it. In terms of economic data, cost of living increased by the most since 2013 with CPI climbing 0.4% in April, compared to 0.1% in March. The recent boost seen in energy prices, and a lower US Dollar has allowed inflation to nudge closer to the Fed’s 2% goal. The EUR/USD initiated a massive late day selloff following the CPI report indicating a possible rate hike in June. In addition, the housing market in the US continues to remain solid after housing starts for the month of April increased by 73,000 units beating expectations, hinting at stronger consumer demand.
The chart below shows how well the EUR/USD, OIL, S&P and GOLD have correlated since January 2016. Intermarket analysis is key to understanding what is driving markets and at any point in time, there are different drivers. Currently, the key drivers are US economic activity and when the Fed will raise rates. This week, GOLD and the Dollar followed their inverse relationship, with the Dollar climbing and GOLD selling off. Also, the S&P 500 price action followed the movement of OIL this week.
Meanwhile, it was a quiet week for data in Europe and the EUR/USD traded with U.S. news. With the EUR/USD hitting a high price of 1.1616 on May 3rd, this week was a continuation of the selloff from that level with the EUR/USD trading as high as 1.1349 on Tuesday and as low as 1.1180 on Thursday. The May 6th commentary said, “Next week we should continue to see the EUR/USD trade lower provided we respect 1.1480 and then 1.1617”. From an Elliott Wave perspective, we are trading in a wave 3 down, targeting lower levels.
Crude oil prices saw a massive spike to start off the week and traded more than $2/barrel higher before peaking at $49.29 on Friday. The initial rally came after Goldman Sachs, previously placing a target of $20/barrel on oil, stated their new bullish price target of around $50/barrel. The investment bank believes that robust demand and declining production has led to an earlier than predicted deficit. With that said, they cautioned that a push back into $50/barrel runs the risk of bringing on new production back into the market, and hence into a surplus again. On Wednesday however, the U.S. Energy Information Administration showed crude stocks rising by 1.31 million barrels which caused prices to bottom at $48.19, and trade higher up to $48.94 prior to the FOMC minutes. In addition, reports showed that Iran’s oil exports were expected to increase by 60% in May y-o-y, adding further downward pressure to prices. Post-FOMC, the market acknowledged the Fed’s hawkish tone for a rate hike in June, hence triggering a sharp rally in the US dollar. Thus, the dollar-denominated oil led to a selloff in oil prices by about $2/barrel before reversing the losses on Thursday morning. Our Elliott Wave perspective suggests fading a move up to $50.
Gold peaked on May 2nd at 1303.8 and for the last 3 weeks has been trading lower. Gold’s stellar performance failed to continue as increasing concerns over the global economy, financial market volatility, and the Fed’s ability for further tightening have all been a major factor in adding to the metal’s gains. Gold had been rising in recent weeks as the market had only priced in a 4% chance of a rate hike in June, but this changed following the FOMC meeting minutes this week. The Fed Funds rate is now giving a 32% probability of a June hike, causing a selloff in Gold as the US dollar strengthened. Looking at Gold for the last 5 days with the EUR/USD plotted as an overlay, one can readily see the inverse relationship between Gold and the Dollar. (EUR/USD is perfectly correlated with Gold).
Finally, the S&P 500 followed Oil all week long for the most part as shown in the chart below. After FOMC, the S&P 500 traded lower into Thursday to a low of 2025.3, only to give back all of the losses on Friday, with the rally in Oil. From an Elliott Wave perspective, the S&P 500 is trading in a choppy downtrend within the downtrend channel.
Jody Samuels, Trader, Coach and Author