- preliminary discussions to merge with Norway’s Yara International, creating the largest nitrogen fertilizer company in the world.
- The health care sector also outperformed as biotechnology stocks such as Gilead, Biogen Idec and Celgene continued recent outperformance.
- Sigma-Aldrich was the best performer in the S&P 500 as mentioned above, but other well-known names such as Nike, Micron Technology and Bed Bath & Beyond all traded higher in a down week on good earnings results.
Weaknesses
- The industrial sector was the worst performer this week. Broad-based weakness was seen across most industry groups. Concerns over the global growth outlook and a stronger U.S. dollar were the biggest contributors to the weaker performance.
- The energy sector was also under pressure as the sentiment around weaker oil prices did not improve.
- CarMax was the worst performer in the S&P 500 this week, falling by 11.33 percent. The company reported disappointing earnings, citing customer purchasing preference for new cars versus used cars.
Opportunities
- The Federal Reserve remains accommodative and other global central banks even more so. This should prove as a strong tailwind for equities.
- The U.S. economy is currently a bright spot in the developed world, potentially allowing money to funnel back into the U.S. equity market.
- The path of least resistance for the market appears higher as this “classic” bull market phase of grinding higher with lower volatility remains intact for now.
Threats
- Volatility has been remarkably low and this bull market has been an abnormally smooth ride. This calmness won’t last forever and late summer/early fall has traditionally been more volatile.
- With central banks and earnings off the agenda for next week, the focus will likely be on geopolitical risks.
- Geopolitical tensions remain high, and while the market has been able to shrug off these events so far, an escalation could be the catalyst for a long-awaited correction.
The Economy and Bond Market
Treasury yields were lower this week, but the two-year portion of the curve continues to inch higher. As seen in the chart below, short-term Treasury yields have moved consistently higher for the past six weeks or so and reflect growing speculation that the Federal Reserve is getting closer to actually raising interest rates. The market is anticipating a move from the Fed by June 2015 and this is being gradually factored into prices. On the other hand, the long end of the yield curve rallied this week, sending yields lower as equities sold off mid-week while the market had a risk-off tone.
Strengths
- Markit’s manufacturing purchasing managers’ index (PMI) in the U.S. held steady for September at a 52-month high, continuing to bode well for both the U.S. manufacturing sector and the economy overall.
- New home sales rose 18 percent in August, hitting a six-year high and keeping the idea alive that housing could be a positive economic catalyst in the months ahead.
- Truck tonnage hit a new high in August, up 4.5 percent year-over -year. This should be a good read on the health of the economy as well as activity levels.
Weaknesses
- While new home sales were solid, existing home sales were weak, falling 1.8 percent in August.
- German business confidence hit a 17-month low in September, now falling for five straight months. This weakness from Germany is a bad sign for Europe, as this country is the heart of manufacturing on the continent.
- Two-year Treasury yields continue to creep higher, implying that the market is bracing itself for tighter Federal Reserve policy.
Opportunities
- Bond yields in Europe remain low, with some short-term European bond yields trading in negative territory. U.S. fixed income yields look attractive and will likely bring money flows from overseas.
- European Central Bank (ECB) president Mario Draghi continued to reiterate his pledge that monetary policy will be easy “for a long time.”
- With key global central banks back into easy policy mode and inflation trending lower in many parts of the world, the path of least resistance for bond yields likely remains down.
Threats
- The U.S. economy has some positive momentum and appears poised to continue to build on that as we move into the fall. If the economy gains strength it could force the Fed’s hand.
- The geopolitical situation remains unsettled and a flare up could occur at any time.
- The two big economic indicators to watch next week are the ISM Manufacturing Index along with nonfarm payrolls. If either positively surprises the market, the bond market will likely sell off and fears of Fed tightening could get pushed forward.
Gold Market
For the week, spot gold closed at $1,218.07 up $2.37 per ounce, or 0.19 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 2.74 percent. The U.S. Trade-Weighted Dollar Index rose 1.04 percent for the week.
| Date | Event | Survey | Actual | Prior |
|---|---|---|---|---|
| Sept 22 | HSBC China Manufacturing PMI | 50.0% | 50.5 | 50.2 |
| Sept 24 | US New Home Sales | 430K | 504K | 427K |
| Sept 25 | US Initial Jobless Claims | 296K | 293K | 281K |
| Sept 25 | US Durable Goods Orders | -18.0% | -18.2 | 22.5% |
| Sept 26 | GDP Annualized QoQ | 4.6% | 4.6% | 4.2% |
| Sept 29 | Germany CPI YoY | 0.8% | — | 0.8% |
| Sept 30 | Eurozone Core CPI YoY | 0.9% | — | 0.9% |
| Oct 01 | US ISM Manufacturing | 58.3 | — | 59.0 |
| Oct 02 | ECB Main Refinancing Rate | 0.5 | — | 0.5 |
| Oct 03 | US Change in Nonfarm Payrolls | 215K | — | 142K |
Strengths
- Gold mint sales are on the rise. This week, the United Kingdom’s Royal Mint launched an online bullion trading website for the first time. The move is aimed at accessing unsatisfied gold demand in the UK. The Mint’s gold coin sales have increased after being granted value-added-tax-free status in the UK. In the United States, gold coin sales are on the rise as well. Thus far in September, sales of American Eagle bullion gold coins have increased 84 percent from August.
- Central banks remain attracted to gold. Russia announced that its central bank has added another 9.3 tonnes of gold to its reserves. Russia has almost doubled its gold reserves since the financial crisis, being a net buyer every month since. Furthermore, European central banks have retained much more gold than they expected, unloading just 1.7 percent of the gold allowed in their agreement to limit sales.
- Roughly 50 tonnes of gold have been smuggled into India over the past ten days according to the Hindustan Times. The substantial inflows into the country stem from the seasonal demand for gold and highlight the resilient demand for the precious metal in India. Premiums for gold in India are anticipated to double to $20 per ounce over the London cash price going into October.
Weaknesses
- South African platinum mining stocks fell to their lowest level since 2013 as metal prices continue to be depressed. The three largest platinum producers have also been unable to fully recover their production from the previous five-month strike.
- Down 12 percent this quarter, commodities are poised for the biggest decline since the financial crisis. Weak global growth data from Europe and China as well as a strong dollar have created severe headwinds for the asset class.
- The ETF that tracks the Market Vectors Junior Gold Miners Index, the GDXJ, is reportedly too large to match the benchmark. Most of the fund’s holdings have exceeded 10 percent of the outstanding shares, causing the need for the ETF to rebalance to an asset mix that departs from its benchmark.
Opportunities
- The World Gold Council says that gold will rebound by the end of 2014. The confidence in gold expressed by the council is due to the strong demand from India during the current wedding season. The council is forecasting demand figures in the range of 850 to 950 tonnes.
- A recent report issued by McKinsey and Company argued that the diamond industry will likely continue to be a strong and profitable one. In the near future, demand growth will outstrip supply.
- Desjardins Capital Markets issued a report on Mandalay Resources, identifying the company as a ‘top pick.” Desjardins expects production to grow over 50 percent by 2015. Mandalay sports a P/E of just 11 relative to the S&P 500 at 18. In addition, Mandalay has a dividend yield of 3.5 percent.
Threats
- According to Goldman Sachs Group’s Jeffrey Currie, gold is set to continue its decline. He argues that gold has been supported recently by geopolitical tensions in Ukraine, which are now fading. Investors are also shying away from gold as the dollar continues to appreciate and commodities as a whole suffer. Despite gold being unable to find many buyers during its recent slump, Mohamed El-Erian, Chief Economic Adviser at Allianz, noted today in an editorial that “only brave investors would omit it from their investment portfolio given the fluid world we live in.”
- Norilsk Nickel is looking at buying palladium from the Russian Central Bank. Uncertainty surrounding the deal, which is expected to amount to 2.4 million oz., may push palladium prices lower. Furthermore, whereas it was uncertain to what degree the Russian Central bank was holding palladium, this deal now reveals that the bank holds a substantial position in the metal.
- The Central Bank of Japan (BOJ) has reportedly purchased a record amount of Japanese equities. Holding 1.5 percent of the entire Japanese equity market, the BOJ’s aggressive purchasing leads one to speculate as to whether or not the U.S. Federal Reserve is doing the same. Since higher equity prices would directly enhance the wealth effect, thus raising consumer confidence, it is not beyond reason to consider.
Energy and Natural Resources Market
Strengths
- A coalition among the U.S. and five Arab states (Saudi Arabia, United Arab Emirates, Qatar, Bahrain and Jordan) launched coordinated strikes this week on two terrorist organizations, Islamic State and the Khorasan Group. Despite concerns from global leaders about a protracted struggle, concrete action has been taken. The United Kingdom voted late in the week to participate in the strikes as well. The solidarity of the international community over the growing threat in the Middle East is a reassuring sign.
- Wunderlich Securities raised Hi-Crush Partners, a domestic frac sand producer, from “hold” to “buy” this week. Equity analyst Abhishek Sinha set a twelve-month price target of $66.
- WTI crude oil rose for the second-straight week as stronger data out of the U.S. boosted prospects for higher oil demand. The recent increase in WTI comes as a relief to the energy market, which has languished recently.
