With Dow touching 22,000, rough second half approaches
Five big themes likely to dominate thinking of investors and traders in the coming week
1. August angst
With the Dow Jones Industrial Average touching 22,000 in the past week, some investors and traders are bracing for a rocky second half of 2017. The August through October time frame is the only three-month period to have a negative average return going back to 1928, according to Bank of America/Merrill Lynch.
Some US stock market internal measures are showing signs of rally fatigue, as the number of new stocks striking 52-week lows on the New York Stock Exchange and Nasdaq has risen for seven straight days while the number marking fresh highs has declined in five of the past seven sessions. While new highs still outnumber new lows, they do so by the slimmest margin in about a month and stand at roughly a quarter of the 200-day moving average difference between the two.
A similar dynamic is evident in the recent shift in the number of stocks advancing versus those declining on a daily basis. After a long period when gainers broadly outnumbered decliners, the table has turned in the last two weeks. On average over the past 10 days, the number of stocks falling has outnumbered those rising by the widest margin in four months.
2. Weak dollar, strong stocks
Not so long ago, some investors were worried that a strengthening dollar, as the US Federal Reserve raised interest rates, would drive the long rally in global stocks into the sand. In fact an 8% fall since May in the greenback against a basket of other currencies has coincided with ever more record highs in MSCI’s All-Country World stocks index. While the fall in the dollar index also happened alongside a reduction in expectations of more Fed rate hikes, many analysts say the dollar weakness does not reflect concerns over the US economy or over the uncertainty emanating from President Donald Trump’s White House. Instead, it reflects the relatively loose monetary conditions and confidence to invest in higher-yielding assets that could see the “risk-on” stocks rally maintained for a while yet.
3. Asian Small-Caps struggle
Even as Asian main stock markets bask in the glow of improving earnings estimates and scale new peaks, the region’s small-cap markets have been sold off in quick succession. This week, it was Japan’s Mothers start-up market .MTHR sinking to fresh lows and marking a loss of almost 10% from a one-year peak hit in June.
Hong Kong’s small-cap Growth Enterprise Market .SPHKGEM has been under pressure for weeks and China’s tech-heavy start-up board index ChiNext .CHINEXTP has likewise been sliding on worries about growth prospects and valuations of technology firms. The broader stock markets have so far not seen a spillover, and MSCI’s Asia index has been on a sustained uptrend. These markets have been fairly correlated with Nasdaq in the past. If global stock markets succumb, earnings growth and rising currencies may not insulate Asian stock markets. Researchers at MSCI point out that the first signs of stress in US mortgage markets in 2007 triggered liquidity needs in multi-strategy funds which then were forced to unwind equity positions. The first to feel the hit were small-caps.
4. Tech that
Inflows this year into tech stocks globally are running second only to the rush into EM debt, according to data from EPFR and Bank of America Merrill Lynch. Surprisingly strong quarterly results from Apple and hopes of a blockbuster launch of the 10th anniversary iteration of the game-changing iPhone lifted its shares to a record high. The tech behemoth is now worth more than $800 billion and potentially on its way to becoming the world’s first $1 trillion company.
In Asia, the tech sector, led by Samsung Electronics, is at the forefront of earnings upgrades. That, along with the sweet spot that tech is in as a beneficiary of low rates, global growth and disruption underway across industries from retail to banking, has ensured that tech stocks are the best performers by some distance across each of the world’s major market regions and the gap with sectors such as energy is particularly wide. Slowing inflows into the sector over the past week, as BofA-ML points out, could be the first signs that investors are keen on banking some profits.
5. Resilient rand
With South African President Jacob Zuma facing the ninth no-confidence motion of his career on Aug. 8, the rand and other markets are remarkably resilient, with the currency near three-week highs against the dollar and local rand-denominated stocks at record highs. Five-year CDS near 2-1/2-year lows, according to IHS Markit. If passed, the motion would require the cabinet to step down along with Zuma. While Zuma is unpopular with investors and citizens alike, it would add political turmoil to the mix for South Africa, which is in recession and has suffered a ratings downgrade to junk and seen joblessness soar to 14-year highs.
One reason for market calm is that the dollar is at 16-month lows – a plus for the deficit-ridden South African economy – and second, the scandal-prone leader is likely to survive the vote as usual. There is potential for a surprise with the parliament speaker allowed to decide if the motion can be held under a secret ballot. The motion needs a simple majority to pass but this would still be unlikely, given it would need a fifth of the ruling ANC Party’s MPs to vote against Zuma, said John Ashbourne of Capital Economics.