Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Focus Turns to Rates and Earnings Guidance
Once again stocks began the week with a bang and ended with a whimper. The rally inspired by good news at Netflix was dampened by concerns related to fixed income markets and lowered forecasts from one of the world largest chip companies, Taiwan Semiconductor (TSM). Netflix’s subscriber growth jumped 50% year over year, which helped offset investor worries regarding its rapid debt accumulation of $4.7 billion YoY, or 29% of expected 2018 revenues. Following the release, shares of the company quickly added about 9.9% in trade on Tuesday – but just barely set a new high.
There seemed to be some angst developing in the broader technology markets leading up to trade on Thursday. At that time, TSM revealed that it had to cut its forecasts because of weakness in iPhone sales at Apple – which shouldn’t surprise anyone. But the size of the cuts may be as much as 50% quarter on quarter – this on top of a 30% drop in Q1. I suspect that that event, combined with some shocking moves along the Treasury curve during the week, was enough to delay hopes (maybe indefinitely) of an official bottom in stocks. The Dow, along with the other major indices, finished the week with modest gains of a little over 0.5%.
The ascent in Treasury yields was impressive, as both the 2-year and 10-year yields touched on new interim highs of 2.46% and 2.95%, respectively. When the spread between those two rates fell to 41 basis points on Tuesday, Fed governor Bullard warned of an imminent inversion in the curve – which of course usually precedes a recession. Elsewhere, the dollar caught a bid (serving as the mindless safe haven). Now at 90.32, the dollar looks as if it could break out from its 3-month-old trading range. This had the metals finishing the week in mixed fashion: Gold lost 0.5% and silver gained 3.2%. Silver may also have benefitted from a few large speculators who have started to reverse some of the largest short positions on record. Oil traded lower after Trump accused OPEC of deliberate price manipulations that are at least partly responsible for the 60% increase in gas prices since the start of 2016.
It’s also worth mentioning that both the ECB and the PBoC intervened in efforts to stimulate and/or stabilize their markets. In the past week, the ECB stepped up its pace of bond purchases to about $16.7 billion (the fastest pace since November) and the PBoC cut reserve requirements by one percentage point – freeing up about $200 billion in capital for banks. The reasons for these moves are not clear. Reports have the economy in Europe “teetering,” along with a few banks there, while China may have reacted to a freefall in its equity markets during overnight trading on Tuesday. In any case, it dawns on me that it may behoove our Fed to take note that the interventions had little to no positive effect. Both stocks and bonds in each respective market surrendered most of their immediate gains by week’s end.
VP Investment Management