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Market Overview

Dow Jones Sets Fifth Straight Record High; 22,000 In Focus

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The Dow’s meteoric rise continued on Tuesday, with the benchmark index setting its fifth consecutive record high on the heels of upbeat corporate earnings.

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Dow 30 Doesn’t Let Up

The Dow Jones Industrial Average added 72.80 points, or 0.3%, to close at 21,963.92. The index came within nine points of 22,000, a milestone that is becoming more likely by the day.

The Dow also rose on Monday, capping off one of its strongest months of the year. The index rose 2.5% in July, boosting its year-to-date return to nearly 11%.

Large-cap stocks were no slouch, either, with the S&P 500 Index adding 1.9% during the month. Meanwhile, rebounding tech shares lifted the Nasdaq to a 3.4% monthly return.

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Apple Jumps After-Hours as Earnings Beat

Dow blue-chip and world’s most valuable company Apple Inc. (NASDAQ: AAPL) reported better than expected earnings on Tuesday, sending the stock to new record highs.

The Cupertino-based tech giant posted adjusted per-share earnings of $1.67, well ahead of expectations for $1.57. Revenues climbed to $45.4 billion on the quarter, exceeding expectations of $44.89 billion.

Apple shares were down at the start of the week amid news of an expected delay in delivering the iPhone 8 to store shelves. The next-gen iPhone is expected to be Apple’s most expensive yet. According to various reports, the asking price will start at $1,200.00.

Dollar Woes Continue

The U.S. dollar (DXY) hastened its decline at the start of the week, falling to fresh two-and-a-half year lows against a basket of major currencies. Both the euro and British pound notched solid gains as a result. On Monday, the euro climbed above $1.18 U.S. for the first time since 2014, while the pound re-took $1.32 for the first time since September.

Both currencies weakened on Tuesday. In the case of the euro, the gains may have been too much, too soon.  The common currency remains in overbought territory, according to the daily RSI.

Dow Jones Industrial Average

 

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Analysis

5 Things to Watch Next Week: Earnings Bonanza, Bitcoin in Danger Zone, Trump’s Tax Reform, The Dollar Rally, The US Yield Curve

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1.            $4.5 Trillion in Market Cap Reporting

So far, the US earnings season has been a positive affair, as the most important companies, especially mega caps, beat the estimates across the board, lifting the major indices to new all-time highs in the process. Next week, is calendar will be full of another huge batch of key earnings, such as Microsoft (MSFT), Google’s parent Alphabet (GOOG), ExxonMobil (XOM), Amazon (AMZN) and Visa (V).

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With the overbought readings in the Dow, the S&P 500, and the Nasdaq, there is not much left in the tank for the equity rally, and the long-term prospects are not better by any means. That said, trying to pick a top in such a rally is futile, but controlling the Fear of Missing Out is not an easy feat. The correction will come, without a doubt, and it will either bring a trading opportunity as in August or a confirmation for the bears.

Dow 30 Index, Daily Chart Analysis

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2.           Bitcoin Reaches Target but Uptrend Remains Intact

The new all-time highs in BTC have been the most important move in the cryptocurrency segment this week, even as Ethereum‘s major update made headlines earlier on. As the short-lived break-out of ETH and some of the other major altcoins faded away, Bitcoin’s dominance reached levels not seen for months, surpassing 58% as the coin reached the $6000 level towards the end of the week. While the long-term picture is clearly overbought for BTC, we wouldn’t rule out another leg higher towards the range extension target at $7000, but pocketing most of the recent gains is probably the way to go. The quick and deep corrections in the segment always come when the last bears had given up hope, and we are close to that state.

BTC, Daily Chart Analysis

3.           Trump Tax Plan Might Live After All

As the Senate passed the 2018 budget resolution this week, the new tax bill got much closer to passing this year than previously thought. While a lot of experts agreed that the controversial proposal had a good chance of failing at one of the many legislative hurdles, but he Senate’s decision opened up the way for a short-cut and if the GOP speeds up the process of writing the bill, the much-awaited tax cuts could arrive very soon. The next step is to pass the budget bill in the House, while tackling the opposition towards the actual bill in the Senate and the House. So while the process will be grueling, the market already hailed the first step with a rally, and the progress could be a major driver for stocks and the Dollar in the coming weeks.

4.           The Dollar Showing Stability

With the focus still on the next Fed Chair, and the above-mentioned tax reform, the Greenback had a choppy but slightly bullish week, even compared to the relatively strong Euro. The Yen, the Pound, and the smaller majors all lost considerable ground compared to the USD, with the New Zealand Dollar falling the most after the announcement of the new coalition. Technically speaking, the Dollar is not out of the woods, but it seems that a higher low formed on the daily chart of the DXY, and that could have a major implication for all markets. Should the Index post a new swing high next week, the door could open for a major rally in the battered currency.

Dollar Index (DXY), Daily Charts

5.           The US Yield Curve is Collapsing

As short-term Treasury yields are rallying thanks to the hawkish tone of the Fed, and the modest economic numbers, the longer end of the curve is lagging severely. That represents the doubts regarding the long-term growth potential of the US economy, and is usually a strong precursor of a looming recession.

Some analysts argue that raising interest rates this late in the cycle is a major policy error, but with the extremely loose monetary policy of recent years, the normalization must begin, or the Fed will be out of options in the case of an economic shock. In any case, long-term investors should keep a close eye on Treasuries, as the bond market is usually a better predictor of troubles ahead than the stock market.

Key Economic Releases Next Week

Day Country Release Expected Previous
Monday CANADA Wholesale Sales 1.1% 1.5%
Tuesday CHINA PPI 6.3% 6.3%
Tuesday GERMANY Manufacturing PMI 60.1 60.6
Tuesday GERMANY Services PMI 55.5 55.6
Tuesday EUROZONE Manufacturing PMI 57.9 58.1
Tuesday EUROZONE Services PMI 55.7 55.8
Wednesday AUSTRALIA CPI 0.8% 0.2%
Wednesday GERMANY IFO Business Climate 0.4% 0.2%
Wednesday UK Prelim GDP 0.3% 0.3%
Wednesday US Core Durable Goods Orders 1.1% 2.0%
Wednesday CANADA BOC Rate Decision 1.0% 1.0%
Wednesday CANADA BOC Statement
Wednesday US New Home Sales 556,000 560,000
Wednesday US Crude Oil Inventories -5.7 bill
Thursday EUROZONE ECB Rate Decisiion 0.00% 0.00%
Thursday EUROZONE ECB Press Conference
Thursday US Unemployment Claims 236,000 222,000
Thursday US Pending Home Sales 0.7% -2.6%
Friday US Advance GDP 2.7% 3.1%

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Market Overview

Week In Review: Stocks Take-Off Along with Bitcoin and the Dollar

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Stocks, bitcoin and the dollar are seeing green this week, with momentum hard to stop thanks to a multitude of favorable developments in the global financial markets.

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Wall Street’s Rally Extends to Six Weeks

U.S. stocks ended in record territory on Friday, with the Dow, Nasdaq and S&P 500 setting fresh highs. Upbeat earnings and progress on the political front have been the main catalysts behind the recent run of gains.

The Dow Jones Industrial Average rose 0.7% on Friday, extending its weekly rally to 2%. The blue-chip index has gained 18% since Jan. 1.

The Nasdaq Composite Index on Friday produced its 62nd all-time for the year, on par with the 1999 tech bubble. The S&P 500 Index also printed fresh records Friday for the 49th time this year. According to Bloomberg, that rate has been eclipsed five times since 1946.

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A measure of 30-day volatility known as the CBOE VIX settled in the single digits Friday. Investors have been net short volatility all year long.

The VIX has traded in the 9s for the better part of the month. That’s less than half of its historic mean.

Corporate Earnings Mostly Positive

Several Dow Jones blue chips reported earnings this week, with the likes of UnitedHealth (UNH) and Goldman Sachs (GS) beating forecasts. The broader S&P 500 is on track for another quarter of year-over-year earnings growth, according to FactSet.

The financial researcher says 17% of S&P 500 companies have reported earnings through Friday. Their blended earnings growth is 1.7%. Six sectors have contributed to the gains, with energy leading the way.

Dollar Gains Traction

The U.S. dollar index (DXY) rose half a percent Friday en route to two-week highs after Republican senators approved a budget blueprint that paves the way for President Trump’s tax overhaul. Lawmakers voted along party lines, with 51 GOP Senators backing the budget.

The DXY dollar basket finished the week at 93.70, having gained in five of the last seven sessions. The greenback rose to more than three-month highs against the yen. It also jumped more than 1% against the Canadian dollar Friday to reach the highest level since August.

A stronger dollar also weighed on commodities, which are denominated in the U.S. currency. U.S. West Texas Intermediate (WTI) crude futures finished higher for the week, but were knocked off multi-week highs.

Precious metals were among the biggest losers this week, with gold futures shedding more than $24 to settle at $1,280.50 a troy ounce. That’s the lowest settlement in two weeks on the Comex division of the New York Mercantile Exchange.

Silver futures also sold off 1.9% to $17.08 a troy ounce.

Bitcoin Reaches New Milestone

Bitcoin surpassed its altcoin competitors this week by posting fresh all-time highs. The world’s no. 1 blockchain asset briefly rose above $6,000 on Friday, bringing its total market cap to $100.8 billion. If bitcoin were a stock, it would be more valuable than Goldman Sachs and Netflix.

Like prior rallies, there was no immediate explanation for bitcoin’s massive appreciation. Investors continue buying the dips as bullish sentiment extends globally.

The broader cryptocurrency market didn’t participate in bitcoin’s rally on Friday. The asset class is collectively valued at over $173 billion, according to CoinMarketCap.

The Week Ahead

Economic data are back in focus next week, headlined by U.S. durable goods orders, U.K. GDP and a slew of PMI reports. Corporate earnings from the S&P 500 are also set to continue all week.

On the policy front, the European Central Bank and Bank of Canada are scheduled to deliver interest rate decisions. No change on either front is expected.

The outcome of Japan’s forthcoming election will also be in the spotlight. Prime Minister Shinzo Abe is expected to win big in the Oct. 22 vote.

Featured image courtesy of Shutterstock. 

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Analysis

Will Crude Oil Reach $68 a Barrel in 2018?

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Crude oil prices are likely to climb close to $68 per barrel mark in 2018. We believe that oil supply will be hit due to a few geopolitical issues if they play out as we expect. Additionally, though high crude prices will be a strong incentive for the shale oil drillers to pump more, their increase is unlikely to tilt the deficit into oversupply.

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Key observations

  1. The OPEC production cut is tilting the crude oil markets to a balance
  2. Rise in the shale oil production is unlikely to equal the increase in demand in 2018
  3. The geopolitical issues can tilt the markets into a deficit
  4. If crude oil breaks out of $55 per barrel, a move to $68 is likely

What are the current market conditions?

OPEC oil production cuts

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The November 2016 production cut by OPEC and its allies is helping the market stabilize. The US crude stockpiles have been decreasing over the past few months, which indicates that the OPEC cuts are having their desired effect, albeit slowly.

The stockpiles in the Organisation for Economic Co-operation and Development (OECD) nations is down to just under 3 billion barrels, which is roughly 171 million barrels above the 5-year average. The OPEC wants to bring the inventory levels below the 5-year average.

Reports suggest that the OPEC and its allies will extend the deal, which is set to expire in March 2018 by another 9-months. However, the oil cartel is unlikely to deepen the cuts. In the September quarter, it had produced 32.9 million barrels per day (bpd), as against 33.4 million bpd production in November 2016, prior to the production cut agreement.

In the fourth quarter of this year, the OPEC production is expected to further decline to 32.7 million bpd.

US shale oil production

The main threat to any recovery in crude oil prices is the ever-increasing production of the US shale oil drillers. US crude oil production, which averaged about 9.2 million bpd in the first quarter of this year has increased to 9.56 million bpd by the third-quarter.

The US Energy Information Administration (EIA) expects the average US crude oil production to increase to 9.9 million bpd in 2018, compared to 9.2 million bpd in 2017. That is an addition of 700,000 bpd of supply.

On the other hand, Investment bank Tudor, Pickering, Holt & Co (TPH) expects US crude oil production to reach 10.2 million barrels in 2018.

So, on an average, crude oil production by the shale oil drillers is expected to increase by 700,000 bpd to 1 million bpd.

Demand increase in 2018

The global economy is growing at a decent pace, which is expected to increase the demand for crude oil. The US EIA expects the global demand to increase by 1.6 million bpd in 2018.

Therefore, with everything else being equal, this will lead to a faster reduction in crude oil inventory and an improvement in sentiment, but not a large increase in price.

So, why do we expect crude oil prices to increase next year?

What are the events that have changed in the recent past that warrant a change in our view?

For the past two years, oil prices have not responded to geopolitical tensions because of the supply glut.

However, next year, when the markets are in a balance, any geopolitical event that can have an effect on the supply side will tilt the market to a deficit, resulting in a rally in oil prices. What are these events?

The Iran sanctions

President Donald Trump has been a critic of the deal between the US and Iran, which led to lifting of sanctions on the Islamic nation. The deal is called the Joint Comprehensive Plan of Action (JCPOA). As a result of this deal, Iran was able to resume its exports, which have skyrocketed from about 1 million bpd in 2013 to about 2.3 million bpd in September 2017.

President Trump decertified the deal on October 13 but has still not quit the deal. He wants the deal to be renegotiated, however, the remaining countries who were party to the deal and Iran are unwilling to do so.

This creates a tension between the US and Iran. Chances are that President Trump will withdraw from the deal sometime next year to fulfill his pre-election promise of ripping the deal apart.

What are the repercussions if the US quits the deal?

Presently, the EU nations are not in favor of scrapping the deal with Iran. If the US unilaterally withdraws from the deal, Iran’s exports are unlikely to have an immediate effect, until the EU decides to support it. After all, EU has been the major consumer of Iranian oil since sanctions were lifted.

However, Iran’s fields are aging. They need fresh investments to keep the oil flowing at the current rate. If the US quits the deal, it is unlikely that major oil companies, that have operations in the US will enter Iran. This can limit the capital flows to the Islamic nation’s oil sector.

As an immediate effect, the US sanctions will “put at risk a few hundred thousand barrels of Iranian exports,” Goldman Sachs wrote in a research note. However, these are only estimates and the real impact will be known only after the US withdraws from the deal. Due to the uncertainty, the markets are likely to boost prices higher, until it gets a clear picture of the effects.

Geopolitical tensions in the gulf can lead to a severe shortage of oil

The northern Iraq region – Kurdistan – is a semi-autonomous region, which recently declared Independence from Iraq. This has led to a conflict between the two. While the Iraqi forces have declared their victory in the important oil-rich region of Kirkuk, the victory is not final because the Kurdish army did not put up a fight initially to defend the oil-rich region.

However, both the Kurdish peshmerga and the Iraqi army have been trained by the US. Therefore, if the conflict is not resolved quickly, through a dialogue, it can turn bloody and lead to disruption of about 600,000 bpd of oil supply.

“Oil prices could spike a lot higher on this development because this time is different, after years of war in the region. The battle, finally, is for the oil, and no other reason. In other words, here we go,” John Kilduff, partner at energy-focused investment manager Again Capital, told CNBC.

Unless a permanent solution is reached, we expect these issues to linger on and again crop up in 2018, propping prices higher.

What does the chart forecast?

The WTI crude has been broadly trading in a range of $42 and $55. Oil has taken support close to the $42 levels four times in the past year and a half. Therefore, this is a strong support level and can be used as a stop loss for our positions.

On the upside, the zone between $50 and $55 has been a strong resistance. Oil has struggled to breakout of this zone. However, if any geopolitical event triggers a breakout above $55, a rally to $68 levels is likely, which is the minimum target objective of a breakout from the range.

How can we benefit, if crude rallies according to our expectations?

The best way to benefit from the rise in crude oil is to trade the oil futures, but due to their volatility, it is not advisable to hold it for the long-term.

The oil-based ETFs can offer an opportunity to take a position in oil. Individual energy stocks are also another means of benefitting from a rally in crude oil.

We shall soon identify the best oil-based ETF and stocks that can offer good returns in 2018.

Risk to our analysis

Our analysis is based on the assumption that the existing geopolitical issues are unlikely to be sorted out within the next year. However, a good dialogue can easily put an end to these, thereby invalidating any risk-premium to crude oil.

Also, consistent high prices above $50 can increase the US shale oil production, much higher than the currently anticipated levels. This will prevent the markets from balancing out.

Due to infighting among its members, the OPEC and its allies can opt out of the production cut deal,  which will boost supply and can lead to a crash in crude oil prices.

Featured image courtesy of Shutterstock. 

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