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Cold Front Blows In: Overseas Weakness Might Hit US As Gold, Bonds See Rise

December 06, 2017

Pressure from falling overseas markets and a lack of new positive catalysts could weigh on U.S. stocks Wednesday. Defensive investments like gold, the Japanese yen, and bonds all firmed in the early hours.

Though overseas markets generally fell across the board, Japan’s Nikkei deserves special notice because it dropped nearly 2%. Analysts in Asia noted a decline in risk appetite. Some of this could stem from uncertainties surrounding the U.S. budget process, where a government shutdown could take place if Congress doesn’t act by Friday. A stall in Brexit talks between the British government and the European Union earlier this week could be another factor spooking some investors.

U.S. stock futures fell in pre-market trading, and crude oil slipped under $57 a barrel for the first time in two weeks. The S&P 500 (SPX) is down three days in a row for the first time in four months. Last Thursday was the most recent day of gains for the SPX. Meanwhile, gold ticked up from recent four-week lows, and 10-year U.S. Treasury bond yields fell to 2.33% as investors snatched up bonds. This type of trading could signal a bit of risk intolerance.

There’s not much in the way of economic data or corporate news that might help move the market today. Productivity and unit labor costs are about it on the data side, along with a private report on the U.S. jobs picture that came in basically as analysts had expected and the weekly crude oil stockpile numbers. Many investors are in a waiting mode with November payrolls coming up Friday.

It was interesting to see the government continue to peg Q3 productivity growth at a 3% annual rate even as it slashed annualized unit labor costs to negative 0.2%, down from its previous estimate of 0.5% growth. This could contribute to the growing sense that employee pay continues to languish, one possible reason for the weak inflation we’ve seen despite recent economic gains.

Tech shares made a slight comeback Tuesday after getting pummeled the previous session, but everything else turned lower. Info tech was the only sector to rise at all, with all 10 others falling amid a lack of news. With stocks still near all-time highs and valuations running above the historical average, it might take some fresh positive catalysts to get the market climbing again.

Crude oil is at two-week lows ahead of today’s supply report. Last week’s report delivered a mixed picture, with a big drop in crude inventories balanced by a large rise in gasoline inventories. Production continues to post new all-time weekly highs, and that’s helped keep pressure on crude prices despite OPEC’s decision to extend output cuts.

It’s just two shopping days until payrolls, to borrow a seasonal allusion, and the estimates out there don’t look quite as lofty as they did ahead of last month’s report. The official October jobs number was 261,000, but that actually fell below many estimates, some of which had topped 300,000. Looking toward Friday’s report, the average Wall Street estimate stands at just 170,000, according to Briefing.com. That would be roughly average for the year so far, and certainly more than enough to signal an economy that continues to hum along. Unemployment is expected to remain at 4.1%, Briefing.com said.

The report isn’t all about jobs. Wages also come into play, and analysts expect a better showing in that category for November after a flat pay number last month. The average analyst estimate for November has hourly wages rising 0.3%, which would be pretty solid. Keep an eye on year-over-year wage growth as well, which as of October was up 2.4%, vs. 2.9% for the 12 months ended in September. Any big jump in wages would probably get the market concerned about chances of the Fed becoming more aggressive, because higher wages sometimes lead to the economy heating up and potentially lighting some inflation kindling.

Despite the last couple days of struggles, stocks remain near all-time highs and TD Ameritrade’s November 2017 Investor Movement Index®, or IMX, also hit a new all-time high of 8.53. The IMX had its largest single month increase ever in November—climbing more than 15%—as TD Ameritrade clients were net buyers for a 10th-consecutive month.

The IMX reading appears to show that investors had continued confidence in the market and wanted exposure to the big rally in November as all three major indices hit all-time highs.

https://www.benzinga.com/news/17/12/10879555/cold-front-blows-in-overseas-weakness-might-hit-us-as-gold-bonds-see-rise