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S&P 500 Sinks Amid Weak U.S. Economic Data And Rising Geopolitical Tensions While The Trump Trade Is Now Gone

|Includes: SPDR S&P 500 Trust ETF (SPY), XLF

By Ed Wijaranakula, Ph.D., NMS Investment Research

The S&P 500 lost 1.13% for the short holiday week, to close on Thursday at 2,355.54, following another series of weak U.S. economic data including retail sales, which showed a 0.2% decline in March, while the February figure was revised downward from a 0.1% increase to a fall of 0.3%. The U.S. dropping a bomb in Afghanistan, using the MOAB on Thursday, might have destroyed ISIS tunnels but also shook investors' confidence. The index has struggled for the past six weeks under the trendline resistance and may pull back further to the 2,310 support level, as disappointing numbers continue to pile up while geopolitical tensions are on the rise.

S&P 500 Technical Chart

S&P 500 Financials

The best performing S&P 500 sectors for the week were Real Estate ($SPRE) and Utilities ($SPU), up 0.73% and 0.56%, respectively. The worst performing sectors for the week were Financials ($SPF) and Materials ($SPM), down 2.65% and 2.42%, respectively. The Financials sector got hammered after the Trump administration told the media on Monday that their tax reform bill is now on the back burner. To make matters worse for that sector, the yield spread between the 10-year and 2-year U.S. Treasury Notes sunk to the lowest level since November 2016. The "Trump Trade" is all but gone as the Materials, Industrials, Financials and Energy sectors are either underperforming or underwater for the year.

The U.S. Dollar index, or DXY, essentially the USD/EUR exchange rate, closed at 100.46 on Thursday, down 0.65% for the week, following weak economic data and comments by President Trump during an interview with the Wall Street Journal on Wednesday that he thinks the U.S. dollar "is getting too strong" and that he favors low interest rates.

The Federal Reserve Bank of Atlanta revised its U.S. first-quarter 2017 GDP forecast on Friday to 0.5% from the previous 0.6%, citing slowing consumer spending after the retail sales report from the U.S. Census Bureau and the Consumer Price Index release from the U.S. Bureau of Labor Statistics. Separately, the Federal Reserve Bank of New York trimmed its U.S. first-quarter and second-quarter GDP forecasts on Friday by 0.2 and 0.6 percentage points, respectively, to 2.6% and 2.1%. The average forecast for first-quarter 2017 growth from both the Atlanta Fed and the New York Fed now stands at 1.6%, inline with the consensus Wall Street forecast. The U.S. Department of Commerce will release its advance estimate first-quarter 2017 GDP on April 28.

10-Y and 2-Y U.S. Treasury Notes

The yield of 10-year U.S. Treasury Notes tumbled 5.88% this week, to close on Thursday at 2.24%, while the yield of the 2-year Notes tanked 6.20% for the week, to close on Thursday at 1.21%. The yield spread between the 10-year and 2-year U.S. Treasury Notes dropped 5.50% to 1.03 percentage points. The spot gold price jumped another 2.48% for the week, to close at $1,288.50 per ounce on Thursday, while the Japanese yen appreciated 2.22% against the U.S. dollar at 108.65 yen on Friday.

WTI Crude Price

The WTI crude spot price surged another 1.80%, closing at $53.18 per barrel on Thursday, while the Brent crude spot price was up 0.87% to close at $55.67 per barrel, despite a bullish EIA weekly report. Traders turned quickly bearish after a Reuters report on Wednesday said that storage at Cushing, Oklahoma, the largest oil storage facility in the world, may be near the capacity at which operational efficiency starts to be compromised. Technically, the WTI crude price was rejected at $53.96 per barrel, or the 76.4% Fibonacci retracement level, and could pull back further to retest the trendline support at about the $50 level.

Crude oil prices began to move higher on Monday, following a Reuters report saying that Libya's Sharara oilfield was shut on Sunday after a group blocked a pipeline linking it to an oil terminal. Reuters also reported on Wednesday that Saudi Arabia has been pushing OPEC and non-OPEC members to extend production cuts beyond June.

Goldman Sachs seems to be all over the place with its crude price forecasts, as they sent out a research note on Wednesday that the firm anticipates a return to long-term oil price stability at $50 per barrel, according to CNBC. Last week, Goldman said in a research note that with global demand exceeding supply, they are "constructive" on oil prices, at least in the short term. The firm then said, "We project WTI will increase from $50/bbl to $57.50/bbl by mid-year and average of $55/bbl in the second half of 2017", according to Barrons.

The EIA weekly U.S. oil inventory report on Wednesday showed that domestic crude supplies decreased by 2.17 million barrels to 535.38 million barrels, excluding the Strategic Petroleum Reserve, in the week ending April 7, compared to the S&P Global Platts forecast for a build of 0.125 million barrels. The American Petroleum Institute, or API, inventory data on Tuesday showed a U.S. crude inventory decline of 1.3 million barrels.

Separately, the EIA said the weekly U.S. crude oil production increased 36,000 barrels per day, or bpd, for the week ending April 7, to 9.235 million bpd. U.S. crude oil output increased 101,000 bpd to an average of 9.235 million bpd in April, compared to a March average of 9.134 million bpd. Output has fallen less than 4% from the peak level of 9.60 million bpd in June 2015. Houston-based oilfield services company Baker Hughes Inc. said on Thursday that the U.S. oil rig count rose another 11 to 683, compared to 316, when the rig count hit the low on June 6, 2016.

S&P 500 Summary: +4.03% YTD as of 04/13/17
Barclay Hedge Fund Index: +2.86% YTD

Outperforming Sectors: Information technology +9.99 YTD, Healthcare +7.28% YTD, Consumer discretionary +6.40% YTD, Utilities +6.21% YTD, Consumer staples +6.02% YTD, and Real Estate +4.13% YTD.

Underperforming Sectors: Materials +3.08% YTD, Industrials +2.39% YTD,, Financials -1.59% YTD, Telecommunication services -6.39% YTD, and Energy -8.13% YTD.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.