Weak data from China, simmering politics in the Ukraine and improving U.S. economic data combine to drive equity prices lower.

Introduction

When I first woke up and saw that Chinese economic data was worse than expected I then expected to see Asian and European markets largely in the red. Surprisingly that was not the case. Asian markets were mixed, as were those in the EU, with only the Nikkei and Hang Send indices closing in negative territory. Chinese industrial production fell to +8.6% from 9.7%, retail sales fell to 11.8% from 13.%. Both were below expectation. Other news in the Asia/Pacific region helped to temper any bearishness caused by the data. For one, Chinese regulators are in the process of approving the issuance of 1st preferred shares by Chinese companies, a move met with applause. For another, the central bank of New Zealand raised interest rates, the first country to do so during the current round of global economic stimulus.


European markets were trading near to the flat line, that is, until the U.S. markets turned negative. The release of today's economic data helped to keep U.S. index futures trading in the green during the early hours, also boosting EU markets but they turned negative before the close of the trading day. Weak Chinese data, the fear of economic slow down in China and the as yet unresolved trouble in the Ukraine all taking their toll on outlook.

U.S. futures trading was largely positive ahead of and after the release of jobless claims, retail sales and later, import prices. Trading was positive going into the open, which was rather calm and quiet. It wasn't until the afternoon that the major markets lost most of their ground as concern over Crimea took hold of the market.

The materials and financial sectors were early leaders but were unable to keep the indices in the green. By lunch time the SPX was down about -6 points with the Dow down about -65. Later in the afternoon it was comments from John Kerry and Mario Draghi, unrelated, that really drove the markets lower. The S&P lost close to 25 points on an intra-day basis with the Dow down more than 200 points. Selling, or at least weak trading, could continue tomorrow on Ukraine fear if no solution develops before then. The economic calendar is light tomorrow but is full next week with the FOMC meeting on Wednesday.


The Economy

Initial claims for unemployment fell this week, opposite the expectation for a mild rise in claims. Initial claims fell by -9,000 from a mild upward revision for a net drop of -10,000. Adjusted claims this week are 315,000, the lowest level since mid November 2013. The four week moving average also fell from a mild upward revision to 330,500 and 3 month low. On an unadjusted basis claims fell by just over -15,000 to 302,218. Initial claims are trying really hard to move lower and could be signaling an improvement in labor conditions. This is now the second week of declines in this figure and with last weeks surprise NFP make the chances for a spring uptick in employment look a lot better. On a longer term basis claims are down but still hovering near to the levels seen just last year. State by state there were 6 reporting a drop in claims greater than -1,000 led by California's -5,765 for a total near -20,000. Four states reported an increase in claims, led by New York with a gain of +18,709 for a total near 23,500.


Continuing claims, those filing for a second week, also fell. This number fell by -48,000 from a mild downward revision to 2.85 million. This is a three month low and just above the long term low set last year. This is the 6th straight week of steady declines and helps make the declines in initial claims look a little more long lasting. With these two figures on the decline I expect to see total claims begin to drop in the next week or two providing there actually is an improvement in labor markets as the data is suggesting.


Total claims ticked up this week by 12,282 to 3.450 million. This is the 7th week of relatively flat total claims numbers following the sharp drop due to the expiration of long term unemployment benefit extensions. I think that it is safe at this time to assume that that effect has passed. I have heard nothing else about it since the first of the year. That being said total claims are holding fairly steady but may begin to move lower should the declines in initial and continuing claims continue. These number are not really a forward look at March jobs number yet since they lag by at least a week but they do confirm, at least somewhat, the unexpectedly large NFP number. Taken together the unemployment claims data is mildly bullish and supports expected economic improvement this month and this spring. A late day deal in the Senate paved the way for a reinstatement of the expired benefits, if passed in full there will be a jump in total unemployment claims to match the dip at the start of the year.


Retail sales climbed slightly more than expected due to a stronger second half of February, as reported by a few of the retailers. U.S. retail sales grew by 0.3%, ex-auto 0.3% and ex-auto and gas 0.3%. This is slightly ahead of the expected 0.2% rise. January sales were revised lower to -0.6%. In general, the retailers are expecting March sales to pick up as the weather gets warmer.

Import prices surged by 0.9%, twice their expected gain, in February. This is also the largest monthly gain in the past 12 months but still down on a year over year basis. Business inventories also gained in February. Inventories rose by 0.4%, in line with expectations and an important part of first quarter GDP. Ex-auto's inventories rose by 0.6%, slightly ahead of expectations. This is the biggest gain since July 2013 but its affect on GDP could be hurt by weak sales and new orders in the same period.

The Oil Index

Prices for bench mark West Texas Intermediate crude bounced back from the lows set yesterday. Prices climbed by about a quarter during the days trade. Nat Gas prices fell on a smaller than expected draw down of inventories. Nat Gas fell by more than a full percent after data showed that inventories were higher than expected. With the turn of the seasons at hand traders are speculating on the need for heating fuel now and the expected need for AC fuel in the near future. Also impacting oil prices at this time are the weak numbers out of China, unsettled tension in the Ukraine and U.S. data.

Out of the nine major S&P 500 sectors the energy sector was today's worst performer. The Oil Index traded to the downside but is still near long term high levels. The index is at a crucial juncture between the long term up trend started in 2009 and the long term resistance set during the declines of 2008. At this time the trend is still up and the index is finding support at and above the short term 30 day EMA and the long term up trend line. The indicators are bullish but have growing divergences which give reason to pause. It looks like the index may could enter a near term period of bearishness and retest support at the trend line. A break below the trend line would be bearish and could take the index down to the 1425 level. A confirmation of support at the trend line would be bullish in the near term but there is still serious long term resistance to higher prices at this time. Until there is a strong catalyst for prolonged higher oil prices this index could remain range bound between 1400 and 1500. Watch oil prices for more clues to the direction of this index.


The Gold Index

Gold prices held fairly steady after yesterday's massive climb to a new 6 month high. After an initial drop following the release of today's economic data gold prices got their footing and advanced to another new high. Gold prices are now sitting just above the $1373 level. The Gold Index has responded as expected in the face of higher gold prices. The index has moved higher and broken back into the previous pennant formation on a tear to retest the 78.6% Fibonacci Retracement of the 2009-2012 bull market in gold stocks. Today's move is an extension of yesterday's bounce from the 30 and 150 day EMA and a possible continuation signal. Caution is in order though due to the possibility that Ukraine tension will ease and that U.S. economic data will continue to improve. There is also the FOMC meeting next week to consider. Gold prices and the gold index have been tied together for a long time and will likely to remain that way. Technical resistance lies just ahead that may coincide with the FOMC meeting. Resistance is just above at the $110 level, support just below around the $100 level.


The Dollar

The dollar had a volatile trade versus the euro and yen. The euro had at first extended it's rally versus the dollar but comments mid day from John Kerry quickly reversed that move. The EUR/USD set a near 2 and a half year high against the dollar, approaching the 1.4000 level. However, the upcoming referendum vote in the Crimea on whether to join Russia has traders on edge. Kerry said that there would be a U.S.-EU response on Monday if the vote went ahead and backed Russia. Adding to the pressure were cautious comments from Mario Draghi. He said that the banks outlook for interests rates would curb appetite for the euro, for sure his comments did. After them the euro tanked in favor of the dollar and the dollar tanked in favor of the Swiss Franc and the Japanese Yen. Up until today the eur/usd pair had been in an uptrend driven by improving economic data but the risk of deflation has the ECB ready to act in order to curb the strengthening euro.


The yen gained strength against the dollar, dropping more than a full yen to come to rest at support. This pair has been in an uptrend driven by Abenomics, a plan to devalue the yen. There has been speculation that the BOJ would have to increase QE in order to reach the goals set by them and by Abenomics but as of yet have not done so. A strengthening of the yen due to the Crimea situation could force their hand if left unresolved or if it escalates. Should the situation end peacefully the pair could snap back to the recent highs near 103. Until then I think the uptrend is on pause. Support exists at the previous levels around 101.70 with resistance just to the upside around 102.75.


Story Stocks

GM is making headlines. The car maker is dealing with a recall and government investigation of possible criminal negligence in it's handling. The issue involves ignition switches and goes back as far as 2001 and carries over the next 6-8 years. The news has GM shares down but may not have as long a lasting impact as some may think. The good news is that most of the problems are before the government bail out and restructuring of the company which should shield it from some of the fall-out. Additionally, the new CEO has clean hands in terms of this scandal and can address it full faced. Shares of GM fell more than 1% today and are now trading near the long term support level around $34-$35.


Amazon announced an increase in membership fees for its Prime program. For those of you unfamiliar with Prime it is a yearly subscription that enables users to receive free two day shipping and have access to online streaming video and a free Nook Library. The previous cost was $79 and had not been changed since it's inception nearly ten years ago. The new price of $99 is less than the previously discussed $119 price target and well received by the market. Shares of Amazon popped 2% in the premarket trading, gapped open, moved up another 2% or so and then fell back giving up most of today's gains along with the rest of the market. Today's move took Amazon share price above resistance but the late day sell-off confirmed that resistance was still there. Amazon may trade in a range between $350 and $375 until another catalyst takes over.


The S&P 500

The major U.S. indices fell hard today. Despite the somewhat positive economic data geo-political and economic events weighed heavily on today's trading. Weak Chinese data added to fear of a massive slow down in the country that has been growing for some time. On top of that the situation in the Ukraine is coming to a head. The referendum scheduled for Sunday is expected to result in a vot for Crimea to join with Russia. This result will cause a combined U.S.-EU response on Monday according to John Kerry. Both are most likely near to short term blips on the radar provided neither one disrupts U.S. and EU recovery prospects.

Today's data, while not robust, great or even that good were better than expected and help to paint a picture of renewed economic activity. Joblessness as portrayed through jobless claims fell this week to new lows, confirming the NFP data from last week. This is the second week of noticeable, if not significant, declines in claims that along with jobs creation could lead to further reduction in the unemployment rate, increased earnings, a stronger consumer and a more robust economy. This view is in line with the long term trend and the current economic outlook for 2014. The dip in the first quarter was expected, it's depth perhaps not as much but that was likely helped by the weather. An uptick in the second quarter is also expected and that is what today's data could be leading too.


The S&PP 500 fell more than a full percent today, breaking the support of the previous all time highs set in December/January. Today's move was halted by the short term moving average but this near term support may not hold going into the weekend and first of next week. Of course, changes in the Ukraine situation could occur at any time so there is a lot risk associated with that going into the weekend. The long term trend is still up but the index has some room to move down in the near term. Looking at the indicators the index is bullish in the longer term but a nearer term divergence and MACD that has just entered a bearish wave suggest that there will be some more downward pressure. A break below the short term 30 day EMA could easily take the index back to trend over the next couple of days. That being said I am still in a buy-on-the-dips mode and expect the index to bounce back and set new highs this spring.


Economically there isn't much going on tomorrow to move the market. PPI data and Michigan sentiment could ordinarily do so but with Ukraine and China in the mix maybe not this time. On Monday the calendar heats up again with Empire Manufacturing, TIC flows, numerous housing data and on Wednesday the all important FOMC meeting. Even with the Ukraine situation resolved the FOMC meeting could keep stock prices in check. I think the big mover of stock prices tomorrow and at the beginning of next week will be the Crimea referendum and political posturing from involved parties. I think that Crimea will pass soon and the markets will rebound

Until then, remember the trend.

Thomas Hughes