The U.S. stock market managed another weekly gain in spite of some big headlines that could have been used as an excuse to sell. Equities were weak on Monday, March 3rd, following news that Russian forces had invaded the Crimean peninsula of Ukraine. The Germany stock market and most of the European markets were down -3% on Monday but the Russian stock market plunged -10% on Monday. U.S. stocks were down on Monday but not that bad.
In an interview on Tuesday Russian President Putin suggested Russia is not planning to annex Crimea by force and stocks surged on Tuesday. The situation in Ukraine remained in the foreground while markets digested economic news in addition to headlines that China had its first significant corporate bond default. By Friday's closing bell the NASDAQ was up +0.65% for the week. The S&P 500 index was up +1.0% and the Russell 2000 index posted a +1.7% gain for the week. Transports and financials were both up more than +3% offering strong leadership for the U.S. market.
It was the first week of the month and that meant a lot of economic data to digest. Market participants have been talking about how the unusually cold winter has created a "blame it on the weather" type of "get out of jail free" card and allow traders to ignore disappointing data. The Federal Reserve did not shy away from blaming the weather. The monthly Beige Book report for February 2014 mentioned the winter weather as a factor 119 times versus an average of just 14 times over the last 15 plus years.
American PMI data came in at 57.1, which was higher than expected and the best reading since May 2010. Numbers above 50.0 suggest growth. The ISM services index fell from 54.0 in January to 51.6 in February, which was the weakest reading since February 2010. The employment component of the index plunged from 56.4 to 47.5 in February. Since numbers under 50.0 represent contraction February's drop in the employment component snapped a 25-month growth streak.
Factory orders fell -0.7% in January following a downwardly revised -2.0% drop in December. A number of analysts were alarmed at the drop in Q4 productivity gains, which were adjusted from +3.2% to +1.8%.
The monthly ADP Employment Change report for February came in at +139,000 new jobs while the January number was revised lower from +175K to +127K.
The nonfarm payroll (jobs) report on Friday was mostly a nonevent. The general consensus was that if the February jobs report was poor then everyone would just blame it on the weather. Only if the report was significantly above expectations would it be a real market mover. Economists were expecting between +150K to +160K new jobs in the jobs report. February's number came in at +175,000 while January's reading was adjusted higher from +113 to +129K. The unemployment rate ticked higher to 6.7%.
Most of the economic data from Europe was bullish, except for the constant threat of deflation. The European Central Bank (ECB) kept interest rates unchanged at 0.25% and the Bank of England also left its rates unchanged at 0.5%. The Eurozone GDP estimate rose to +0.3% growth for the quarter. Eurozone manufacturing PMI inched higher from 53.0 to 53.2. Unfortunately the Eurozone retail PMI dipped from 50.5 to 48.5. Numbers above 50.0 suggest growth and under 50.0 indicate contraction.
Germany said its manufacturing PMI ticked higher from 54.7 to 54.8. German industrial production came in at +0.8%. Germany said their wholesale price index slipped -0.1%. Meanwhile Italy also saw its producer price index (PPI) fall -0.2% month over month.
Most of the data out of the Asia region came from China. The HSBC services PMI in China rose from 50.7 to 51.0. Their official manufacturing PMI fell from 50.5 to 50.2. Yet the HSBC manufacturing PMI data for China inched up from 48.3 to 48.5. The Chinese National People's Congress released their 2014 GDP target of +7.5% growth, which is the same as 2013's target growth rate. Unfortunately there were a couple of analysts out this past week suggesting that Chinese GDP growth would likely fall into the +6.0% to +7.2% range this year. Plunging exports do not support their +7.5% GDP target. The most recent data on Chinese exports was alarming with a -18.1% drop in February compares to estimates for +7.5% growth. Chinese imports rose +10.1%.
Another big story in China was news that the Shanghai Chaori Solar Energy Science and Technology company had failed to make a $14.5 million interest payment on its bond debt. This is the first corporate default in China in over 17 years. Normally the Chinese government tends to prop up local corporations for fear that letting them default would be bad for their economy and investor sentiment. Their decision to stray from tradition and let this company default could have very significant shockwaves.
The corporate debt market in China is $14 trillion. The question investors will ask is what about all the companies that should have defaulted in the past but did not thanks to government assistance. Will these companies miss their next debt payment? How much pain is the Chinese government willing to endure to let the markets adjust now that the government safety net is gone? It could be a very volatile year for Chinese investors and markets if this is the new normal going forward. Borrowing costs for Chinese companies should skyrocket and the number of defaults is likely to soar this year.
The situation in Ukraine will remain a potential stumbling block for the global equity and currency markets. I'm going to try and just go over the highlights. Last year Ukraine President Viktor Yanukovich turned down an economic deal with the European Union in favor of a deal with Russia. A large portion of the Ukraine people saw this as a betrayal and signs of corruption and manipulation by Russia. This kicked off three months of massive protests in Ukraine that climaxed into a bloody battle between protestors and Ukraine police.
Yanukovish fled Ukraine when it appeared the protestors had won. 24 hours after he fled Kiev (capital of Ukraine) Russian President Putin launched military drills on the Ukraine-Russian border. Shortly thereafter unidentified men, speaking Russian and carrying Russian military equipment, took over the Crimean peninsula of southern Ukraine, seizing the two airports, the parliament building, TV stations, and cutting off road access from Crimea to the rest of Ukraine.
This Russian invasion of Ukraine occurred last weekend. Stock markets around the world were rattled on Monday, March 3rd, following a story that Russia had threatened Ukraine troops with an ultimatum to surrender or "face of storm" of military might from Russia. Fortunately, this was quickly walked back by Russia's Defense Minister, denying any such threat was made.
Russia already had a major naval base near the southern tip of Crimea on the Black Sea. They were leasing it from Ukraine. Putin claims Russia had a right to protect their military base and all Russian-speaking people following the collapse of the Ukraine government. In the past week Russia has bolstered its presence in Crimea to 30,000 troops.
According to Stratfor, the geopolitical intelligence firm, the Russian navy has sunk a mothballed ship in the inlet to Crimea's Donuzlav lake, which essentially blocks access from Ukraine's naval port to the Black Sea. By blocking the channel they have trapped seven of Ukraine's 25 ships.
On March 6th the Crimean parliament voted to leave the Ukraine and join the Russian Federation and proposed a referendum on the matter in ten days (March 16th). The U.S. and Europe are blaming Russia behind this move and fueling the Crimean separatist movement. While President Putin blames the west for the protests that brought down the pro-Russian government. It is important to note that there is a significant Russian (or pro-Russian) population in southern and eastern Ukraine. A poll several years ago found that over 50% of the Crimea region identified themselves as Russian, not Ukrainian.
President Obama and President Putin spent over an hour on the phone discussing the situation. They failed to reach any significant agreements. Obama pointed out that the proposed Crimea referendum violates international law. If Russia does not cooperate the U.S. and Europe would retaliate with economic sanctions. Apparently the threat of sanctions did not work and a Russian minister warned that any sanctions would boomerang back and hurt the U.S.
As it stands now the U.S. and Europe have levied sanctions against Russia and any individuals that threaten the sovereignty of Ukraine, and they're prepared to increase them of Russia doesn't cooperate. Russia has promised the retaliate and the Russian parliament is said to be drafting legislation that would allow their country to seize U.S. and European assets in Russia.
Russian energy giant Gazprom, essentially a state-run corporation, has threatened to cut off natural gas supplies to Ukraine if Ukraine doesn't pay its overdue $1.89 billion bill. Part of the issue there is that Europe receives 20% of its natural gas from pipelines that flow through the Ukraine. Fortunately, that number is a lot lower than it was back in 2009 when Russia and Ukraine had a conflict over gas pricing and debt. This time Europe has a lot more natural gas storage and the winter weather in Europe has been mild this year. If Russia were to cut off gas supplies it would hurt but it probably wouldn't be crippling. There are some lawmakers in the U.S. suggesting America could help by sending natural gas to Europe and Ukraine if Russia did cut off supplies.
In the meantime the U.S. and the IMF are working with Ukraine to come up with an economic bailout package to help the country get back on its feet. The recently removed Ukraine president has allegedly stolen billions from his countrymen.
Map of the Black Sea region:
The situation remains fluid. A 37-member observation team from 18 nations by the Organization for Security and Cooperation in Europe tried to enter Crimea but they were stopped at the border by Russian troops. Over the last week Russian troops and Ukraine troops in Crimea have been at a stalemate with nothing more than a few warning shots in the air. The Russians had surrounded all of the Ukraine military bases in Crimea but the latest news coming out this weekend suggests that Russians have upped the ante and started storming Ukraine bases (in Crimea).
The U.S. has started sending F-15 and F-16 fighter jets to the region and a guided-missile cruiser was seen heading north into the Black Sea. At the same time Russian surveillance planes have been pushing the boundaries of international airspace and Turkey has scrambled jets to chase off Russian planes. The current consensus among analysts would suggest that this conflict in Crimea will not be over quickly. Thus far we have probably only seen act one in a four-act play.
The S&P 500 index ended the week at new all-time highs. Last week's +1.0% gain lifted its year-to-date performance to +1.6%. Some of the momentum indicators are starting to look tired. The index is up 120+ points from its February lows near 1740 without much of a pullback along the way.
The good news is that prior resistance near 1850 should offer new support. If the market continues to push higher then we're looking at likely round-number resistance near 1900.
chart of the S&P 500 index:
The NASDAQ's weekly gain has pushed its 2014 results to +3.8%. The index tagged new 14-year highs. Yet it's worth noting that Friday's performance has created a bearish engulfing candlestick reversal pattern. These patterns need to see confirmation but it remains a warning signal. The 4400 level is probably overhead resistance. We can look for potential support near 4300 and 4240.
chart of the NASDAQ Composite index:
The small cap Russell 2000 index was one of the better performers with a +1.7% gain and a bullish breakout past the 1200 mark. However, you will notice on the chart below that the rally has stalled at one of its trend lines of resistance. The $RUT has been stuck there under this trend line the last three days. The $RUT is also very short-term overbought with a rally from 1,082 to 1,203 with almost no profit taking. Odds would favor a pullback here. Look for support near 1180 and 1160.
chart of the Russell 2000 index
Economic Data & Event Calendar
After last week's parade of economic data this week is pretty quiet.
Economic and Event Calendar
- Monday, March 10 -
Bank of Japan interest rate decision
- Tuesday, March 11 -
- Wednesday, March 12 -
- Thursday, March 13 -
Weekly Initial Jobless Claims
China retail sales
China industrial production
U.S. retail sales for February
business inventory data
- Friday, March 14 -
Producer Price Index (PPI) for February
University of Michigan Consumer Sentiment Survey
Additional Events to be aware of:
Mar. 19th - FOMC policy update and economic projections
Mar. 19th - new Fed Chairman Yellen's first press conference
Earnings season is over. We have a very light scheduled of economic data. That could leave investors focused on geopolitical events overseas, specifically the Ukraine. We don't know yet how U.S. and European sanctions on Russia and Russia's reprisal sanctions and seizures on the West will impact markets.
I do find it interest that Russia will host the upcoming CIS meeting on April 4th in Moscow. What is the CIS? That's the Commonwealth of Independent States, comprised of former Soviet Republics. It's sometimes referred to as the Russian commonwealth. Current member countries include Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Uzbekistan, and of course Russia. Turkmenistan and Ukraine are unofficial members since they did not ratify the most recent charter.
On a side note, European borders have been changing for a long time. Here's a short video clip of European border changes over the last 1,000 years. click here.
The Bull Market Turns 5 Years Old
March 9th, 2014 happens to be the fifth anniversary or birthday of the current bull market. March 9th, 2009 was the closing low on the S&P 500 at 676 points. The intraday low was 666.79 on March 8th. The large cap index is up +177% from the 2009 low, which marks the second most powerful market move since World War II. The Dow Jones Industrial Average is up +10,000 points from its March 9th, 2009 low of 6,547.
It is worth noting that the current bull market had some help from the Federal Reserve. Five years later and multiple stimulus programs have swollen the Fed's balance sheet from $1.9 trillion to $4.1 trillion today (yes, you read that right. trillion with a "t").
The average bull market has a lifespan of about 3.8 years old, dating back to 1932. Only five bull markets in the last 80 odd years have lived more than 4 1/2 years old. Is the bull market living on borrowed time? While we don't have a large sample size to work with, those markets that do make it past their 5th birthday have a 60% chance of making it to their 6th birthday.
Here's another factoid for you, market technician Carter Worth pointed out that only seven times in history has the S&P 500 rallied five years in a row. 2013 was the fifth up year.
I do want to remind investors that a normal market sees a -10% correction about twice a year. Right now the market is up about 870 days without a 10% correction. Are we overdue for a correction? Absolutely! Does that mean one is imminent? No, it doesn't but if a correction shows up, possibly on rising geopolitical fears, then we shouldn't be surprised.
What is worrisome is the tone of the market. CNN's fear & greed index is firmly in the greed category. The volatility index (VIX) is awfully low considering a Russian invasion of one of its neighbors.
CNN's Fear & Greed index:
You can view the details
by clicking here.
The market's trend is still higher. However, I would not be surprised to see a minor pullback or see stocks churn sideways while investors wait to see how the situation in Ukraine turns out. We do have an FOMC meeting coming up in less than two weeks. Stocks could start to drift sideways the closer we get to the meeting as traders wait to hear what the Federal Reserve will do and their outlook for the economy.
U.S. stocks and bonds are the most likely beneficiaries of any global flight to safety. That doesn't mean they can't go down but they should perform better than their European peers as the Ukraine situation unfolds.