North American stock markets have stabilized in the last week as the focus has turned from broad macroeconomic events like a potential trade war toward developments in individual companies and sectors, particularly earnings reports.
So far this earnings season, market reaction to the results has been mixed. A number of reporting companies across different sectors have seen their stocks slide initially and then rebound. It’s as though some investors are looking to earnings news for an opportunity to get out or had overly high expectations and have been shaken out, while other investors have been looking at dips as an opportunity for bargain hunting.
Fed Chair Powell gave his first testimony to Congress this week, taking an upbeat tone about the US economic and employment outlook. With the economy growing and the central bank wary of allowing inflation pressures to build, Chair Powell suggested the Fed’s program of quarterly rate hikes is likely to continue for some time. This hawkish outlook continues to put a tailwind behind the US Dollar, with the US Dollar Index regaining 95.00 this week.
On the other hand, long-term interest rates remain stalled with the 30-year treasury yield still sitting just below the 3.00% level where a breach earlier in the year sparked a stock market selloff. This suggests that the street is expecting another 4-6 hikes over the next 12-18 months taking Fed Funds up into the 3.00%-3.50% area then stopping may be the plan.
In recent months, we have seen a rotation of capital away from the big cap stocks of multinational companies toward smaller cap and more domestically focused US companies. Initially this appeared to be due to the risk that multinationals could get caught in the crossfire of a trade war and duelling tariffs. Netflix (NFLX) highlighted an initial risk for multinationals this week; the rising US Dollar. A rising greenback reduces the US Dollar value of overseas sales earnings which could drag on the potential growth rate of multinationals relative to domestically focused companies. The impact of a rising currency on guidance may capture increased attention from investors as we move deeper into earnings season.
In this week’s edition of Equity Leaders Weekly, we take a look at the impact of global developments and capital flows on the price of gold and health care stocks.
Gold Continuous Contract (GC.F)
Gold has fallen of a cliff in recent months, plunging down from near $1,370/oz toward $1,225. Along the way, a number of previous support levels failed including $1,305 and $1,230. Historically, Gold has often weak at this time of year, but the yellow metal appears at risk to further pressure before setting a seasonal bottom with next potential support near the $1,200 round number then $1,170.
Gold is facing headwinds from three major factors in addition to seasonality.
First, it’s being impacted by the rise in the US Dollar. Gold is the world’s premiere hard currency while the US Dollar is the premiere paper currency and they often trend in opposite directions.
Second, the goldilocks economic environment of a strong economy coupled with rising interest rates has kept inflation under control. In recent weeks, crude oil has levelled off while copper and grain prices have plunged, reducing the need for gold as an inflation hedge.
Third, capital continues to flow out of defensive havens, not only Gold, but also the Japanese Yen. Trade war fears appear to be contained to China sensitive markets at the moment. Capital has been moving back into North American stocks on both sides of the border, indicating a willingness to take on risk for potential return.
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iShares US Healthcare ETF (IYH)
With investors focusing more intently on sectors that are focused on the US domestic economy and less at risk of being caught up in a trade war, the health care sector has been attracting renewed interest lately. In last week’s Equity Leaders weekly, we highlighted recent gains in the NASDAQ Biotechnology Index (NBI.I). This week we look at the iShares US Healthcare ETF (IYH) as representative of the wider health care sector.
Last winter, the sector ETF sold off with the overall US market but has been heating up again into the summer. IYH recently broke out of a downtrend clearing $180 and then completed a bullish Spread Triple Top clearing $133 to confirm the start of a new upleg. IYH has continued to climb since then and next faces potential resistance at it previous high near $192.00 followed by the $200 round number. A horizontal count suggests that $208 could potentially be tested over time. Initial support appears in the $175 to $180 area.
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