Monday, August 1, 2016

Market Circle-Up

Global equity markets exhibited caution in the final week of July amid the latest round of corporate earnings and key economic data releases. Quarterly earnings were largely responsible for the return differentials in the major U.S. stock indexes, as the tech-heavy NASDAQ advanced 1.22% for the week, whereas the Dow Jones Industrial Average shed 0.8% and, despite registering an intraday record high, the S&P 500 declined 0.7% for the week. Although momentum from the post-Brexit rebound appears to be waning, U.S. stock indexes still remain at near record levels, with the NASDAQ, Dow Jones and S&P 500 up 6.60%, 2.80%, and 3.56% respectively for the month of July.

Better than expected earnings reports from several new age bluechip tech companies, including Facebook (FB), Alphabet (GOOGL), and Amazon (AMZN), helped boost the NASDAQ index. It is no surprise, therefore, that funds that devote large weightings to these tech behemoths, such as the iShares U.S. Technology ETF (IYW), have benefited from the warming of investor sentiment towards technology companies - IYW was up 8.41% for the month of July.

On the opposite end of the spectrum, the Dow was hampered by the impact of continued sluggish global economic growth and the recent descent of oil prices. After reporting second-quarter, same-store sales growth that fell short of estimates, McDonalds (MCD) weighed on the Dow's performance.

Additionally, with U.S. crude oil registering its biggest one-month decline and approaching a bear market from its recent June high of $51.23 a barrel, energy companies added further pressure to the Dow. Of course, what happens in the underlying, comes out in the ETFs and therefore our fund flow summary reflects the struggles of the energy industry.  For example, the Energy Select Sector SPDR fund (XLE) experienced nearly $150 million of redemptions during the past two weeks.

The overall headwinds pressuring the Dow are also evident in our Behavioral score of the SPDR Dow Jones Industrial Average ETF (DIA), dropping from a score of 61 at the beginning of the week to its current score of 48. With overlapping component companies, the larger, more diversified S&P 500 essentially split the difference between the NASDAQ and the Dow for the week.

Aside from a slew of earnings releases, global central bank policy announcements captured the attention of investors. The Federal Reserve held the line on interest rates, but conveyed confidence in the US economy and raised the possibly of a rate increase as early as September. This improving outlook was somewhat offset by a downward revision of first-quarter GDP growth and a disappointing 1.2% annual growth rate for second-quarter GDP.

Across the Pacific, the Bank of Japan surprised many market observers by not expanding their monetary and fiscal stimulus packages. The lone action from the BOJ was an expansion of its equity ETF buying program. This measure appears to have offered immediate support for Japanese-based ETFs, as the iShares MSCI Japan ETF (EWJ) was the top gainer on our weekly Quant Movers list.

As we look toward the week ahead, the marquee economic event will be the U.S. employment report on Friday. A strong jobs report could bolster the Feds confidence and increase the possibility of a September rate hike. Apart from the employment report, investors will be paying attention to the Bank of England Monetary Policy Committee's meeting and the release of durable goods orders, vehicle sales, and PMI data.

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