Market Update: Wednesday, August 5, 2020

U.S. markets showed strength for the 4th-straight session on signs of a stimulus deal being reached by Friday. President Trump has indicated he will go it alone on the payroll tax cut if he has to and is not included in the deal.

Reports that the U.S. and China will meet on August 15th to assess the phase one trade deal also fueled sentiment and helped offset mixed economic news.

The Russell 2000 jumped 1.9% following the late day push to 1,546. Current and lower resistance from early June at 1,535-1,550 was cleared and held. A move above the latter would indicate additional momentum towards 1,560-1,575.

The Dow soared 1.6% with the intraday high reaching 27,221. Mid-July and lower resistance at 27,000-27,250 was recovered. A close above the latter would be an ongoing bullish signal for additional upside towards 27,500-27,750.

The S&P 500 added 0.6% while reaching a session peak of 3,330. Early February and lower resistance at 3,325-3,350 was reclaimed. A close above the latter would suggest continued strength towards 3,375-3,400 with the current all-time high at 3,393.

The Nasdaq rose 0.5% after trading to an intraday and all-time high of 11,002. New and lower resistance at 10,950-11,050 was breached and held. A move above the latter would keep upside potential towards 11,100-11,200 in focus.

Industrials led sector strength after rallying 1.9% while Materials and Financials gained 1.5% and 1.4%, respectively. Utilities and Real Estate paced sector weakness after sinking 1.3% and 0.8%, respectively.

European markets closed higher across the board.

UK’s FTSE 100 added 1.1% and France’s CAC 40 rose 0.9%. The Stoxx 600 and Germany’s DAX 30 rose 0.5% while the Belgium20 climbed 0.3%.

Asian markets were mixed as a number of services PMIs weighed on sentiment.

South Korea’s Kospi soared 1.4% and Hong Kong’s Hang Seng rose 0.6%. China’s Shanghai edged up 0.2%. Australia’s S&P/ASX 200 was down 0.6% and Japan’s Nikkei declined 0.3%.

China’s Caixin/Markit services Purchasing Managers’ Index fell to 54.1 from June’s 58.4 print, which was the highest reading since April 2010. Japan’s PMI edged up to a seasonally adjusted 45.4 in July, up from 45 in June and a preliminary 45.2 reading. Meanwhile, Australia’s reading fell back to 58.2 from 58.5.

MBA Mortgage Applications fell -5.1% last week, after dipping -0.8% previously. The headline index was 55.3% year-over-year higher, but much lower than the 71.5% pace previously. The refi index led the decline, tumbling -6.8%, while the purchase index slid -1.8%. On a 12-month basis, refis are up 84.1% year-over-year versus 122% previously while purchases are up 21.5% year-over-year versus 21.1% previously. The 30-year mortgage rate continued to slide and fell to 3.14% on the week, from 3.20%. The 5-year ARM inched up to 3.09% versus 3.08% previously.

June trade deficit narrowed -7.5% to -$50.7 billion, after widening 10.1% to -$54.8 billion in May, which was a 17-month high. Exports rebounded 9.4% following May’s -4.3% drop, and breaks a string of three monthly declines. Imports jumped 4.7% after sliding -0.7% previously, and stops four months of declines. The deficit excluding petroleum shrank to -$52.0 billion versus -$55.1 billion. The “real” goods balance fell to -$81.0 billion from -$86.2 billion.

ADP reported private payrolls increased 167,000 in July, but sharply blow estimates of 1,888,000, following a 4,314,000 jump in June and the 3,341,000 bounce in May. The services sector added 166,000, with professional/business services leading the way, followed by education and health services with 46,000, and trade/transport with 41,000. Financial firms let go 18,000 workers. The goods producing sector added 1,000 jobs while construction shed 8,000. Large companies added 129,000 jobs.

Markit PMI Services Index rose to 50 in the final July read, bettering the 49.6 preliminary and the 47.9 reading in June. The prices charged sub-index rose to 55.8 from 53.1 and is the highest since October 2018. Input prices also increased to their highest since October 2018. The final print on the composite index was unchanged at 50 from the preliminary and is stronger than the 47.9 print in June. Of note, all three indexes are back at their best readings since the start of the year and they are at or above the 50 expansion-contraction mark.

ISM Services Index rose 1 point to 58.1 in July, topping forecasts, after jumping 11.7 points to 57.1 in June. The employment number fell to 42.1 from 43.1, though it’s up from the 30 in April. New orders rallied to 67.7 from 61.6 and it’s double the 32.9 from April. New export orders dropped to 49.3 from 58.9, with imports at 46.3 from 52.9. Prices paid slid to 57.6 from 62.4.

Fed vIce Chairman Richard Clarida noted that high frequency data were reflecting a slowdown in July growth but he expects a rebound this quarter with the economy back at pre-virus levels by the end of 2021. He hasn’t changed his longer run outlook as he doesn’t see damage to that view yet. However, he said the longer the pandemic drags on, the more dame it will do to the economy and that the course of the economy will hinge on the virus.

Clarida went on to say very powerful disinflationary forces are keeping down global rates. He acknowledged that the FOMC discussed the Framework Review at last week’s meeting and said that the they are examining important evolutions in the strategy.

The iShares 20+ Year Treasury Bond ETF (TLT) was down for the 3rd time in 4 sessions following the intraday pullback to $169.69. Prior and upper support at $170-$169.50 was breached but held. A close below the latter would signal a false breakout with additional backtest potential towards $168.50-$168.

Lowered resistance is at $170.50-$171 followed by $171.50-$172.

The S&P 500 Volatility Index ($VIX) extended its losing streak to 4-straight sessions with the morning low tapping 22.86. Current and upper support at 22.50-22 was challenged but held for the 2nd-straight session.

Resistance remains at 25-25.50 followed by 26.50-27 and the 200-day moving average.

The Spider Small-Cap 600 ETF (SLY) extended its winning streak to 3-straight sessions after tagging a high of $64.02 ahead of the closing bell. Lower resistance from early June at $64-$64.50 was cleared but held. A close above the latter would signal a retest towards $65-$65.50 with the June peak at $65.55.

Rising support is at $63.50-$63. A close below the latter would suggest a false breakout with backtest potential towards $62-$61.50 and the 200-day moving average.

RSI is in an uptrend with key resistance and the May high at 65 getting cleared and holding. Continued closes above this level would signal strength towards 70-75 with the latter representing the June top. Support is at 60-55.

The Utilities Select Spider (XLU) remains in a 14-session trading range following the morning pullback to $59.81. Current and upper support at $60-$59.50 was breached but held on the close back below the 200-day moving average. A move below $59.50 would suggest additional weakness towards $59-$58.50 and the 50-day moving average.

Lowered resistance is at $60.50-$61. A close above the latter and the late July high at $61.42 would be a bullish signal for a retest towards $62-$62.50 with the early June peak at $62.36.

RSI is back in a downtrend after failing to hold upper support at 55-50. A close below 50 would signal additional weakness towards 45-40 with the latter representing the late June low. Resistance is at 60-65.