TRADING THE WEEK: Gains Continue Despite Weak Jobs

There’s no stopping the U.S. equities market.

US equities extended their gains last week, throwing caution and a weak US job report to the curb. The S&P 500 closed at a record high last Thursday – it’s longest streak of all-time closing highs since 1997.

Last week saw the market jolted slightly by the monthly jobs report, which reported an unexpected drop of 33,000 versus an expected 66,000 gain in employment. While traders foresaw some hiring troubles given the effects of multiple hurricanes in parts of the U.S., few, if any saw a net loss of jobs.

“Hurricanes are responsible for the weak September job report breaking a streak of 83 months of positive job growth here in the US,” said William Mingoine, Head of Equities at Drexel Hamilton. “Job growth has been weakening with negative revisions to both July and August numbers (38k total).  Wages were still positive, keeping the opportunity for the Fed to raise rates in December.”

Despite the report, figures from the United States, Europe and China released last week all showed continued solid economic growth globally, lending enthusiasm to the equities markets. Mingione added that september figures for the US manufacturing and services sectors both showed their strongest readings in more than a decade, but the US data may have been somewhat distorted by the recent hurricanes.

Also lending support to stocks is traders view of risk – in this case political risk despite some sabre rattling that continues out of North Korea.

In the US, traders were encouraged by progress in Congress toward a final agreement on a budget resolution. Also, the markets seem to have an eye on President Trump’s next pick for Chairman of the Federal Reserve. Mingione said that there appears tobe a short list of candidates of four, or perhaps five, people.

“Trump has reportedly spoken with Fed chair Janet Yellen about re-upping, though she is not expected to receive reappointment, according to reports,” Mingione said. “Sitting Fed governor Jerome Powell, former governor Kevin Warsh and National Economic Council director Gary Cohn have all reportedly spoken with the president about the position, while Stanford University economist John Taylor has apparently not been interviewed but is said to be under consideration. All are known quantities to the markets, with Warsh and Taylor seen as the most hawkish of the group.

In the fixed-income markets, the number of investors reporting they were short longer-dated Treasurys increased to 44% from 30% in the past week, while those reporting long positions dropped to 5% from 11%, according to a JPMorgan Chase client survey. Analysts attribute the drop in longer-dated bond holdings to the Federal Reserve's intentions to continue increasing interest rates, as well as the announcement of President Donald Trump's tax plan.

In other market news, The Consolidated Audit Trail (CAT), years in the making, might have to wait a little longer before going online.

In testimony to Congress, Jay Clayton, Chairman of the SEC, said he had outstanding questions related to the CAT and that the SEC wouldn’t accept data from the massive system until they were answered, according to a report on Bloomberg. More generally, Clayton said his agency was conducting a review to make sure the SEC wasn’t collecting unnecessary personal information.

“I’ve made it clear that I don’t want information unless we need it for our mission,” Clayton told lawmakers.

Chair Clayton affirmed that the CAT was “very important” to the SEC’s oversight role, but stressed that the SEC “would not take sensitive data that we cannot protect.”

The exchange traded fund (ETF) sector continues to see record inflows across asset classes, reported State Street Global Advisors. Despite heightened geopolitical tensions and growing uncertainty around fiscal policy, the debt ceiling, and the Fed, US-listed ETFs posted inflows of $22 billion in August. This raises 2017’s year-to-date total to $295 billion – topping 2016’s record high of $285 billion of inflows and hitting an all-time high in inflows.

Matthew Bartolini, Head of SPDR Americas Research at SSGA, told Traders Magazine that if the year were to stop here, this would be the highest annual haul ever – besting the record set just last year of $285 billion. The pace of inflows has slowed, however, he cautioned. This month’s total is 20% less than July’s figure of $28 billion, which was 42% less than June’s.

“This reduction is largely driven by a slowing of equity flows, even as the category surpassed the $200 billion mark for the year in August,” Bartolini said. “Fixed income ETFs flows also slowed, although they’ve been strong all year.”

Lastly, in the syndicate markets chatter has surfaced that the global and multi-billion Saudi Aramco offering might be delayed, according to reports. Market scuttlebutt has it that the Kingdom is preparing contingency plans for a possible delay to the IPO of the state-owned oil company by a few months into 2019, according to people familiar with the matter.

That is not say that a delay from the original 2018 date is certain as the government is still aiming for an IPO next year. But sources told Bloomberg that 2018 could prove a challenge given the complexities of the global offering and its enormous size.

In aa statement, Saudi Aramco said the IPO "remains on track. The IPO process is well underway and Saudi Aramco remains focused on ensuring that all IPO related work is completed to the very highest standards on time.” However, no specific time was mentioned.