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posted on 27 May 2016

Investing.com Weekly Wrap-Up 27 May 2016

Written by , Investing.com

U.S. stocks rally late after Yellen foresees near-term rate hike

U.S. stocks ticked up on a volatile final session before the Memorial Day holiday, as Janet Yellen rattled Wall Street by offering strong indications that the Federal Reserve could raise interest rates in the coming months.

The Dow Jones Industrial Average gained 44.93 or 0.25% to 17,873.22, while theNASDAQ Composite index added 31.74 or 0.65% to 4,933.51, rallying late in the session after briefly turning negative in response to Yellen's remarks. The S&P 500 Composite index, meanwhile, rose 8.96 or 0.43% to 2,099.06, as nine of 10 sectors closed in the green.

Building off hawkish comments from her colleagues on the Federal Open Market Committee over the last two weeks, Yellen said Friday afternoon that it could be appropriate for the Fed to implement an imminent rate hike if the economy and labor markets continue to show improvement. The FOMC has left its benchmark Federal Funds Rate at a targeted range between 0.25 and 0.50% in each of their three meetings in 2016, after halting a seven-year zero interest rate policy in December. Any rate hikes from the Fed this year are viewed as bearish for equities, as investors pile into safer investments such as government bonds in order to capitalize on higher yields.

Yellen said in a Question-And-Answer session with Harvard economics professor Gregory Mankiw:

"It's appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time."

Stocks in the Financials, Health Care and Consumer Services industries led, each gaining more than 0.5% on the session. Stocks in the Basic Materials sector lagged, closing fractionally lower on Friday.

With the sharp gains over the last five days, the Dow posted its strongest weekly performance over the last 10 weeks, while the NASDAQ and S&P 500 recorded their best week in more than two months. The major indices are on track for their third consecutive monthly gains.

The top performer on the Dow was VZ Holding AG (SIX:VZN), which gained 0.44 or 0.88% to 50.60. Verizon shares rose moderately on Friday after the leading wireless service provider agreed on terms of a deal, halting a six-week labor strike that involved 36,000 union workers. The agreement between Verizon and two prominent unions, the Communications Workers of America (CWA) and the International Brotherhood of Electrical Workers, came after two weeks of negotiations brokered by the U.S. Department of Labor. Terms of the deal were not disclosed. Chris Shelton, president of the CWA, said in a statement:

"This proves that when we stand together we can raise up working families, improve our communities and protect the American middle class."

The worst performer was McDonald's Corporation (NYSE:MCD), which lost 0.53 or 0.43% to 123.26. Shares in McDonalds, which have lingered near 52-week highs throughout the spring, are still up by more than 25% over the last year.

The biggest gainer on the NASDAQ was Ulta Salon Cosmetics & Fragrance (NASDAQ:ULTA), which soared 19.46 or 9.11% to 233.15 after the beauty retailer posted record sales growth and topped analysts' earnings forecasts last quarter. The Chicago-based company now expects full-year earnings to grow by more than 20% for Fiscal Year 2016. The worst performer was Check Point Software Technologies (NASDAQ:CHKP), which fell 2.21 or 2.58% to 83.60.

On the New York Stock Exchange, advancing issues outnumbered declining ones by a 2,019-1,000 margin.

Additional stock news from Reuters at Investing.com with more details on U.S. markets.

Forex

EUR/USD fell sharply on Friday, plummeting to fresh 10-week lows, after Federal Reserve chair Janet Yellen said it could be appropriate to raise short-term interest rates in the near future if incoming data in the coming weeks fulfills the expectations of the U.S. central bank.

The currency pair traded between 1.1111 and 1.1201, before settling at 1.1115, down 0.71% on the session. Since hitting nine-months in early-May, EUR/USD has fallen considerably by nearly 3%. Despite the recent pullback, the euro is still up sharply against its American counterpart over the last 12 months. Last year, during the last Friday of May, EUR/USD closed just under 1.10.

EUR/USD likely gained support at 1.1055, the low from March 15 and was met with resistance at 1.1434, the high from May 12.

The dollar rapidly appreciated on Friday afternoon after Yellen ostensibly supported a rate hike for the first time this year. Echoing hawkish sentiments from her colleagues on the Federal Open Market Committee over the last two weeks, Yellen said Friday afternoon that it could be appropriate for the Fed to approve an imminent rate hike if the economy and labor markets continue to show improvement. The FOMC has left its benchmark Federal Funds Rate at a targeted range between 0.25 and 0.50% in each of their three meetings in 2016, after halting a seven-year zero interest rate policy in December.

Any rate hikes by the Fed this year are viewed as bullish for the dollar, as foreign investors pile into the greenback in order to capitalize on higher yields.

At the same time, Yellen noted that the unemployment rate nears the FOMC's long-term objective, even as wage growth and the level of part-time workers, marginally attached to the labor market remains soft. Yellen also blamed ineffective fiscal policy initiatives for leading to slower productivity growth:

"That's a serious and negative development."

Prior to her appearance, the U.S. Commerce Department revised prior estimates of first quarter GDP higher by 0.3% to 0.8% on Friday morning, slightly below consensus forecasts of 0.9%. Though residential investment and exports helped drive growth, non-residential investment and government purchases continued to lag. In addition, soft personal consumption data could compel the Fed to adjust the timing of its next rate hike. In its latest estimates, the Commerce Department lowered the GDP price index for the first quarter by 0.1 to 0.6% on a year over year basis. Analysts expected to see a flat reading of 0.7%.

Also on Friday, the University of Michigan's Consumer Survey Center said consumer sentiment fell 1.1 points in May from the flash reading when it surged nearly 7 points to 95.8, the strongest monthly improvement in a decade. Despite the slight pullback, consumer sentiment is still at its highest level in more than a year.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, gained more than 0.6% to an intraday high of 95.77, before settling at 95.73 The index is still down by more than 3% since early-December.

Yields on the U.S. 10-Year rose two basis points to 1.85%, while yields on the Germany 10-Year fell one basis point to 0.14%.

CTFC Commitment of Traders

This week speculators became less bullish on oil, gold and the yen and shifted from slightly bearish to bullish on the S&P 500. Bullishness decreased for the yen increased on the dollar.

Note: This data closes on Wednesday so the last two days of trading are not reflected.

cot.2016.may.25

Gold

Gold inched down on Friday remaining near three-month lows as moderate upward revisions to first quarter U.S. GDP helped boost the dollar, ahead of a closely-watched speech by Federal Reserve chair Janet Yellen at Harvard University.

On the Comex division of the New York Mercantile Exchange, gold for June delivery traded between $1,210.00 and $1,223.20 an ounce before settling at $1,212.95, down $7.45 or 0.61% on the session. For the week, gold tumbled more than 2.5% extending losses from a week earlier when the Fed triggered a sell-off with strong suggestions that it could raise interest rates when it meets again next month.

Since hitting 15-month highs around $1,300 an ounce at the start of May, gold has plunged more than 5% and $75 an ounce. Nevertheless, the precious metal is still holding onto massive gains from the first quarter is on pace for one of its strongest first halves of a year in more than a decade.

Gold likely gained support at $1,125.00, the low from February 3 and was met with resistance at $1,304.40, the high from May 2.

On Friday morning, the U.S. Commerce Department revised prior estimates of first quarter GDP higher by 0.3% to 0.8% on an annual basis, slightly below consensus forecasts of 0.9%. Though residential investment and exports helped drive growth, non-residential investment and government purchases continued to lag. In addition, soft personal consumption data could compel the Fed to adjust the timing of its next rate hike. In its latest estimates, the Commerce Department lowered the GDP price index for the first quarter by 0.1 to 0.6% on a year over year basis. Analysts expected to see a flat reading of 0.7%.

Also on Friday, the University of Michigan's Consumer Survey Center said consumer sentiment fell 1.1 points in May from the flash reading when it surged nearly 7 points to 95.8, the strongest monthly improvement in a decade. Despite the slight pullback, consumer sentiment is still at its highest level in more than a year.

Analysts from Morgan Stanley (NYSE:MS) warned in a report that an imminent rate hike from the Fed would be a "mistake," due primarily to lower than expected first half growth and "abundant downside risks" to the economy. Earlier this week, strategists at the Wall Street firm said they expect the Federal Open Market Committee (FOMC) to raise short-term interest rates next at their monetary policy meeting in December, the last time the FOMC will meet this year. A gradual rate path is bullish for gold, which struggles to compete with high yield bearing assets when rates increase rapidly.

Gold's recent downturn can also be attributed to a rally among global equities, which has dampened enthusiasm for gold as a safe-haven asset. The Euro Stoxx 600 Index inched up on Friday to close at 3,078.48 ending the session up approximately 3% for the week. On Wall Street, the three major indices were all on pace to close with their strongest week in more than two months.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, gained more than 0.4% to an intraday high of 95.60. The index is still down by more than 4% since early-December. Dollar-denominated commodities such as gold become more expensive for foreign purchasers when the dollar appreciates.

Silver for July delivery fell 0.083 or 0.51% to $16.260 an ounce.

Copper for July delivery inched up 0.010 or 0.45% to $2.112 a pound.

Oil

Crude futures eased on Friday, settling just below $50 a barrel, as long-term supply concerns remained in focus ahead of Memorial Day Weekend, the official start to the summer driving season.

On the New York Mercantile Exchange, WTI crude for June delivery traded in a broad range between $48.70 and $49.47 a barrel before settling at $49.27, down 0.21 or 0.42% on the session. On the Intercontinental Exchange (ICE), brent crude for July delivery wavered between $48.70 and $49.55 a barrel, before closing at $49.22, down 0.37 or 0.75% on the day. With one session left in May, both the international and U.S. benchmarks are up more than 10% for the month.

Brent traded at a 0.05 discount against WTI at Friday's close of trading, down slightly from Thursday's close when it traded at a 0.10 premium. Earlier this week, the front month contract for North Brent sea futures slipped below WTI for the first time in months.

Crude prices were relatively unaffected by reports of a slight decline in U.S. oil rigs last week, providing further indications that top energy companies are still hesitant to reinvest in drilling operations even as oil hovers near 7-month highs. One session earlier, oil hit $50 a barrel for the first time in 2016, amid continued production slowdowns in Nigeria and signals of increased demand in Asia.

On Friday afternoon, oil services firm Baker Hughes said in its weekly rig count report that U.S. oil rigs fell by two to 316 for the week ending on May 20. A week earlier, the domestic oil rig count stabilized, marking the first time in nine weeks the oil rig total did not move lower. The rig count stood at 646 at this time last year, representing a 36% increase from the current level. Meanwhile, the combined Oil and Gas rig count stayed flat last week at 404, as gas rigs rose by 2 to 87.

Energy traders continued to monitor developments in Nigeria, one day after the Niger Delta Avengers, a Southern Nigerian insurgent group, claimed responsibility for an explosion that shut down operations at a Chevron Corporation (NYSE:CVX) facility. As fighting between rogue terrorist factions persist, a series of production halts at key operational facilities have dragged Nigerian output below 1.2 million barrels per day, according to Platts. At current levels, crude production in Nigeria remains near 20 year lows.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, extended gains following relatively hawkish remarks by Federal Reserve chair Janet Yellen on Friday afternoon. At a closely-watched speech in Cambridge, Mass., Yellen indicated that it could be appropriate for the U.S. central bank to lift rates in the coming months if the economy and the labor markets continue to show improvement. The index, which has crashed 4% since early-December, surged more than 0.60% in Friday's session to an intraday-high of 95.76.

Also on Friday, AAA said in its Daily Fuel Gauge Report that the average price of gasoline per gallon stood at $2.32, 0.40 below their level 52 weeks ago. While U.S. gas prices have crept up to 2016-yearly highs, they are still at their lowest level on Memorial Day Weekend in a decade. Approximately 34 million Americans are traveling this weekend, according to AAA.

Despite the recent upswing in oil prices, crude is still down by more than 50% from its level in June, 2014, when it peaked at $115 a barrel.

Natural Gas (Thursday Report)

U.S. natural gas futures extended losses in North America trade on Thursday, after data showed that natural gas supplies in storage in the U.S. rose more than expected last week.

Natural gas for delivery in June on the New York Mercantile Exchange dropped 4.4 cents, or 2.02%, to trade at $2.137 per million British thermal units by 14:34GMT, or 10:34AM ET. Prices were at around $2.172 prior to the release of the supply data.

The U.S. Energy Information Administration said in its weekly report that natural gas storage in the U.S. in the week ended May 20 rose by 71 billion cubic feet, compared to expectations for a gain of 68 billion.

That compares with a gain of 73 billion cubic feet in the prior week, an increase of 112 billion cubic feet in the same week a year earlier and a five-year average rise of around 97 billion cubic feet.

Total U.S. natural gas storage stood at 2.825 trillion cubic feet, 26.8% higher than levels at this time a year ago and 27.2% above the five-year average for this time of year.

Meanwhile, the latest U.S. weather model called for mild temperatures over the next two weeks, which should reduce heating demand during that time.

Natural gas prices have closely tracked weather forecasts in recent weeks, as traders try to gauge the impact of shifting outlooks on spring heating demand.

Gas use typically hits a seasonal low with spring's mild temperatures, before warmer weather increases demand for gas-fired electricity generation to power air conditioning.

Unless intense summer heat boosts demand from power plants, stockpiles will test physical storage limits of 4.3 trillion cubic feet at the end of October.

Natural gas prices are down nearly 15% so far this year as weak winter heating demand, near-record production and record-high storage levels dragged down prices.

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