Stocks Squeak By as U.S. Dollar, Oil Drop Lower

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Hopes for a slowdown in the Federal Reserve’s rate hike campaign this year has led to a two-day drop in the U.S. dollar, lifting spirits on Wall Street. Meanwhile, the PowerShares U.S. Dollar Bullish Fund (NYSEARCA:UUP) has fallen back to levels not seen since the middle of October.

While a weak dollar is seen as a bad thing from a patriotic (reflects American strength) and consumer (increases import prices) standpoint, there are two reasons why this good news for stocks.

First, the dollar’s weakness is helping to stabilize commodity prices, with precious metals benefitting the most Thursday. Second, a weaker dollar would go a long way toward alleviating the pent-up pressure on corporate earnings.

At the end of trading Thursday, the Dow Jones Industrial Average gained 0.5%, the S&P 500 went up 0.2%, the Nasdaq Composite wafted up 0.1% and the Russell 2000 ended the day 0.4% higher. Gold gained 1.3%.

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Materials stocks led the way with a 2.8% gain. Consumer staples lagging behind with a 0.9% loss, however, and machinery and transport stocks finished strong. Highlights included an 18% gain in Freeport-McMoRan Inc (NYSE:FCX), a 10.1% gain in Alcoa Inc (NYSE:AA) and a 4.3% rise in Caterpillar Inc. (NYSE:CAT).

On the downside, ConocoPhilips (NYSE:COP) lost 8.6% after reporting a larger-than-expected loss for Q4 on lower realized gas and oil prices. GoPro Inc (NASDAQ:GPRO) lost 8.7% after releasing poor quarterly numbers and issuing disappointing forward guidance.

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The rise in precious metals and materials stocks was a perfect combination for the gold and silver positions recommended to Edge subscribers. Highlights included a 11.5% gain in Kinross Gold Corporation (USA) (NYSE:KGC), taking the position to a 17.3% gain February so far. Edge Pro subscribers are enjoying a 212% gain in their Feb. $105 calls on the Gold Trust ETF (NYSEARCA:GLD).

On the economic front, there was more evidence of labor market tightening and slowing manufacturing activity.

Nonfarm productivity dropped at a 3% annual rate in the fourth quarter, helping push up unit labor costs at a 4.5% annual rate, faster than the 1.8% rate seen in Q3 and above the consensus estimate for a 3.8% gain. But December factory orders were down 2.9% month-over-month (worst result since December 2014), a big comedown from November’s 0.7% slide and lower than the Street’s forecast for a 2.5% loss. What’s more, durable goods orders suffered their largest decline in December since the middle of 2014.

All eyes now turn to Friday’s nonfarm payroll report for hints as to the health of the labor market and the possible timing of additional Fed rate hikes. Analysts are looking for payrolls to grow 188,000 (vs. a 292,000 add in December) with the unemployment rate standing firm at 5%.

Although wage inflation is showing signs of picking up, a result matching the consensus forecast would likely push another 25 basis point Fed rate hike into the second half of the year, as U.S economic data, weakness in crude oil and recent declines in inflation expectations will give policymakers pause.

This should reinforce the idea that global central bankers are turning dovish. The Bank of Japan just cut rates into negative territory; the European Central Bank has hinted at more stimulus efforts as early as March; overnight, the Bank of England noted that wage growth has been more muted than expected.

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This should keep the pressure on the dollar and help stocks continue the oversold rebound out of the January lows, led by the areas of the market that were hit the worst by the post-2014 energy price meltdown, and are now best positioned to benefit from the likely increase in inflation later this year.

Materials. Gold. Silver. Mining stocks.

Should market chatter about a possible OPEC/Russia production cut actually come to fruition, energy and crude oil would be added to the list and the inflation surge will shift into overdrive.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/crude-oil-prices-obama/.

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