• U.S. stocks advance after Europe-focused selloff yesterday. Domestic markets opened higher this morning even as investors grapple with headline issues out of the European banking sector. The S&P 500 dipped 0.9% yesterday as healthcare (-1.8%), financials (-1.5%), and utilities (-1.5%) led the decline, while energy (-0.1%) outperformed as it has for much of the last week thanks to an ongoing rally in crude. European shares are mostly down, though well off of session lows, as concerns mount about the risks that Deutsche Bank may pose to the European banking system. In Asia, the Nikkei (-1.5%) sank amid a slew of economic reports, and the Hang Seng also lost ground; the Shanghai Composite finished with modest gains. Elsewhere, WTI crude oil ($48.15/barrel) is up half a percent this morning after climbing to fresh 3-week highs yesterday. Meanwhile, there is mild weakness in Treasuries as the yield on the 10-year note is up to 1.58%, while COMEX gold ($1325/oz.) sits near the middle of its range for the month.

• European bank concerns grow. The largest bank in Germany, Deutsche Bank, dropped nearly 7% yesterday on a report from Bloomberg that a number of funds that clear derivatives with the bank have lowered excess cash and reduced positions with the bank. This news came out midday and it sparked the sell-off in U.S. markets. How concerned should you be around the European banking problem? Here’s the catch, this is nothing new. Many European banks were down significantly over the past year, well before yesterday’s news hit. Today on the LPL Research blog, we will take a look at this very important development.
• Another big daily swing. The S&P 500 dropped 0.9% yesterday, for its largest daily drop since September 13. The Deutsche Bank worries sparked the equity weakness, with financials and healthcare the big underperformers on the day. All 11 S&P 500 sectors were lower, with energy (down 0.1%) the strongest. One thing is certain though, it is late September and volatility continues to increase. As we’ve been noting, the last few weeks of September until late October are historically the most volatile time of the year, and that is playing out so far. Technically, the S&P 500 found trouble near its flattening 50-day moving average and this was the seventh straight day the S&P 500 closed higher or lower by half a percent. That is the longest streak since eight in a row in late January.
• Private sector stability in China. The Caixin Purchasing Managers’ Index (PMI) for manufacturing in August was released at 50.1, consistent with expectations. The Caixin index is important, as it is a private sector company that works with smaller and midsized companies in the country, companies that are not heavily influenced by the government. This survey gives insight into the true situation in China. The data show stability, but not reacceleration of the Chinese economy.
• Week ahead. The September jobs report (due out Friday, October 7) concludes a busy week of data and events as markets gauge the health of the economy as Q3 ended and Q4 began. The September Institute for Supply Management (ISM) reading and vehicle sales will be closely watched as well, ahead of the start of Q3 earnings reporting season, which begins in mid-October. There are 10 more Federal Reserve Bank (Fed) speakers on the docket next week (after 13 this week), including an appearance from Fed Vice Chair Fischer. Overseas, China will release its PMI data for September over the weekend, and central bankers in India and Australia will meet next week. Japan’s key Tankan data for Q3 is due out over the weekend, so markets will already be reacting to it as trading resumes on Monday, October 3.

Friday

• Chicago Area PMI (Sep)
• Eurozone: CPI (Sep)
• China: Official Mfg. PMI (Sep)
• China: Official Non-Mfg. PMI (Sep)

Saturday

• Start of New Fiscal Year and Potential US Government Shutdown

Sunday

• Japan: Tankan Survey (Q3)

Click Here for our detailed Weekly Economic Calendar

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Member FINRA/SIPC
Tracking # 1-540926

German banks continue to dominate the headlines, with the largest German bank of them all, Deutsche Bank (DB), down more than 50% this year amid a litany of issues. For starters, negative interest rates in Europe have put a major damper on banks’ ability to create profits. Then, as this CNBC article notes, the U.S. Justice Department just levied a fine of $14 billion on DB to settle penalties regarding mortgage securities sold before the financial crisis in 2008. When you consider DB’s market cap is just under $16 billion, as the article notes, this fine has many concerned about its future. Lastly, an article on Bloomberg came out yesterday afternoon that drove DB and global equities lower on a report that a number of funds that clear derivative trades with the bank have withdrawn excess cash and reduced positions at the lender. In simple English, there are major counterparty concerns as related to DB currently.

We asked Matthew Peterson for his take on European banks and here’s what he had to say:

“It seems likely that the real issues will take months to fully resolve. In the interim, European bank prices will probably be determined by the big global hedge funds and fast money traders. Many of these traders have taken bets against European banks, but some have also been buying them, hoping for a recovery. We have seen this happen before in other banks; they stop reflecting fundamental value and effectively become vehicles for short term traders.”

European bank uncertainty is not a new issue. In fact, back in June in the Weekly Market Commentary, “Overcoming a Wall of Worries,” we listed European bank performance as one of our big concerns. Still, should a major European bank go under or need to be bailed out, this could create a good deal of worry over what dominoes fall next, and likely bring with it global volatility.

Here’s the interesting part—the German DAX continues to look technically strong. In fact, it recently broke above a trend line that goes clear back to the April 2015 peak.

As long as the DAX can stay above this trend line, we would view Germany as holding up relatively well. Should it break back beneath this trend line, we’d be much more concerned. We will continue to monitor the developments in European banks, as they could be a major market mover over the coming months.

IMPORTANT DISCLOSURES
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
The economic forecasts set forth in the presentation may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC

Tracking # 1-540778 (Exp. 09/17)

The Investment Company Institute (ICI) reported yesterday that municipal bond funds saw inflows of $754 million for the time period September 14, 2016, to September 21, 2016, the 51st consecutive week of inflows. Although we won’t know until next Wednesday if the asset class will hit a full year of uninterrupted inflows, the strength of the streak is worth discussing.

As the chart below shows, the current streak is the second longest, and also the second strongest, in the past 10 years. The only one that has been longer started following the financial crisis in 2009 and persisted until March 2010, with an average weekly inflow of $1.35 billion. The current stretch has a slightly lower, but still strong, $1.2 billion in average weekly inflows. It is also interesting to note that some previous streaks would have been much longer, if not for a lone outflow in the middle. Had these not been broken, the current run would only be the fourth longest, though would remain the second strongest.

While uninterrupted stretches of inflows make for a nice headline, investors are more interested in what they mean for markets going forward. We reviewed all streaks that hit at least 20 weeks, and the results are shown below. The sample size is small, and there are certainly other drivers of performance such as demand for municipal bonds outside of mutual funds, supply (see last week’s Bond Market Perspectives, “Municipal Supply Surge”), and macro events. However, the general trend seems to show positive performance while the streak is happening, with some short-term weakness after (though the data unfortunately do not show an easy way to forecast when the streak will end). Following the end of a streak, the total return on the Barclays Municipal Bond Index was positive only 38% of the time, though returns were positive in all but one case (88% of the time) at the one-year mark.

Even rarer than streaks of inflows are stretches of more than 20 weeks of outflows. There have been only two since 2007, and both happened during periods of market disruption (following fears of an uptick in municipal bond defaults in 2011, and the taper tantrum in late 2013). However, both of these events were clear buying opportunities in hindsight, with total returns following the first inflow at an average of 3.7% three months later, and a very strong 10.3% one year later.

Fund flows measure just one way of purchasing mutual funds, but the length of the current streak of inflows, coupled with the large average weekly amount, shows that we have been in a period of very strong demand for municipal bonds. Retail demand is difficult to forecast and can see sudden reversals, but municipal bond demand has remained strong in recent weeks, making it possible that we see headlines about a full year of inflows when results are reported next week.

IMPORTANT DISCLOSURES
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
The economic forecasts set forth in the presentation may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

The Barclays U.S. Municipal Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC
Tracking # 1-540575 (Exp. 09/17)