Base Metals Break Out

Base metals–as opposed to precious metals like gold and silver–are widely used in commercial and industrial applications, and their price movements can provide insights on the health of the global economy. And despite the observation that we are in the latter part of the economic cycle, base metals are certainly breaking out.

And it’s not just copper, the metal considered to have a Ph.D. in economics; zinc also broke through the $3,000/ton level for the first time in 10 years, and aluminum prices recently hit a three-year high. So, what’s happening here?

As usual, when something happens in the base metals markets, for better or worse, all eyes turn to China: the world’s largest consumer of industrial metals and one of the largest producers. However, China has curtailed its production of base metals, perhaps because of a slowing economy, but also to combat pollution. The world’s biggest aluminum producer, located in China, announced on Monday, August 21, that it had taken production capacity equal to 4.5% of last year’s global production offline. Similarly, nickel production in China is down 9% from last year’s levels at this time.

But it’s not just supply that is being contained here. Per Matthew Peterson, Chief Wealth Strategist, “We believe that the market is starting to discount the “China hard landing” story. We have been told for so long that the Chinese economy is about to disintegrate; maybe the market is starting to discount this possibility. Maybe China will instead start to behave like a normal economy, with ups and downs, but not booms and busts.” If you take away the nightmare scenarios for the Chinese economy, the range of potential outcomes for the global economy improves, and the metals markets are sensitive to that change. Of course, it could be premature to suggest smooth sailing for China’s economy as it still has not announced how it will deal with its bad debt problem.

 

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 involves risks including possible loss of principal.

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 #1-636694 (Exp. 08/18)

Market Update: Tuesday, August 22, 2017

MarketUpdate_header

Last Week’s Market Activity

  • Stocks closed mixed yesterday in a slow session. Dow, S&P 500 Index +0.1%, Nasdaq -0.1%.
  • Rate-sensitive sectors outperformed as Treasury yields fell; real estate (+1.1%), telecommunications (+0.7%), utilities (+0.3%).
  • Energy (-0.5%) was the laggard as oil prices dropped 2.4%. News of Libya working to reopen an export terminal, and a report of slightly lower compliance to OPEC’s output reduction deal in July were blamed for the fall.

Overnight & This Morning

  • Stocks in Asia up overnight. Hang Seng +0.9%, Shanghai Composite +0.1%. Japan bucked trend (Nikkei -0.1%). No economic news, though today marks opening talks to revise Korus agreement-trade deal between U.S., South Korea.
  • Generally positive in Europe, STOXX Europe 600 +0.6%, most countries positive (Italy the exception -0.5%). Euro down ~0.4% vs. dollar after >10% gain over past five months. Market will be focused on the European Central Bank (ECB) President Mario Draghi’s Jackson Hole speech Friday, and the September 7 ECB meeting for clues on possible tapering of current bond buying program.
  • German ZEW survey data showed high confidence in current economic conditions, but showed weakening, and weaker than expected, confidence in the future by German investors. Germany’s ongoing emissions cheating scandal (auto industry historically a source of pride in German economic model), combined with upcoming elections, potentially soured investor sentiment.
  • Treasuries fall after recent strength. 10-year yield +3 basis points (0.03%) to 2.21%.
  • Commodities – WTI crude oil ($47.40/bbl.) adding to prior losses, COMEX gold shedding prior day gains (-0.5% to $1290/oz.), industrial metals higher.
  • U.S. indexes are modestly higher in early trading, potentially boosted by reports that the Trump administration is making strides on tax reform.

MacroView_header

Key Insights

  • Markets may be more susceptible to volatility this month. We’re starting to enter a slower period of news flow, which along with weak August seasonals could make markets more susceptible to volatility from things like political discussions (budget, debt ceiling), geopolitical factors (North Korea), or other unexpected events in the near term. Earnings season is over and the economic calendar is slow. Expectations for the Kansas City Federal Reserve Bank’s annual Jackson Hole Economic Policy Symposium, attended by representatives from the central banks of more than 40 countries, are lower than they were a week ago, though markets will be watching closely, and it still has the potential to generate some news.

Fixed Income

  • U.S. Treasury rallied back at weeks end. Political issues, central banks, and Barcelona all combined to lead risk-off assets lower. Despite higher yields (lower prices) early in the week, the U.S. Treasury 10-year bond rallied back from a 2.27% on Tuesday, to a 2.19% on the week. Year to date, the U.S. 10-year Treasury is higher in price, but lower in yield by 0.26%. The 30-year bond finished the week at a 2.78% yield, lower by 0.01% from the beginning of the week (2.79%). The 2-year Treasury yield rose 0.03% on the week, underperforming the longer maturities. This brought the 2’s to 10’s slope, a measure of the steepness of the yield curve, flatter by 0.03% to 86 basis points (0.86%). Yields have traded in a tight range for months, and in this week’s Bond Market Perspectives piece, we take a look at why rates have been complacent and what may drive them higher or lower.
  • International bond prices were slightly lower in Germany. The German Bund 10-year prices were lower on the week from 0.38% to 0.39%. This brings the spread between the U.S. 10-year Treasury and the comparable German Bund to 1.80% (0.39% vs. 2.19%).
  • Municipal bond supply is lower. The Bond Buyer’s 30-day visible supply totaled $7.7 billion, below the 5-year average of $9.7 billion. Lower new issuance has led to municipal bond outperformance relative to the Bloomberg Barclays Aggregate Index. Month to date, the Bloomberg Barclays Municipal Bond Index is returning 0.82% vs. the Aggregate Index which is returning 0.50%. Year-to-date intermediate municipals are at 5.34% while the Aggregate Index is at 3.21%.
  • Municipal to Treasury ratios cheapen with the exception of shorter maturities. The 10-year municipal to Treasury ratio cheapened from 85.1% to 85.9% as measured by the Bloomberg BVAL AAA Muni Yield % of Treasury Index. Month to date, a similar pattern has emerged with 10-year ratios cheapening from 82.7% on July 31, 2017 to 85.9% today. The 5-year ratio is more expensive however, moving from 67.3% to 65.7% last week. It is important to note that 65.7% is approaching the 16-year low for the 5-year Index (2001-2017) of 63% reached on December 31, 2009. Generally, as ratios move lower or tighten, demand for municipals can decrease as prices relative to Treasuries become more expensive.
  • High-yield corporate bonds begin to show stress. Despite year-to-date returns of 4.79% as measured by the Bloomberg Barclays High Yield Corporate Index, the sector is underperforming the Bloomberg Barclays Aggregate Index by 0.70% month to date with returns of -0.20%. Pressure in the lower rated credit spreads is leading to underperformance this month.

MonitoringWeek_header

Click Here for our detailed Weekly Economic Calendar

Tuesday

Wednesday

  • Markit Mfg. and Services PMI (Aug)
  • New Home Sales (Jul)
  • France: Markit France Mfg. & Services PMI (Aug)
  • Germany: Markit Germany Mfg. & Services PMI (Aug)
  • Eurozone: Markit Eurozone Mfg. & Services PMI (Aug)
  • Eurozone: Consumer Confidence (Aug)
  • ECB: Draghi
  • Japan: Machine Tool Orders (Jul)
  • Japan: Nikkei Japan Mfg. PMI (Aug)

Thursday

  • Existing Home Sales (Jul)
  • Kansas City Fed Hosts Annual Jackson Hole Policy Symposium (8/24-8/26)
  • UK: GDP (Q2)
  • Germany: Import Price Index (Jul)
  • France: Business & Mfg. Confidence (Aug)
  • Bank of Italy: Visco
  • Japan: Leading Index (Jun)
  • Japan: CPI (Jul)

Friday

 

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.

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.

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.

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 #1-636529

 

 

Market Update: Monday, August 21, 2017

MarketUpdate_header

Last Week’s Market Activity

  • Stocks fell slightly Friday, S&P 500 Index -0.18%, Dow -0.35%, Nasdaq, Russell 2000 marginally lower. Stability after Thursday’s selloff was encouraging. Market focused on Steve Bannon, other potential White House departures with little consequence.
  • Utilities led, though Treasuries little changed; energy, materials the only other gainers.
  • Crude oil jumped 3% on dip in U.S. weekly rig count, Venezuela tensions.
  • Second straight weekly loss for major averages: Dow -0.84%, S&P 500 -0.65%, Nasdaq -0.64%. Biggest two-week loss for S&P 500 since November 2016 election. Focus on potential policy implications for Administration from Charlottesville incident.

Overnight & This Morning

  • Stock lower early. Geopolitics (North Korea in particular), White House remain in focus. With earnings season behind us, it feels like an August Monday.
  • Slight downside bias in Europe. Brexit talks, mergers in focus. German, French markets slightly lower, U.K. unchanged.
  • Asian markets mixed; Nikkei -0.40%, Hang Seng +0.4%, Shanghai Composite +0.6%.
  • Treasuries firm: 10-year yield at 2.18%.
  • Commodities: WTI crude oil ($48.24/bbl.) -0.7%, COMEX gold ($1295/oz.) +0.2%.
  • Jackson Hole likely market’s primary focus this week, but economic calendar also includes durable goods, new home sales, preliminary global manufacturing survey data, second quarter gross domestic product for Germany, U.K., Mexico.

MacroView_header

Key Insights

  • The Federal Reserve’s (Fed) annual Jackson Hole Symposium begins later this week, taking place from August 24-26. This gathering of central bankers has taken place annually since 1978 and tends to be closely watched by markets. While maybe not as exciting as today’s eclipse, this meeting has been significant historically, with central banks at times using the conference to signal upcoming changes to policy. Both Fed Chair Yellen and European Central Bank President Mario Draghi will be in attendance, though expectations for major monetary policy announcements are lower following the release of dovish July meeting minutes from both banks. We discuss our expectations for this year’s event in more detail in this week’s Weekly Economic Commentary, due out later today.

Macro Notes

  • Earnings season update: That’s a wrap. Second quarter earnings season is over, and it was a good one, as we detailed in last week’s Weekly Market Commentary. The S&P 500 has produced a solid 12% year-over-year growth rate, with 4% upside to estimates as of quarter end (June 30), and very impressive beat rates on earnings (73%) and revenue (69%). Energy, financials, and technology shared the load in making the biggest contributions to earnings growth. Note: This will be our last earnings dashboard of this season; however, our “corporate beige book” commentary that analyzes earnings conference call transcripts is coming soon.

  • Generally upbeat corporate management teams. During reporting season, forward estimates only slipped 0.7%; better than the historical average drop of 2-3% and indicative of corporate optimism (analysts are almost always too optimistic). Estimates could certainly come down further, but even in the absence of a fiscal policy boost (unlikely until 2018), the earnings outlook for the second half of the year looks positive.
  • Down two in a row. The S&P 500 closed down 0.6% last week for the second consecutive weekly drop and third in the past four weeks. What stands out about this is how small the losses have been. Incredibly, the S&P 500 has now gone 49 consecutive weeks without a weekly loss of 2% or more, the longest since 61 consecutive weeks that ended in early January 1996. The longest ever was 90 consecutive weeks in the late 1950s. This is yet another way of showing how rare the action over the past year has been.
  • What do the stars say? Today is the first total solar eclipse since 1776 whose path falls only in the U.S. In fact, it has been 26 years since the last total solar eclipse was visible in one of the 50 states, which makes today’s event more unique. First things first, we would never invest based on what the solar system is saying. Still, we had many ask – so we looked at how stocks do around an eclipse. For details, please see today’s LPL Research blog.
  • We think it is a good time to consider taking a little risk off table. In our latest Weekly Market Commentary, due out later today, we discuss how the risks to the market have been stacking up, we are in a seasonally weak period, and we’re probably due for a pullback after a long period of calm. But the longer term outlook still looks good, as we see no recession on the horizon and corporate America is in excellent shape. And don’t count out a tax deal in early 2018. If the moon can completely blocked out the view of the sun, as it will this afternoon, then anything can happen.

MonitoringWeek_header

Click Here for our detailed Weekly Economic Calendar

Monday

Tuesday

Wednesday

  • Markit Mfg. and Services PMI (Aug)
  • New Home Sales (Jul)
  • France: Markit France Mfg. & Services PMI (Aug)
  • Germany: Markit Germany Mfg. & Services PMI (Aug)
  • Eurozone: Markit Eurozone Mfg. & Services PMI (Aug)
  • Eurozone: Consumer Confidence (Aug)
  • ECB: Draghi
  • Japan: Machine Tool Orders (Jul)
  • Japan: Nikkei Japan Mfg. PMI (Aug)

Thursday

  • Existing Home Sales (Jul)
  • Kansas City Fed Hosts Annual Jackson Hole Policy Symposium (8/24-8/26)
  • UK: GDP (Q2)
  • Germany: Import Price Index (Jul)
  • France: Business & Mfg. Confidence (Aug)
  • Bank of Italy: Visco
  • Japan: Leading Index (Jun)
  • Japan: CPI (Jul)

Friday

 

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.

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.

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.

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 #1-636057