Market Update: Tuesday, February 2, 2016

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  • Afternoon buyers retreat, stocks end flat. Indexes shook off early selling pressure stemming from weak economic data at home and abroad to stage an afternoon rally as investors instead focused on the week ahead, but equities failed to hold gains into the close and finished close to par. WTI crude oil sank more than 7%, dragging the energy sector down with it, while interest rate sensitivity helped utilities and telecom stocks outperform but served as a headwind for financials. COMEX gold rose 0.9% on the day, while 10-year Treasury yields rose 0.03% to 1.96%. Final tallies: Dow: -17.12 to 16449.18, Nasdaq: +6.41 to 4620.37, S&P 500: +0.86 (-0.04%) to 1939.38.
  • Equities resume oil price tag along. Indexes are down this morning, though off earlier lows, as traders are again eyeing oil prices after yesterday’s divergence and amid today’s light economic calendar. Some big name earnings reports due out could also provide direction. Overseas, the story is much the same, though China’s Shanghai Composite was among the few gainers in Asian trading overnight, up 2.2%. European markets are also feeling some pressure from disappointing producer prices and mixed earnings. Treasuries and gold are retracing some of yesterday’s moves.

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  • Strong start for high-quality bonds. January was the strongest month for the overall fixed income market in a year according to Barclays Aggregate Bond Index (+1.38). Among sectors, high-quality government bonds led performance globally, as per the Barclays US Treasury Index (+2.08), while corporate issues lagged as measured by Barclays Corporate (+0.52) and Barclays High-Yield Indexes (-1.61). Lower-rated, more economically sensitive sectors had a challenging month due to rising default fears and global growth concerns. Municipal bonds underperformed Treasuries during the month according to Barclays Municipal Bond Index (+1.19), as is typical in falling interest rate environments, but still managed gains. In terms of maturity, long-term bonds, as per Barclays Capital Government Long Index (+4.97) outperformed short-term bonds, as per Barclays Capital Government 1-3 Year Index (+0.61) and yields declined notably with the 5-, 10- and 30-year Treasury yields falling 36, 27 and 22 basis points (0.22%), respectively.
  • Oil bounce helps high-yield bonds in late January. High-yield bonds ended January on a seven-day win streak, including two days in which the S&P 500 declined by over 1%. Although an encouraging sign, selling resumed Monday. A lackluster Institute for Supply Management (ISM) report and China purchasing managers’ data continue to keep uncertainty elevated and yield spreads relatively wide. The average yield spread closed Monday, February 1 at 7.8% above comparable Treasuries, and 6.9% excluding the energy sector.
  • Rate hike expectations continue to fall. A dovish Federal Reserve Bank (Fed) meeting statement last Wednesday, combined with a rate cut by the Bank of Japan (BOJ), drove Fed rate hike expectations down even further. Market-implied rate hike expectations currently price in just one rate hike for 2016 and another single rate hike in 2017.
  • Concerns over downgrades behind recent investment-grade weakness. A sizable number of investment-grade issuers could be downgraded from investment-grade to high-yield over the remainder of 2016 and into 2017. Potential downgrades have pushed investment-grade spreads wider despite recent improvement in high-yield bonds. Downgrades, mostly from the energy sector, could push energy to 20% of high-yield overall, approximately doubling the sector’s weight in the Barclays High-Yield Index. We will explore the implications of increasing downgrades in an upcoming Bond Market Perspectives piece.
  • Puerto Rican government proposed to reduce bond holder debt by 46%. Puerto Rico stated its plans to reduce outstanding bond debt by 46%, including debt of general obligation (GO) bonds. Failure to achieve the proposed debt restructuring would result in a suspension of debt payment (interest and principal) likely in the spring of 2016. The current proposal is not likely to be accepted by bondholders and is merely another salvo in what are likely to be lengthy negotiations and legal battles. Puerto Rican GO debt traded at 71 cents on the dollar on Monday, roughly in-line with the past several weeks.

 

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Tuesday:

  • Vehicle Sales (Jan)

Wednesday:

Thursday:

  • Initial Claims (1/30)
  • UK: Bank of England Meeting
  • Indonesia: GDP (Q4)

Friday:

  • Employment Report (Jan)

Sunday:

  • China: Lunar New Year Holiday Begins
  • India: GDP (Q4)

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) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

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. 

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