Market Update: Tuesday, April 26, 2016

MarketUpdate_header

  • Markets begin week with mild losses. Equities finished Monday’s session slightly lower as investors await Wednesday’s Federal Reserve Bank (Fed) decision and any comments pertaining to the potential path toward rate normalization. Energy stocks, which closed down 1.1%, were further hurt by a 2.4% drop in the price of WTI crude oil; the consumer staples space was the best performing on the day, up 0.7%. COMEX gold prices increased by 0.8% and bonds continued last week’s losing streak, with the 10-year yield climbing 2 basis points to 1.90%. Final tallies: Dow -26.64 to 17977.11, Nasdaq -10.44 to 4895.79, S&P 500 -3.79 (-0.18%) to 2087.79.
  • Crude takes stocks higher; earnings in focus. WTI crude is up 2% this morning, leading U.S. markets higher. Investors are also looking ahead to a slew of earnings results today, including tech giant Apple, which reports after the closing bell. The market expects no changes from the Fed’s April policy meeting that begins today, though wording will be key in Wednesday’s statement release. Gold is trading modestly higher and the yield on 10-year Treasuries is above 1.9%, matching the highest levels in a month. Overseas, European shares are near flat and Asian stocks finished mixed, with the Shanghai Composite up 0.6% and the Nikkei down 0.5%. Both recovered off of mid-session lows.

MacroView_header

  • High-quality bonds post worst week of 2016. The Barclays Aggregate Bond Index posted its worst performance of 2016 last week; but that’s not saying a lot, given its persistent strength this year and a still impressive 3.0% year-to-date return through April 25, 2016. Treasury yields increased by 0.08% to 0.15% between 2- and 20-year maturities last week. Modest weakness persisted yesterday. Yields overall, however, remain lower for the year, and the 10-year Treasury yield is still below the psychologically important 2.0% level.
  • The ECB’s expanded quantitative easing is a tailwind for bonds globally and corporate bonds in particular. The European Central Bank (ECB) didn’t change interest rates last week, but it did share the details of its previously announced Corporate Sector Purchase Programme. The scope of ECB corporate bond purchases–both eligibility of bonds for purchase and amount–was wider than expected, suggesting a bigger boost to corporate bond prices than initially anticipated. On balance, the news was particularly positive for corporate bonds, although doubts linger on the actual implementation of the program given its size and the liquidity of corporate bond markets in Europe.
  • Still all about oil for high-yield. High-yield bond and oil prices remain very tightly linked. A chart of high-yield bond spreads (inverted) continues to track extremely closely with oil price fluctuations. The rolling three-month correlation between high-yield spreads and oil reached -96% on Friday (April 22), an almost perfect inverse correlation and as strong as any point since oil weakness began in mid-2014. Default expectations among energy names continue to be a primary driver of high-yield bond prices.
  • High-yield’s rally since mid-February is extreme. High-yield’s recent rally, which began on February 11, 2016, has been one for the record books. The Barclays U.S. High Yield Index outperformed the Barclays U.S. Aggregate Index by 12% from February 11 to April 22. Rolling 10-week outperformance of this magnitude has occurred just once in the last 15 years, during the recovery of 2009. The rally in high-yield has been driven primarily by relative strength in high-yield energy, the spread of which has halved since February 11, falling from 19.6% to 9.9% on April 22. The strength of the rally suggests caution going forward.
  • Inflation expectations notch up to recent highs. Inflation expectations moved up last week, primarily in response to higher oil prices. The 5-year breakeven inflation rate implied by Treasury Inflation-Protected Securities (TIPS) and Treasury yields moved to its highest point since mid-July 2015. Although making a recent high, it is worth noting that the current 5-year breakeven of 1.6% is still below the 5-year average of 1.7% and 10-year average of 1.8%.
  • Muni ratios decline as Treasury yields rise. Municipal bonds proved more resilient to Treasuries as the 0.12% to 0.15% rise in 10- and 30-year Treasury yields had a much more muted impact on the municipal market. As a result, municipal bonds outperformed Treasuries on the week. The Barclays Intermediate Municipal Bond Index was unchanged for the week, while the Barclays U.S. Treasury Index returned -0.8%. The notable disparity led to a sharp decline in municipal-to-Treasury yield ratios to the more expensive end of a three-year range.
  • What to make of negative interest rates around the globe? Amid another batch of central bank meetings, this week’s Bond Market Perspectives publication, due out later today, discusses the negative rates experiment across the globe and potential implications for investors. The effectiveness of negative rates is questionable at this early stage, with knock-on effects to financial markets in the form of flatter yield curves, lower inflation expectations, and lower yields overall.
  • Big money continues to show caution. On the heels of the smallest gain for the S&P 500 since last July that occurred on Friday, the S&P opened up lower yesterday, but finished down by only 0.2% by the end of the day. For the month, April is up 1.4%, which would be the second straight monthly gain after three straight lower months. Remember, that was the first three-month losing streak in four years. With the S&P 500 about 2% away from new highs, the overwhelming sentiment is still rather dour. The recently released Barron’s Big Money poll found only 38% of money managers were bullish or very bullish. This was down from 55% last fall and 45% a year ago. In fact, this was one of the lowest readings in the poll’s more than 20-year history. The two biggest worries are earnings disappointments and an economic slowdown.
  • March durable goods report suggests that manufacturing limped into the end of Q1. Although core durable goods orders and shipments (a proxy for the business capital spending portion of gross domestic product [GDP]) posted modest month-over-month gains in March versus February, they fell short of consensus expectations. In addition, there were sharp downward revisions to the February data. In short, although oil prices rebounded in Q1 as the dollar weakened, the manufacturing sector remained under duress. The business capital spending portion of GDP is expected to be a drag on overall GDP when the Q1 GDP figures are reported later this week.

MonitoringWeek_header 

Tuesday:

Wednesday:

  • Pending Home Sales (Mar)
  • FOMC Statement
  • UK: GDP (Q1)
  • Eurozone: Money Supply and Bank Lending (Mar)
  • Brazil: Central Bank Meeting (No Change Expected)
  • Japan: CPI (Mar)

Thursday:

  • GDP (Q1)
  • Germany: Unemployment Change (Apr)
  • Japan: Bank of Japan Meeting (More QE Expected)

Friday:

Saturday

  • China: Official Mfg. PMI (Apr)
  • China: Official Non-Mfg. PMI (Apr)

Sunday

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.

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 # 1-491569