Market Update: Tuesday, June 21, 2016


  • U.S. markets look to add to Monday’s gains. Domestic equities are moving modestly higher in early trading, as investors continue to show cautious optimism ahead of the June 23 Brexit referendum. The S&P 500 closed up 0.58% yesterday, though that was well off the session high, as the index failed to hold the key 2,100 level and gains faded throughout the day. Overnight, Asian markets finished mostly higher, led by a 1.3% gain in the Nikkei, while European markets are also moving up in afternoon trade. The dollar is up, both COMEX gold and WTI crude oil are moving lower and the yield on the 10-year note is little changed after jumping 0.06% to 1.67% yesterday.


  • Profit taking begins following Treasury rally. After a 0.27% drop in the 10-year yield since May 31, yields reversed course over the past few days and closed back above 1.6% on Monday as Brexit fears fade. The move in European bond markets, where the most recent leg of the rally began, witnessed a greater reversal. Profit taking began late last week but gathered strength on Monday. We still see high-quality bonds anchored in a low-return world.
  • Inflation expectations continue downward trend. The 10-year breakeven inflation expectations have been tracking lower with Treasury yields over the past couple of weeks; although last Friday’s move higher in yields didn’t translate to inflation expectations, which decreased further to end the week 0.11%, just above 1.4%. Another barometer of inflation expectations, the University of Michigan 5-10 Year Inflation Expectations Survey, declined from 2.5% a month ago to 2.3%, its lowest level ever. The drop in inflation expectations suggests a bond market that remains skeptical of global growth.
  • Treasury valuations remain stretched by historical standards. Real interest rates (as measured by the difference between the 10-year Treasury yield and year-over-year core Consumer Price Index) have been heading into negative territory over the course of 2016, well below the 10-year average and nearing lows set in 2012. However, many developed nations, including Germany and Japan, are seeing real rates that extend even deeper into negative territory, meaning the yield advantage of Treasuries relative to other benchmark bonds remains considerable, which may continue to keep a lid on Treasury yields moving forward.
  • High-yield bond spreads widen, continue to follow the price of oil. High-yield bond spreads continue to closely follow the price of oil, widening to end the week at 6.2% last week as oil prices weakened. Even given last week’s underperformance as measured by the Barclay’s High Yield Bond Index, we continue to believe the asset class is on the expensive side, with yield spreads remaining below the 6.5-7% level, which we believe signals approximate fair value given expectations for rising energy defaults. The close correlation with a single variable (oil prices) also remains a risk in our view.
  • Municipals buck June weakness. Municipals, benefiting from Treasury strength and insatiable investor demand, have so far been able to shrug off the historically weak June period, with the Barclays Municipal Bond Index returning 1.1% month to date as of Friday’s close. Recent strength has driven both 10- and 30-year yields near all-time lows, though Treasury strength has pushed AAA municipal-to-Treasury ratios off the multi-year lows seen in mid-May. July and August have historically offered more positive seasonals for municipal bonds, though already stretched valuations present a headwind this year. Read more in today’s Bond Market Perspectives, due out later today.
  • 50 days without a 1% drop. On Friday, the S&P 500 closed for the 50th consecutive day without a 1% drop. This is the longest streak since 66 straight days during the summer of 2014. Going back to 1980, this has happened 14 other times; the current gain of 1.4% over the past 50 days is the weakest return. Today on the blog we will take a closer look at this phenomenon.



  • Yellen (Dove)
  • Germany: ZEW (Jun)


  • Existing Home Sales (May)
  • Yellen (Dove)
  • Japan: Nikkei Mfg. PMI (Jun)


  • Initial Claims (6/18)
  • Markit Mfg. PMI (Jun)
  • Eurozone: Markit Mfg. PMI (Jun)
  • “Brexit” Referendum in UK (First Results Around 7 P.M. ET; Final Results at 2 A.M. ET Friday 6/24)


  • Durable Goods Orders and Shipments (May)
  • Germany: Ifo (Jun)

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.

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