Market Update: Tuesday, July 26, 2016


  • Stocks mixed as traders focus on Fed, earnings, oil. Global equities are mixed in Tuesday trading as the Federal Reserve Bank (Fed) kicks off its two-day policy meeting, though no rate hike is expected. Earnings also continue to roll in amid the busiest week of the season, with tech bellwether Apple reporting after the close. The S&P 500 lost 0.3% on Monday as 9 out of 10 sectors ended lower. Most sector losses were modest, although energy dropped 2% as WTI crude oil and gasoline inventory reports sparked renewed oversupply concerns. Oil continues to slide this morning, reaching a three-month low below $43/barrel. In Asia, the yen strengthened and the Nikkei Index shed 1.4%; investors continue to anticipate additional monetary stimulus from the Bank of Japan at the end of the week. The Shanghai Composite moved in the opposite direction, gaining 1.1%. European equities are mixed, with little movement today so far. Meanwhile, COMEX gold is unchanged and the yield on the 10-year Treasury has fallen to 1.56%.


  • Three-month Libor moving higher but not bank related. The three-month Libor (London Interbank Offered Rate) continued to grind higher last week in response to pending money market reform, not systemic interbank funding fears. Outflows out of prime institutional money market funds, which will move to a floating net asset value (NAV) in October, and into government money market funds, which will retain a fixed NAV, has led to weakness among commercial paper and CDs, which, in turn, is pushing all short-term rates higher, including Libor.
  • Bond markets consolidate ahead of Fed meeting. Treasury yields were little changed last week, closing unchanged to marginally lower over the past week after post-Brexit strength faded over the prior week. Bond market pricing reflects a dovish Fed statement outcome so as to not disturb the peace following financial markets (and conditions) improvement in recent weeks. Rate hike expectations are very subdued, with a 1.5% overnight rate implied five years forward.
  • Credit spreads stable in sympathy with limited yield changes. Non-government bond sectors are also holding relatively stable ahead of the Fed meeting. Yield spreads on more economically sensitive sectors, like high-yield bonds, remain near their lowest levels of the past year. In many respects, the bond market as a whole remains at the most expensive valuations of 2016 and much of 2015.
  • Municipal bond yields hold near record lows in typical summer trading. Average 10- and 30-year AAA-rated municipal bond yields have held stable at 1.5% and 2.3%, respectively. Valuations were also little changed in low-volume trading.
  • Update on high-yield municipal bonds in this week’s Bond Market Perspectives. This week’s commentary, due out later today, takes a look at the high-yield municipal bond sector and differences between taxable counterparts. High-yield municipal bond valuations have richened (via narrower yield spreads) and along with record low yields (note that Puerto Rico has exited the high-yield universe) suggest caution, but we remain neutral as stable credit quality trends and relative higher yields provide support.
  • The choppy trade continues. The S&P 500 was down slightly yesterday, but more importantly this was the eighth consecutive day of alternating between higher and lower closes. There was a streak of 8 back in May and 13 late last year. The longest streak since 1950 was 14 alternating days in a row in early 2014. Adding to the interesting trading recently, the Small Cap Russell 2000 Index has traded in a range of only 1.32% the past 8 days–the tightest range since late 2012. Taking it out one more day, the Russell has traded in a range of 1.36% in the past 9 days, for the tightest range in 18 years.
  • Can’t they make up their minds? New reports, still unofficial at this point, suggest that the Japanese government will indeed announce fiscal stimulus, but at 6 trillion yen ($57 billion), a far cry from the 10-20 trillion yen originally expected. The market has registered its disappointment by increasing the value of the yen by about 1.5% overnight, with a similar decline in Japanese stocks. Assuming this latest version of the facts is true, it will put more pressure on the Bank of Japan to increase monetary stimulus at its meeting this Friday.





  • Initial Claims (7/23)
  • Germany: Unemployment Change (Jul)
  • Germany: CPI (Jul)
  • Japan: Jobless Rate (Jun)
  • Japan: CPI (Jun)
  • Japan: Tokyo CPI (Jul)
  • Japan: Industrial Production (Jun)
  • Japan: Retail Sales (Jun)


  • GDP (Q2 and Revisions to Data from 2013 – 2016)
  • Chicago Area PMI (Jul)
  • Eurozone: GDP (Q2)
  • UK: Money Supply and Bank Lending (Jun)
  • Eurozone: CPI (Jul)
  • Japan: Bank of Japan Meeting
  • Mexico: GDP (Q2)


  • China: Official Mfg. PMI (Jul)
  • China: Official Non-Mfg. PMI (Jul)
  • China: Caixin Mfg. PMI (Jul)

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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.

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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.

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

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