- U.S. equities follow global markets lower. Following the official release of Japan’s most recent stimulus and continued underperformance from European financials, domestic indexes are lower in early trading. The major averages finished mixed yesterday, with the S&P 500 continuing to trade in a little more than 1% range that began in mid-July. Healthcare and technology outperformed, while the energy sector fell more than 3%, as WTI crude oil briefly dipped below $40/barrel. Overnight in Asia, the Nikkei fell 1.5% as Japan’s latest stimulus package was met with disappointment; China’s Shanghai Composite closed up by 0.6%. European markets are broadly lower in afternoon trading, led by Spain’s IBEX, which is down more than 2%. Meanwhile, Treasuries are continuing their weakness from yesterday as the yield on the 10-year note is up to 1.56%, the U.S. Dollar Index is lower on strength from the yen, and both COMEX gold and oil are moving higher.
- Yields recover following Fed speakers. Yields moved lower across the curve last week, as durable goods and gross domestic product (GDP) numbers missed expectations. Yields moved higher on Monday following comments from Federal Reserve Bank (Fed) Presidents Dudley and Kaplan, with most of the increase coming on the long end of the curve, with the 10-year yield increasing by more than 0.06% to end the day at 1.52%. While the tone from the Fed’s latest meeting was less dovish on balance, loose monetary policy from other major central banks such as the European Central Bank (ECB) and Bank of Japan (BOJ) are likely to keep rates low overseas, and may continue to provide a tailwind for Treasuries in the near term.
- Rate hike expectations remain low. Rate hike expectations moved slightly higher following comments from Fed speakers yesterday, but expectations overall remain benign relative to Fed projections. Markets are currently pricing in an 18% chance of a hike at the Fed’s September meeting, and we have to look out to September 2017 before markets are pricing in even a 50% chance of a hike.
- High-yield weakens, but oil less of a factor. High-yield bonds and oil, which had been moving in near lockstep for the past year, have disconnected in recent weeks as spreads have contracted even in the face of weaker oil prices. Spreads did widen last week as oil fell, though economic data also played a role. Further weakness in oil could certainly impact the high-yield market and bears watching, but so far the impact has been limited. We continue to believe that current spreads, at the 5.7% level, are on the expensive side of fair value, given expectations for rising defaults. We discuss high-yield’s performance in further detail in this week’s Bond Market Perspectives, due out later today.
- Municipal bonds fail to keep up with Treasury strength. Municipal bonds saw positive performance last week, as the asset class benefited from the move lower in Treasuries. However, as is often the case when yields move lower, municipals failed to keep up with Treasury strength, causing both 10- and 30-year AAA municipal-to-Treasury ratios to move higher and end the week at 100%. Valuations are now near the middle of their recent range, an improvement from recent levels. An above-average $14 billion in new issuance is scheduled for the coming week, though continued strong demand from investors may help limit headwinds.
- Japanese fiscal policy: spending, lending and praying? As expected, the Japanese government announced a fiscal stimulus package on Tuesday morning. Though the headline number of 28 trillion yen is large, actual new, so-called “fresh water” spending is relatively small, at 7.5 trillion yen. Much of the rest of the package consists of low interest loans to Japanese corporations and municipalities. The yen rallied on the news, which tends to be negative for Japanese equities.
- EU inflation better than expected. Producer prices in the European Union (EU) gained 0.7% in June, compared to the 0.6% number in May and 0.4% expected. Avoiding deflation in the EU is one of the main goals of the ECB, and has been a major driver of its negative interest rate policy. European banking shares continue to decline, even after the relatively benign stress test results that were released on Friday. Investors remain wary of European banks, given the strain the negative rate policy is having on both bank income statements and balance sheets.
- Up five months in a row. The S&P 500 is up for five consecutive months for the first time in two years. The last time it was up for six straight months was in early 2013. The logical question is: What happens next? Surprisingly, the returns after a five-month win streak are actually stronger than the average returns. Incredibly, since 1950 there have been 23 other five-month win streaks. A year later, the S&P 500 has been higher every single time with an average return of 12.9%. Today on the LPL Research blog we will take a closer look at this phenomenon.
- The amazing range continues. We’ve noted recently the historically tight range equities have traded in during the past few weeks; and after yesterday’s small range, this trend continues. Here are some stats to chew on. The S&P 500 hasn’t moved 0.20% (up or down) for five straight days, the longest such streak since November 2014, and it hasn’t moved 0.50% in 12 days, the longest streak since August 1995. During the past 13 days, the S&P 500 has traded in a 1.04% range, the tightest 13-day range since November 1972.
- Vehicle Sales (July)
- Australia: Reserve Bank of Australia Meeting (Rate Cut Expected)
- China: Caixin Services PMI (July)
- Japan: Cabinet of Japan (Decision on Fiscal Stimulus Package)
- ADP Employment (July)
- ISM: Non-Mfg. (July)
- Challenger Job Cut Announcements (July)
- Kaplan (Hawk)
- UK: Bank of England Meeting (Rate Cut Expected)
- Employment Report (July)
- Indonesia: GDP (Q2)