Market Update: Tuesday, September 27, 2016


  • Stocks mixed; oil pulls back. U.S. markets are modestly higher in early trading, though the energy sector remains under pressure as WTI crude oil trades lower by 2.7%, erasing Monday’s bounce. Yesterday’s session saw all three major averages close lower by 0.9%; financials and healthcare notably underperformed, both losing more than 1.2%, while no sector advanced on the day. Overnight in Asia, markets moved mostly higher, led by Hong Kong’s Hang Seng (+1.1%); European shares are lower in afternoon trading, led down by the German DAX as Deutsche Bank shares have made yet another record low. Treasury strength continues with the yield on the 10-year note now down to 1.56%, and COMEX gold is down half a percent amid a modest advance in the dollar.


  • Yields continue to decline post-Fed and Bank of Japan meetings. High-quality fixed income has rallied after impactful central bank meetings last week that leaned dovish. The steepness of the Treasury yield curve, which hit a recent peak on September 15, has continued to decline, as longer-maturity Treasury yields have declined more so than shorter-maturity. This has been a tailwind for fixed income, with the Barclays Aggregate returning 0.5% last week. The longer duration of investment-grade corporates proved a tailwind, with the Barclays U.S. Corporate Index returning a strong 0.9% during the week.
  • Lower-quality sectors also rallied. Emerging markets debt (EMD) enjoyed a very strong week last week, with the Barclays USD EM Aggregate returning 1.6% on the week. EMD’s elevated duration, relative to high-yield, was a tailwind amid the decline in rates. EMD was also the beneficiary of confirmation of a go-slow approach by the Federal Reserve Bank (Fed) last week during its September meeting. High-yield rallied as well (the Barclays U.S. High Yield Index returned 0.8% on the week), which like EMD, also benefited from strength in the price of oil, which was up 3.4% last week. High-yield and EMD both started this week on weak footing, despite another rise in oil yesterday, potentially indicating profit taking, as the sectors are up 14.7% and 15.1% year to date, respectively.
  • Libor continues to grind higher, not receding as longer-maturity yields have in recent days. As discussed previously, much of this continues to be driven by money market reform. A portion is also due to impending Fed rate hikes, at least one of which is expected this year, per Fed forecasts. The market, however, is only signaling a 50% market-implied chance of a hike by year-end. The Fed lowered its projections for rate hike increases by 0.125% (one half of one rate hike) for year-end 2016 and by one full rate hike (0.50%) each for year-end 2017 and 2018.
  • Municipals underperform amid heavy supply and falling rates. Municipals underperformed Treasuries last week, as is often the case in periods of falling Treasury yields. Munis continue to be challenged with elevated supply, an extension of the record supply (for the month of August) last month. Secondary supply, measured by dealer inventories, remains elevated, a potential headwind for the market in the near-term. However, despite elevated supply, demand remains a powerful force. Municipal funds have seen inflows for 50 consecutive weeks, averaging roughly $1B per week.
  • MBS outperforming in September. The low duration of mortgage-backed securities (MBS) has been a driver of underperformance year to date as interest rates have fallen. However, the same factor has led the asset class to outperform Treasuries and the Barclays Aggregate for the month of September, as intermediate- and long-term interest rates were testing the top of their current ranges in recent weeks. We continue to believe that MBS may offer additional value relative to Treasuries if rates remain range bound or rise, a topic that we discuss in further detail in this week’s Bond Market Perspectives, due out later today.
  • End of quarter window dressing time? The end of the quarter is known as a time for window dressing, as funds buy the top performing equities and sell the worst performing equities. The general consensus is that this can lead to potential market strength. Could this happen in September? Looking at the recent trend, the last four days of September have surprisingly been lower the past six years, with an average drop of 1.2%. With the S&P 500 down 1.1% for the month so far, this historically weak month has put a top on the rally thus far, and any late month weakness wouldn’t be a surprise.
  • The Friday/Monday combo. There has been a lot of discussion on social media about the recent Friday/Monday combination for S&P 500 performance: when the S&P 500 is down on both Friday and Monday (like it was this week), the next few days are historically weak. We took it a step further and looked what happens when the S&P 500 is down at least half a percent on each of those days (like this time). In this scenario, the last time this combination happened was right after Brexit, and the S&P 500 gained 5.1% in the next four days. Going back to late August 2015, this combo has happened five other times; it is worth noting that following three of those times, the S&P 500 closed at least 4% higher or lower four days later. In other words, this might not be such a bearish indicator, as much as it could suggest that volatility may be on the way.
  • Markets say Clinton holds serve. Hillary Clinton appears to have maintained her slight lead in the polls after last night’s first of three presidential debates. Markets seemingly expressed a preference for the status quo, as futures responded positively to the performances; while a popular Trump proxy, the Mexican peso (sensitive to his trade policies), was also up solidly in response. A lot can happen between now and November 8–there are two more debates to come and volatility is still likely over the coming weeks–but the markets are saying the election picture changed little last night.




  • Durable Goods Shipments and Orders (Aug)
  • Yellen (Dove)
  • Bullard (Dove)
  • Evans (Dove)
  • Mester (Hawk)
  • George (Hawk)


  • Pending Home Sales (Aug)
  • Yellen (Dove)
  • Germany: Unemployment Change (Sep)
  • UK: Money Supply and Bank Lending (Aug)
  • Germany: CPI (Sep)
  • Japan: Minutes of the Sep 20-21 BOJ Meeting
  • China: Caixin Mfg. PMI (Sep)
  • Japan: Jobless Rate (Aug)
  • Japan: CPI (Aug)


  • Chicago Area PMI (Sep)
  • Eurozone: CPI (Sep)
  • China: Official Mfg. PMI (Sep)
  • China: Official Non-Mfg. PMI (Sep)


  • Start of New Fiscal Year and Potential US Government Shutdown


  • Japan: Tankan Survey (Q3)

Click Here for our detailed Weekly Economic Calendar

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Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

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