Market Update: Tuesday, November 8, 2016

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  • Global equities hold steady as U.S. votes. Markets around the world are in a holding pattern today as Americans head to the polls. This is in contrast to yesterday’s action, in which the Nasdaq surged 2.4%, followed closely by the S&P 500 and Dow. The strongest-performing sectors were financials, industrials, and healthcare, although gains were broad based as six out of 11 S&P sectors gained over 2%; only telecom failed to advance more than 1%. In Asia, most exchanges rose as China’s Shanghai Composite and India’s Sensex both gained 0.5%. However, the Nikkei finished flat and the major European bourses are in position to follow suit in afternoon trade. Meanwhile, WTI crude oil ($44.83/barrel) is modestly lower, COMEX gold ($1281/oz.) is largely unchanged, and the yield on the 10-year Treasury note has slipped to 1.83%.

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  • Treasury yields move lower. Treasury yields were lower on the week as investors took the opportunity to improve liquidity ahead of the U.S. election and also began to prepare for the expected Federal Reserve Bank (Fed) rate hike looming in December. The 5-year part of the curve did best, lower in yield (higher in price) by 9 basis points to 1.24%. The 10-year was lower by 7 basis points to 1.79%, and the 30-year was lower by 6 basis points to 2.56%.  The 2- to 10-year spread was flatter by 1 basis point to 99 bps.
  • Rate hike expectations move higher. Futures’ market-implied December rate hike expectations moved higher on the week, but not as high as they may have without the overhang of election uncertainty. The Fed pointed to December as a likely time for a rate hike, after having not hiked during its November meeting last week. Despite this, expectations remained muted as the market was still skittish about the FBI’s investigation into Hillary Clinton’s emails. Once that investigation was (again) deemed closed, expectations jumped over 80%, their highest level to date.
  • Weakening oil hurting inflation expectations. The 10-year U.S. breakeven inflation rate fell by 0.05% last week amid a 9.5% decline in the price of oil on the week. The decline in inflation expectations accounted for most of the decline in Treasury yields over the week. Oil bounced 2% yesterday, and the 10-year breakeven inflation rate recovered in tandem, rising by 0.04% on the day.
  • High yield weakens with oil and election uncertainty. High-yield posted its worst weekly return since the pronounced weakness in mid-February, returning -1.1%, represented by the Barclays US High Yield Index. We have been mentioning that valuations above our estimate of fair value had left the sector with little room for error heading into a volatile period. The spread of high-yield to comparable Treasuries rose from 4.7% to 5.1% during the week, the largest spread widening for a week since, again, the height of high-yield weakness in mid-February. Similar to other stories within fixed income, high-yield appears to be shrugging that off this week, with the Barclays US High Yield Index posting a 0.5% return yesterday.
  • Supply headwinds hurt October municipal returns. October’s -1.05% return (as measured by the Barclays Municipal Bond Index) registered as the worst month for municipal bonds since August 2013. Rising interest rates were a headwind, and so was supply, as borrowers pushed to get issues to market ahead of potential volatility inducing events such as the election and a potential December Fed rate hike. October saw $53 billion in new supply, making it the largest single month of issuance since recordkeeping started in 1980. However, supply has started to show signs of receding, and valuations have improved with 10- and 30-year AAA municipal to Treasury ratios at 97% and 99%, respectively. We review supply, demand, and valuations for the municipal market in more detail in this week’s Bond Market Perspectives, due out later today
  • Chinese trade data weaker than expected. Chinese exports and imports both disappointed. Exports fell for the seventh straight month, down 7.3% on a year-over-year basis. The weaker yuan has thus far failed to provide much lift to the Chinese economy. Exports to the European Union were down the most (8.7%). Imports also disappointed, down 1.4%. Asian markets were still up overnight, partially on the strength of U.S. equities on Monday.
  • The losing streak is over. The S&P 500 soared 2.2% for the best day since early March, along the way ending the nine-day losing streak. During the nine-day losing streak the S&P 500 lost 3.1%, so in one day it gained back a good deal of the losses. This was the longest losing streak in nearly 36 years. The big question now is: what happens after long losing streaks? Going back to 1928[1], there have been 10 other losing streaks that lasted at least nine days. The near-term returns after are mixed, up 1.6% on average a month later with a median return of -1.3%, but the good news is rarely do these long streaks usher in new bear markets. We will take a closer look at this today on the LPL Research blog.
  • Improving signs under the surface? As the S&P 500 shakes off the first nine-day losing streak in 36 years, there have been some potential major positives under the surface. Incredibly, the Dow Jones Transportation Index added 3.1% to close at a new 52-week high for the first time since late 2014. Given that transports are a very economically sensitive group, this is a good sign for the U.S. economy. Additionally, copper has quietly gained 11 straight days, for the second longest winning streak ever. It also made a new 52-week high for the first time since February 2011. Copper has long been considered a potential gauge of the global economy, and for it to finally be improving could be another subtle sign of an improving global economic backdrop.
  • Weekly Economic Commentary focused on the debt and deficit. Although the debt and deficit did not get top billing during the election season, we provide answers to some frequently asked questions on the federal debt and deficit in this week’s Weekly Economic Commentary

[1] Any data prior to March 4, 1957 is back-tested, as published by the index’s parent company, S&P DOW Jones Indices. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns

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Tuesday

  • Election Day
  • EU Finance Ministers Meeting
  • China: CPI (Oct)
  • China: PPI (Oct)

Wednesday

  • Kashkari (Dove)
  • New Zealand: Reserve Bank of New Zealand Meeting (Rate Cut Expected)
  • China: Money Supply, Bank Loans and Aggregate Financing (Oct)

Thursday

  • Monthly Budget Statement (Oct)
  • Bullard (Hawk)
  • Malaysia : GDP (Q3)

Friday

  • Consumer Sentiment and Inflation Expectations (Nov)

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.

A money market investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money markets have traditionally sought to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

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) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

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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