- Stocks pause while oil skids. (10:22am ET) U.S. indexes are near flat after the Dow set a fresh record close on Monday. The S&P 500 also advanced amid broad sector strength; only healthcare (-0.2%) and industrials (-0.1%) closed in the red. Overseas, Asian stocks rode domestic markets’ tailwind to finished mostly higher; the Nikkei (0.5%) and Hang Seng (0.7%) gained, though the Shanghai Composite (-0.2) fell modestly. European indexes again shook off early weakness after M&A activity in the utilities sector and a rebound in Italian bank stocks helped shift broad sentiment; the STOXX Euro 600 is currently up 0.6%. WTI crude oil ($50.48/barrel) is slipping more than 2.5% after reports of spiking output ahead of the Organization of the Petroleum Exporting Countries’ (OPEC) planned production cuts, COMEX gold ($1174/oz.) is continuing to inch lower, and 10-year Treasury yields are little changed at 2.39%.
- Treasury yields inch higher, while Libor continues to climb. Intermediate- and long-term Treasury yields inched higher last week, while short-term yields inched lower, leading to a slight steepening of the yield curve. However, the 3-month Libor, an indicator of what banks charge each other in the interbank lending market, has continued to climb, reaching 0.94%. Libor started its climb in July in anticipation of money market reform, and it has continued to climb as markets have priced in a greater chance of a Federal Reserve Bank (Fed) rate hike in December.
- High-yield spread at year-to-date low. High-yield spreads continued to compress last week, spurred by a rally in oil and equity market strength. The spread to comparable maturity Treasuries hit 4.48% last Thursday, its lowest level since June 2015. We continue to believe the high-yield market is pricing in most of the market’s good news, including stronger growth and a continued stabilization in oil prices, leaving the asset class with less room for error if these events don’t materialize. The Barclays High Yield Index has outperformed the Barclays Aggregate Bond Index by more than 20% on a relative basis since spreads hit their February 11 high.
- Italy referendum a nonevent for bond markets. Italian voters turned in a “no” vote, leading to the resignation of Prime Minister Matteo Renzi, but markets took the news in stride, with 10-year Italian bonds moving just 0.09% higher on Monday. Markets had largely priced in the outcome, and comments from central bank sources that the European Central Bank (ECB) stood ready to support Italian government bonds, if needed, no doubt helped as well. The ECB meets later this week and markets will be watching closely for any comments that it may extend its quantitative easing program beyond its current March 2017 end date.
- Municipal valuations cheapen further as selloff continues. An increase in supply ahead of the December Federal Open Market Committee (FOMC) meeting combined with continued outflows from the asset class hit the municipal bond market last week, leading to more weakness. 10-year AAA–municipal-to-Treasury ratios are at their highest levels since September 2015, whereas 30-year ratios are at levels last seen in October 2015. We discuss the recent municipal bond selloff in more detail in this week’s Bond Market Perspectives, due out later today.
- Big moves in the currency markets. On the news of the Italian referendum being voted down, the euro soared by 0.91%, the largest one-day jump since June 23, the day of the Brexit vote. Many expected euro weakness on this news, but as we’ve seen many times this year, conventional wisdom isn’t always right. The big loser due to the Euro bounce was the U.S. dollar, as it lost 0.74% — the largest one-day drop in three months. Remember, the U.S. dollar had a big run after the election on hopes of an improving economy and higher rates, but it is now showing signs of weakening.
- Services sector accelerates. The Institute for Supply Management’s Non-manufacturing Index (NMI) accelerated to 57.2 in October from September’s 54.8, handily topping consensus expectations to post its fastest growth in a year (above 50 indicates expansion). The index joins a parade of recent upside surprises and provides further confirmation that the economy is accelerating in the second half of 2017, following tepid growth in the first half. Based on available data, fourth-quarter growth is now likely tracking near 3%.
- India: Reserve Bank of India Meeting (No Change Expected)
- China: Imports and Exports (Nov)
- Flow of Funds (Q3)
- Eurozone: European Central Bank Meeting (No Change Expected)
- China: CPI (Nov)
- Japan: Economy Watchers Survey (Nov)
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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.
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.
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.
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