Market Update: Tuesday, January 31, 2017


  • U.S., Asian equities continue slide. (10:38am ET) The S&P 500 is lower this morning after posting its biggest loss of the year yesterday. Nine of 11 sectors fell, led down by energy (-1.7%) and materials (-1.0%); utilities and consumer staples bucked the trend to eke out minor gains. Overnight, the Bank of Japan left rates unchanged and raised growth forecasts, though the Nikkei fell 1.7%. Elsewhere in the region, India’s Sensex lost 0.7% while China’s Shanghai Composite remains closed for the week. In Europe, exchanges are modestly lower (STOXX Europe 600: -0.2%) as investors shrug off strong economic data, including Eurozone GDP that expanded at a faster rate than the U.S. last year for the first time since 2008. Meanwhile, WTI crude oil ($53.13/barrel) sits in the middle of this year’s range, COMEX gold ($1217/oz.) is up 1.7%, and the yield on the 10-year note is down 5 basis points (0.05%) to 2.44%.


  • Muted returns for fixed income sectors last week. Most fixed income sector returns were muted to lower through Thursday. Friday’s weaker-than-expected fourth quarter gross domestic product (GDP) came in at 1.9%, compared to the economist survey of 2.2%. This helped fixed income sectors to recover slightly, as lower growth was interpreted to be less inflationary.
  • Treasury prices bounce around to end the week slightly lower in price. Despite higher prices in Friday’s session as a result of disappointing economic data, prices ended the week lower with the U.S Treasury 10-year bond moving from 2.48% on Monday to 2.49% on Friday. The weekly price movement continued the pattern observed this January: prices have risen in Monday’s session, only to fall gradually throughout the week.
  • Slightly flatter yield curve on the week. The 2-year Treasury yield was higher by 0.02% on the week, moving from 1.20% to 1.22%, whereas the 10-year Treasury finished higher by 0.01%. This decreases the 2-year to 10-year slope, a measure of the steepness of the yield curve, to 1.27%. The 2-year to 30-year yield slope was also narrower on the week by 0.01%, as the 30-year Treasury bond moved higher from 3.05% to 3.06%.
  • Inflation expectations continue to rise. Inflation expectations as measured by the 10-year breakeven inflation rate rose last week from 2.00% to 2.08%. The new level is above the Fed’s 2% inflation target and is the highest reading year to date. Additional economic strength and improving oil prices could cause inflation to move higher.
  • Bond prices lower in Italy and Germany. Italian bonds were cheaper on the week as yields moved from 2.01% to 2.25%. This dramatic move higher in yield was sparked by Wednesday’s Italian court decision to allow for early voting. Although expected to pass, sellers interpreted this as adding volatility to the bond market. The German bund 10-year prices were lower on the week, with the yield rising from 0.42% to 0.48%. This brings the spread between the U.S. 10-year Treasury and the comparable German bund to 2.01% (0.48% vs. 2.49%).
  • What’s in a fixed income benchmark? Stock market indices are fairly easy to understand, while fixed income indices can be more opaque and less intuitive. In this week’s Bond Market Perspectives, we dig into fixed income benchmarks like the Barclays Aggregate, explaining their makeup and how market forces can change them over time.
  • BOJ stands pat. As expected, the Bank of Japan (BOJ) left monetary policy unchanged this morning after its first meeting since the U.S. election. In his post-meeting statement, BOJ Governor Kuroda made several comments about the United States and how increased protectionism may hinder global economic growth. The BOJ did increase its estimate of Japan’s GDP, up to 1.4% from the earlier 1% forecast. The Japanese yen strengthened modestly overnight, while stocks in Tokyo fell 1.7%, carrying on the sell-off that began in the United States.
  • The worst day of the year. The headlines will say it was the worst day of the year for equities, but the S&P still lost only 0.6% on the day. To put this in perspective, nine days in January 2016 closed at least 1% lower. Yesterday was down as much as 1.2% at the lows, but late-day buying helped stem some of the weakness. It is always nice to see late-day buying, as it can potentially be a sign of institutions buying into the weakness. Lastly, today is the final trading day of the month, a day that has been weak recently–four of the past five months have seen the S&P 500 close in the red on the final trading day.
  • Did volatility just bottom? During the worst day of the year for equities, the CBOE Volatility Index (VIX) spiked more than 12%–its largest one-day jump since before the U.S. election. With the VIX near historically low levels, could this be the start of a higher period of volatility? For starters, the VIX often reaches a bottom in January, with only July and December reaching a calendar-year low more often. February following an election year has been the worst month, down 1.8% on average, again increasing the odds of higher volatility in the near term. When the VIX has been low (sub-15) there has always been worry how it is “too low” and an assumed blast of higher volatility could be right around the corner. The good news is historically a low VIX has been more bullish for equities going out three to six months than a higher VIX. We will take a closer look at this on the LPL Research blog later today.



Click Here for our detailed Weekly Economic Calendar


  • Employment Cost Index (Q4)
  • Chicago Area PMI (Jan)
  • Eurozone: GDP (Q4)
  • Eurozone: CPI (Jan)
  • Germany: Unemployment Change (Jan)
  • UK Parliament Begins Debate on Article 50 (Brexit)
  • Japan: Bank of Japan Meeting (No Change Expected)
  • China: Official Mfg. PMI (Jan)
  • China: Official Non-Mfg. PMI (Jan)
  • India: GDP (2016)


  • ADP Employment (Jan)
  • ISM Mfg. (Jan)
  • Vehicle Sales (Jan)
  • FOMC Statement
  • UK Parliament Expected to Vote on Authorizing Article 50 (Brexit)
  • India: 2017-18 Budget Speech


  • UK: Bank of England Meeting (No Change Expected)
  • China: Caixin Mfg. PMI (Jan)



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.

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.

Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Tracking #1-577530