Market Update: Tuesday, April 11, 2017

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  • Stocks move lower amid geopolitics, looming earnings. (10:22 am ET) U.S. equities are trending lower in Tuesday’s session as traders eye ongoing tensions in Syria and the Korean peninsula and gear up for earnings season to begin later this week. The S&P 500 is in the red in early trading after again finishing near flat on Monday to start the holiday-shortened week. Energy (+0.8%) led to the upside amid a fifth day of gains for oil, while telecom (-0.3%) and financials (-0.3%) weighed. Overseas, Asian stocks were mixed as the Shanghai Composite (+0.6%) and Hang Seng (-0.7%) moved in opposite directions, and the Nikkei (-0.3%) slipped as safe-haven buying in the yen dragged down exporter stocks. Europe is marginally higher in what has been a range-bound session; the STOXX 600 is up 0.1%. Elsewhere, WTI crude oil ($52.95/barrel) is facing some resistance after five days of gains, COMEX gold ($1267/oz.) is up more than 1%, and 10-year Treasury yields are off 5 basis points (0.05%) to 2.32%.

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  • Treasury prices were unchanged in the belly of the curve. 2-year Treasury yields moved higher (prices lower) by 0.03% despite the belly of the curve holding its yield last week. The market rallied slightly on Friday morning after weaker than expected U.S. jobs data was reported. Gains subsided into the close as Federal Reserve (Fed) Governor Dudley walked back his earlier dovish commentary. The 10-year note closed the week unchanged to yield 2.38%. The long-end of the curve also finished the week lower in yield by 0.01% to 3.00% on the 30-year bond.
  • The yield curve flattened. The Treasury yield curve remains flat as the 2’s to 10’s slope, a measure of the steepness of the yield curve between 2- and 10-year maturities, ending the week at 1.10%. The 2’s to 30’s yield slope ended the week at 1.72%, flatter by 3 basis points from the prior week.
  • German bonds rallied on the week. The high-quality German bund 10-year rallied on the week as up-in-quality bonds did well. Geopolitical risk in Syria and North Korea added to the demand for German bunds and coupled with dovish commentary from the European Central Bank (ECB), pushed yields lower in Germany. The latest spread between the U.S. Treasury 10-year and its German equivalent is 2.16% in favor of the U.S. bond.
  • Municipal bonds performed well on the week. The 1-10 year part of the municipal yield curve is lower in yield by 0.16% to 0.30% on the year. The strong performance has been driven by investors buying the shorter maturities that are dramatically cheaper after the weakness in Q4 2016. Municipal ratios are now rich relative to the beginning of the year, especially in the shorter maturities.
  • Inflation expectations are slightly lower. The 10-year breakeven inflation rate finished the week slightly lower from 1.97% to 1.94% according to Federal Reserve Economic Data. The 1.94% level is below the Fed’s 2% inflation target.
  • Small business optimism remains high. The NFIB Small Business Optimism Index fell 0.6 points in March to 104.7, near consensus expectations, but the overall reading remains very strong, retaining almost all of its large post-election gains. Planned increases in capital outlays and hiring helped buoy the index, while real sales expectations and earnings trends weighed, highlighting the difference between expectations and current conditions. The index continues to point to prospects of improved economic growth. Small business make up a little under 50% of overall business activity in the U.S.
  • The indecision continues. The S&P 500 has been trading in a tight range recently and big moves simply aren’t happening. Think about this: the S&P 500 has alternated between higher and lower closes the past six sessions. Also, not once during that time has it closed more than 0.35% higher or lower. The last time that happened was early in 1969. Additionally, the S&P 500 has traded higher and lower on an intraday basis for 18 consecutive days now – the longest such streak since 21 in a row during the summer of 2008. All in all, even with the potentially volatile headlines, markets are keeping it very close to the vest.

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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.

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.

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