Market Update: Tuesday, April 25, 2017

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  • Equity gains continue amid earnings barrage. (10:21am ET) U.S. stocks are looking to build on yesterday’s momentum as investors digest a swath of earnings today, including five Dow components ahead of the opening bell. Yesterday, the MSCI All-Country World Index (+1.6%) hit a new record high, and the S&P 500 (+1.1%) followed suit on strength in the heavily-weighted financials (+2.2%) and industrials (+1.3%) sectors. Reports that President Trump is expected to attempt to lower the corporate tax rate to 15% when he outlines his tax plan Wednesday are also providing a tailwind. Overseas, Asian markets advanced for the second straight day led by the Nikkei (+1.1%) and Hang Seng (+1.3%); the Shanghai Composite (+0.2%) stabilized overnight after being left out of Monday’s global equity lift.  European markets are holding up as well; the STOXX 600 Index (+0.3%) is trading comfortably in the green. Meanwhile, the yield on the 10-year Treasury is trying to climb back above the 2.30% mark, oil is slightly lower to $49.10/barrel, and COMEX gold ($1268/oz.) is down more than half a percent.

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  • Treasury prices moved higher on the week. Treasury bonds were higher in price last week with the 2-year lower in yield by 0.04%, the 5-year yield lower by 0.03% at 1.74%, and the 10-year also lower by 0.03% at 2.21%. Rates moved higher on Monday following the outcome of the initial round of the French election, with the 10-year yield now near 2.31%. The probability of a Fed rate hike for the June meeting has also increased in recent days to 73%. We discuss the recent volatility in rate hike expectations in this week’s Bond Market Perspectives, due out later today.
  • The yield curve flattened. The Treasury yield curve flattened with the 2’s to 10’s slope, a measure of the steepness of the yield curve, ending the week at 1.04%. The 2’s to 30’s yield slope was also flatter by 0.04% to 1.70% as the 30-year Treasury bond finished the week at 2.89%.
  • Inflation expectations are lower. The 10-year breakeven inflation rate finished the week lower from 1.94% to 1.85% according to Federal Reserve Economic Data. 1.85% is the lowest inflation expectation number this year, and below the Fed’s 2% inflation target.
  • Credit spreads widen from their March lows, making corporate prices cheaper. The Bloomberg Barclays US Aggregate Corporate Average OAS index which measures the yield spread relative to US Treasuries, finished the week at 1.23%, up from its low (year-to-date) of 1.11% on March 6, 2017.  The historical average since 1989 has been 1.35%. For context, the highest spread for this index reached 5.55% on December 31, 2008.
  • High yield spreads. High yield spreads as measured by the Bloomberg Barclays High Yield Average OAS index finished the week at 3.92%, higher than the 3.44% low (year-to-date) on March 2 2017. Higher OAS spreads generally equate to lower bond prices, a negative to bond holders, while tightening spreads can positively impact bond prices. We continue to believe that the income generated by high yield bonds remain attractive in a low yield world, but also note that current valuations leave little room for error in economic and default forecasts, leaving us neutral on the sector overall.
  • Municipal supply begins to build. Supply in the municipal bond market is building as issuers are enticed by lower yields in the sector. Municipal bonds have rallied since March 14, 2017 but this could dissipate as a result of increased supply. The 30-day visible supply as measured by the Bond Buyer has grown to $14.6 billion, well above its trailing 30-day average of $12 billion.
  • Big day for European equities. There was a substantial relief rally across Europe after the French election eased anti-euro concerns. The Paris CAC 40 gained 4.1% for the best day since August 2015, while the Euro STOXX 50 added 4.0% for the first time since August 2015 as well. After the gains, most European countries are now outpacing U.S. equity gains this year. The big question is can this strength stick? Today on the LPL Research blog we will take a closer look European equity technicals, specifically a 17-year breakout for the Paris CAC 40, which could bode well for continued higher prices.
  • Volatility implosion. The CBOE Volatility Index (VIX) closed down 25.9% yesterday, as the worst fears over the French election subsided. Going back to 1990, this was the fourth largest one-day drop, and the largest since August 2011. We’ve seen a similar pattern play out ahead of Brexit and the U.S. election. Fear grows and the VIX increases, only to decrease after the event is over. Last, the S&P 500 gained more than 1% for only the second time this year and first time since March 1, 2017.

 

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • New Home Sales (Mar)

Wednesday

  • Bank of Japan (BOJ) Outlook Report & Monetary Policy Statement
  • BOJ Interest Rate Decision

Thursday

Friday

  • GDP (Q1)
  • UK: GDP (Q1)
  • Eurozone: CPI (Apr)

Saturday

  • EU Leaders Summit
  • China: Mfg. & Non-Mfg. PMI (Apr)

 

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.

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.

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