Market Update: Wednesday, May 10, 2017

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  • U.S. markets are down fractionally as firing of FBI director Comey news escalates concerns relative to Trump agenda–deregulation, infrastructure spending and tax reform.
  • 10-year Treasury yields pulling back a couple basis points to 2.38%.
  • Stocks in Asia were mostly flat last night as South Korea elected a new leader and news of FBI Director James Comey’s firing escalated concerns about a delay in U.S. pro-growth legislation.
  • China Consumer Price Index (CPI) rose +1.2% year over year in April and was slightly higher than forecast; Producer Price Index (PPI) was +6.4%, though less than projections.
  • Emerging markets are at fresh highs powered higher by its largest weight, Hong Kong.
  • China ADRs are also breaking out along with consumer shares; overall there are signs of global strength.
  • Stocks in Europe have also been mixed as France’s CAC 40 Index climbed back to par after early declines of ~1.0% as investors balanced good EPS with concerns over whether “relief rally” from Macron victory was already priced in and whether indexes could move to new highs.
  • European Central Bank (ECB) head Mario Draghi noted it’s not time to think about reversing the central bank’s quantitative easing policy.
  • Defensives rallying as gold up almost +1.0% in early trade and the yield on the 10-year Treasury is down.
  • VIX popped back above 10.

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Key Insights

  • The S&P 500 snapped a three-day winning streak yesterday, but has traded within a 1.0% range for ten consecutive trading days, the smallest range in 37 years! This can be viewed as a sign that strong corporate earnings and steady economic data is offsetting political headlines and falling commodity prices.
  • Correlations have declined, making it difficult for broader market moves; essentially, it appears stocks are delivering exactly what was priced in earlier this year.
  • Bond proxies are showing weakness – REITs are at three-year relative low to S&P 500 and utilities also seeing relative performance erode.

Macro Notes

  • Comey firing exacerbates concerns about delayed tax reform timetable. The ongoing healthcare reform roller coaster has already led to heightened concerns of the tax reform timetable getting pushed further out into 2018 and potentially running into the mid-term election campaign season. Now the news of FBI Director Comey’s firing is adding to those concerns this morning and leading to a slight increase in volatility, modest dip in S&P futures and slight bid to Treasuries just ahead of the market open. We continue think stimulus will be enacted, especially energy infrastructure that does not rely on congressional approval, but odds of a spring 2018 ETA (rather than December 2017) for tax reform have increased.
  • Oil prices bounce overnight. A bullish private inventory report and news that the Saudis will curb oil exports to Asia in June are supporting crude prices over night after recent pronounced weakness. Today’s government inventory data will be closely watched to determine if there is any follow through. We continue to see oil’s fair value in the $50-55 range and therefore see some upside from current levels; however, the ability for the U.S. shale producers to ramp up quickly will likely limit the magnitude of any rally should it emerge as summer driving season and the Organization of the Petroleum Exporting Countries’ (OPEC’s) May meeting approaches.
  • Chinese producer inflation cools. Chinese producer prices rose 6.4% year over year compared to expectations of 6.8% and 7.6% the prior month. Lower commodity prices helped. Consumer prices remained contained, rising 1.2% year over compared with 1.1% expected and 0.9% in March. Key takeaway is inflation in China is moderating as less producer inflation is translating into benign consumer price increases. Managing the country’s debt problem is a higher priority but it is inflation being under control is clearly positive for China’s growth outlook at this point.
  • Dovish comments from ECB. ECB chief Draghi made relatively dovish remarks in a policy speech at Dutch parliament earlier today, suggesting tighter policy is not imminent. Draghi’s remarks were consistent those made last month, conveying that downside risks had diminished, economic conditions have improved in the region, but it is still too early to declare victory on inflation. Draghi also called for individual countries to enact fiscal policies to contribute to more sustained growth and for further progress toward fiscal, monetary and banking union in the Eurozone, which we know is a tall order. Bottom line, though economic growth has improved in Europe, the ECB is unlikely to accelerate its timetable for tapering quantitative easing (QE) which currently calls for a leg down in early 2018.
  • Sell in May? Technicals may suggest otherwise. The well-known axiom is based on performance, justifiably so, but technicals suggest this year could be different. Today on the LPL Research blog, we take a look at whether this historically weak period could be a buying opportunity in 2017.

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Click Here for our detailed Weekly Economic Calendar

Wednesday

  • Monthly Budget Statement (Apr)
  • ECB: Draghi Speaks

Thursday

  • Initial Jobless Claims (May 6)
  • PPI (Apr)
  • Eurozone: European Commission Economic Forecasts
  • UK: Bank of England Rate & Inflation Report
  • ECB: Publishes Economic Bulletin

Friday

  • CPI (Apr)
  • Retail Sales (Apr)
  • Germany: GDP (Q1 Prelim.)
  • Germany: CPI & PPI (Apr)
  • Eurozone: Industrial Production (Mar)

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

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