Yesterday’s Market Activity
- Oil rallied on news that Saudi and Russian energy ministers backed nine-month extension of supply cut agreement; International Energy Agency (IEA) skeptical global oil markets can be balanced by year end. WTI crude oil rose 2.1% to $48.85/bbl., leading to energy sector outperformance; strong gains for financials also helped Russell 1000 Value index outpace its Growth counterpart.
- Materials topped the sector rankings on gains in industrial and precious metals. U.S. dollar weakness, positive China sentiment also helped. Dollar weakened as oil currencies strengthened. Strong regional election result for Merkel likely helped the euro.
- Consumer discretionary continued to struggle with retail weakness and ended the day unchanged, ahead of only the telecom sector’s 0.2% decline.
- Treasuries slightly weaker. Higher implied inflation from rising oil prices, weaker U.S. dollar played roles.
- Strong housing data drove 1.1% gain in homebuilder stocks. The National Association of Homebuilders Index beat consensus forecasts. Housing market recently passed the tenth anniversary of the 2007 peak in prices, the topic of our latest Weekly Economic Commentary.
- Ransomware attack put focus on cybersecurity stocks which rallied 2-4% on the day, helping tech sector outperform.
Overnight & This Morning
- U.S. stocks up modestly as oil rally continues. S&P 500, Nasdaq at record highs.
- Oil adding to yesterday’s gains (up 0.5%) on Saudi-Russia backing for global supply cuts.
- European markets recouping early losses, support coming from positive Eurozone GDP and German economic data. U.K. markets leading, France lagging.
- Asian equities mostly higher overnight, solid gains in China and India.
- The U.S. dollar is weaker vs. euro and yen, pointing to fifth straight decline.
- Russia continues to dominate the news cycle. Market participants will continue to assess what the accusations that President Trump leaked classified information to the Russians may mean for his Administration and its ability to make progress on its agenda. Clearly the stock market, for a number of possible reasons, is not particularly concerned with the S&P 500 at record highs. Firming economic data, strong earnings, low interest rates and central bank accommodation are clearly among those reasons.
- Housing market in good shape. Yesterday’s strong homebuilder sentiment data, good results from a leading home improvement retailer this morning, and generally favorable fundamentals for housing (affordability, demographics, etc.) suggest housing will continue to contribute to gross domestic product (GDP) for a while. The mixed housing starts/permits report this morning throws some cold water on this thesis, however, as more cooperative weather earlier in the spring selling season likely pulled some starts forward.
- U.S. Treasury yields lower on the week, with most of the move occurring Friday. Yields ended the week lower (prices higher) with the U.S. 10-year Treasury bond moving from 2.36% to 2.33%. A majority of the move occurred Friday after political news (FBI director fired) developed late Thursday. This, coupled with lower than expected CPI data put downward pressure on yields and inflation expectations. Year to date the U.S. 10-year Treasury yield is lower by 0.12%. The entire Treasury yield curve saw similar moves.
- Breakeven inflation rates decline after CPI. The 10-year breakeven inflation rate declined from a 1.88% on Thursday to a 1.85% last Friday, remaining below the Fed’s 2% inflation target as the core consumer price index rose less than forecast in April (0.1% vs. survey 0.2%). Additional signs of economic weakness and lower oil prices could cause inflation to move lower, but this may take time to materialize.
- Chinese fixed income market under pressure as of late. With slightly slower growth in April (declining industrial output, fixed asset investment and retail sales data misses), the People’s Bank of China (PBOC) may soon reverse its tightening program, at least in the near-term. The yield curve, as measured by the difference between the 2- and 10-year spot rates is nearly flat at 0.12%. Generally, flatter yield curves signal waning economies, but more time is needed to draw conclusions from recent bond activity in China.
- Preferreds, high-yield municipals, and Emerging Markets Debt (EMD) deliver solid year to date performance. Preferreds, high-yield municipals, and Emerging Markets Debt (EMD) performed well year to date with the BofA Merrill Lynch Hybrid Preferred Securities Index returning 8.1%, the Bloomberg Barclays High Yield Municipal Index up 4.7%, and the JPMorgan EMBI Global Index (EMD) up 5.8%. The longer duration profile of these asset classes (especially preferreds and high-yield municipals) helped performance, and a continued search for yield in the market also played a role.
- High-yield corporate spreads tighten. The spread of high-yield corporate bond yields over comparable Treasuries tightened from 3.82% to 3.72% on the week. Some of the move can be attributed to banks improving lending standards, which is supportive of high-yield fundamentals. In this week’s Bond Market Perspectives, we dive deeper into the high-yield sector and what may drive returns going forward.
- U.K. inflation. U.K. inflation data rose slightly higher than expected, with annualized core Consumer Price Inflation of 2.7%; though some of gain came from energy and transportation, which is unlikely to be repeated. The British pound lost 0.5% immediately after this data was released.
- European growth. Eurozone GDP grew 1.7% over the past year, meeting expectations, according to data released this morning. Analysts are focusing on the disparity amongst countries in the region: Finland, Portugal and Spain leading, but major countries like Italy, and to a less extent France, brought the average down.
- New highs, yet another small gain. The S&P 500 Index closed at another new all-time high yesterday, the fourth over the past seven days. What continues to stand out about the recent strength though is the lack of volatility. In fact, the S&P 500 closed without a gain or loss of more than 0.50% for the 14th consecutive trading session. This is the longest streak since 14 in 1995. Incredibly, it hasn’t made it to 15 since 1969.
- Italy: GDP (Q1)
- UK: CPI & PPI (Apr)
- Eurozone: GDP (Q1)
- Russia: GDP (Q1)
- Japan: GDP (Q1)
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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