Yesterday’s Market Activity
- U.S. stocks off slightly, halting seven-day advance as energy fell >1.0% with WTI crude oil ($49.65/bbl.) down slightly.
- Economic data on personal income, spending and inflation largely supportive of Q2 gross domestic product (GDP) growth in the 3.0% range, well ahead of Q1 pace.
- Banks also weak as 10-year Treasury yields fell from 2.24% to +2.21%.
- Stocks hovering near record levels, powered by improving earnings, economic data. Investors trying to decide how long this narrow trading range with low volatility can persist without fiscal legislation to boost economic growth and ultimately, corporate profitability.
Overnight & This Morning
- Stocks in Asia little changed. Bomb attack in Kabul near foreign embassies left 64 dead, >300 injured.
- China’s Shanghai Composite rose slightly on upbeat manufacturing data (details below).
- Improving economic growth in China, likely Fed hike in June puts the China central bank in a bind, where the currency peg could compound growth challenges.
- In Japan, Nikkei fell 0.1%. April housing starts (+1.9% YOY) helped. Politics around loosening cap (¥530B or, $4.8B) for government spending in 2018 budget weighed.
- In Europe, shares down fractionally (Euro Stoxx 600 -0.1%) in afternoon trading.
- Pound hit a five-week low as polls suggest further narrowing of Tories lead, with some stating outright losses in majority seats in Parliament.
- Eurozone inflation remains below target, core CPI slipped more than expected to +0.9%
- German unemployment fell to a record-low of 5.7% in May
- Euro fell 0.2% to $1.11
- Commodities – Mostly lower, led by weakness in WTI oil, -3.5% to $47.93/bbl.
- Investors continue weighing benefits of OPEC production cuts vs likelihood of more U.S. shale production
- COMEX Gold up +0.3% to $1270/oz., copper flat
- S&P 500 is off 0.3% as the financials sector leads the way lower
- Bonds slightly higher; 10-year yield down to 2.20%
- U.S. dollar slightly higher
- We’ve had our fair share of global risks the past year or two, but there are also signs of improved risk management with Organization of the Petroleum Exporting Countries (OPEC) cuts and China yuan fix. China’s debt issues are well documented and tracked by market participants.
- We expect a gradual tightening by the Federal Reserve (Fed) and a likely shift to balance sheet reduction vs reliance on interest rate hikes. We believe an unexpected spike in inflation is unlikely as U.S. shale production is likely to keep global inflation low.
- Populism fears in Europe are not as deep as feared based on recent election outcomes in the Netherlands and France. Elections in the UK, Germany, and Italy should provide additional insights in the coming months.
- European Central Bank (ECB) tapering talk is likely premature with the Italian election still ahead and the country being one of the weak links in the Eurozone.
- South Korean industrial production figures well below expectations. Data released overnight showed a 2.2% monthly decline vs. an expected 0.6% gain. It is common for the actual data to come in either well below or well above expectations. So while one month’s data can and should be taken lightly, it’s still a negative data point, especially given that a decline in exports was one of the leading factors in the miss.
- Chinese manufacturing PMI was slightly higher than expected. Chinese manufacturing Purchasing Managers’ Index (PMI) came in at 51.2 vs. the expected read at 51. Non-manufacturing PMI was 54.5, above the previous figure of 54. Overall, the Chinese economy continues to expand, though at a slower rate. As long as the economy appears to be growing, the Chinese government has the ability to be more aggressive in terms of dealing with the degree of overleverage in the economy.
- Time for a June swoon? June historically is one of the weakest months for equities. Since 1950*, the S&P 500 is down 0.02% on average with only August and September worse. Here’s the catch, things have been very weak recently, as the past 10 years it has been down 1.5% on average – with only January down more over this timeframe. So could there be a June swoon in 2017? We take a look at this important question today on the LPL Research blog.
- Last trading day of the month has been weak lately. Today is the final trading day of the month of May. It has been a good month for equities so far, with the S&P 500 up 1.2%, but the month isn’t over yet. In fact, the final trading day of the month has been lower seven months in a row. Going back in history since 1928*, this has only happened three other times and it has never been down eight months in a row.
*Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.
- PCE (Apr)
- Conference Board Consumer Confidence (May)
- France: GDP (Q1)
- Germany: CPI (May)
- Eurozone: Consumer Confidence (May)
- Japan: Industrial Production (Apr)
- China: Mfg. & Non-Mfg. PMI (May)
- Chicago Area PMI (May)
- Beige Book
- France: CPI (May)
- Germany: Unemployment Change (May)
- Eurozone: Unemployment Rate (Apr)
- Italy: CPI (May)
- Eurozone: CPI (May)
- India: GDP (Q1)
- Canada: GDP (Mar)
- Japan: Nikkei Japan Mfg. PMI (May)
- China: Caixin China Mfg. PMI (May)
- Japan: Capital Spending (Q1)
- ADP Employment (May)
- Non-Farm Productivity (Q1)
- Initial Jobless Claims (May 27)
- Markit Mfg. PMI (May)
- ISM (May)
- Eurozone: Markit Eurozone Mfg. PMI (May)
- Italy: GDP (Q1)
- Brazil: GDP (Q1)
- South Korea: GDP (Q1)
- Canada: Markit Canada Mfg. PMI (May)
- Japan: Vehicle Sales (May)
- Change in Nonfarm, Private & Mfg. Payrolls (May)
- Unemployment Rate (May)
- Trade Balance (Apr)
- Eurozone: PPI (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.
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