Market Update: Tuesday, June 13, 2017

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Yesterday’s Market Activity

  • U.S. stocks fell slightly, as the selloff in technology stocks continued
  • Recent weakness in tech occurred after Nasdaq Composite reached another record last Thursday, though weakness has been largely offset by gains in energy, financials and industrials
  • Telecom also found a bid after year to date weakness

Overnight & This Morning

  • Stocks in Asia mostly higher as real estate, energy boosted Japan, Hong Kong stocks
  • Yen weakened again relative to the dollar; boosting exports. Manufacturing represents smaller portion of economic activity for many developed nations. Global supply chains also play a role.
  • Anticipated boost to exports from currency weakness can be offset by rising import costs; U.K. was primary example, but balance sheet expansion by global central banks could diminish impact of traditional currency wars going forward.
  • Friday’s Bank of Japan meeting could discuss possible exit strategy
  • European stocks climbed ~0.5% after pulling back on Friday’s U.S. tech weakness
  • Gilts and bunds fell. Peripheral sovereigns experienced slight gains.
  • Euro +0.1% to $1.12
  • U.K. inflation jumped +2.9% year over year; fastest in four years
  • Investors will pay close attention to Bank of England Thursday. Focus on economy, pricing, politics, and terror
  • Commodities – WTI crude oil ($46.30/bbl) up ~0.5%. U.S. crude stockpiles expected to weaken following last week’s surprising reading.
  • COMEX Gold ($1262/oz.) down 0.3%; copper -0.8%
  • U.S. stocks back in positive territory (+0.2%) as investors buy on recent weakness
  • Reflation/Trump Trade means shift back to value from outsized gains in growth
  • Headline PPI for May unchanged (0.0%), core PPI down 0.1% vs. expectations for a 0.1% gain
  • 10-year Treasury yield up to 2.22%

 

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Key Insights

  • The recent market shift has been more of a sector rotation than a flight to quality. It is important to remind clients that the year to date performance gap between growth and value (~12% prior to Friday) had been the highest since 2010, so some sort of reassessment should not be viewed with the same degree of alarm as some in the financial media are suggesting.
  • Recent technology weakness is not seen as a threat to the bond market. Traders continue to anticipate subdued inflation, as evidenced by today’s Producer Price Index (PPI) report (details below). Yields, corporate credit spreads and credit default swaps (CDS) are not flashing warning signs.

Fixed Income

  • Treasury prices were lower in advance of the upcoming Fed meeting. Treasury yields moved higher (prices lower) from their year-to-date low yields in 10- and 30-year issues as the market expects the Fed to raise the fed funds rate by 0.25% tomorrow. The yield on U.S. 2-year (1.35%), 10-year (2.21%), and 30-year (2.86%) Treasuries finished higher.
    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 0.86%, the flattest for the U.S. yield curve this year. The 2’s to 30’s yield slope was also flatter by 0.01% to 1.51%.
  • The 10-year breakeven inflation rate declined 0.01% to 1.78% last Friday, below the Fed’s 2% inflation target. The market will focus on this Wednesday’s core consumer price index data for more clues on inflation.
  • The Chinese fixed income market is still under pressure. With slightly slower growth in China in April (declining industrial output, fixed asset investment and retail sales data misses), the People’s Bank of China eased its tightening program, at least for the near-term. The yield curve steepness, as measured by the difference between the 2-year and 10-year rates, stands at 0.03%. The 5-year is now inverted to the 10-year with the shorter bond yielding 3.63% and the longer at 3.62% (higher in price). Generally, flatter yield curves signal waning economies and inverted yield curves can signal recession, but more time is needed to draw conclusions from recent bond activity in China.
  • Fed fund futures is pricing in a 96% chance of a rate hike following the Fed’s meeting this Wednesday as of Friday, June 9th. This would bring the Fed Funds rate to a range between 1.00% – 1.25%.
  • Longer-term rate hike expectations declined. In this week’s Bond Market Perspectives, due out later today, we look at the disconnect between what the fixed income and equity markets are indicating. Despite continued equity market strength, the Treasury yield curve has flattened considerably year to date. Also, though the market has largely priced in a Fed rate hike this week, the market is pricing in a slower pace to rate hikes for 2018 and 2019 than it did a month ago.

 

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • PPI (May)
  • UK: CPI & PPI (May)
  • UK: Retail Price Index (May)
  • Germany: ZEW Survey (June)
  • China: Industrial Production

Wednesday

Thursday

  • Empire State Mfg. Report (June)
  • Philadelphia Fed Mfg. Report (June)
  • Industrial Production and Capacity Utilization (May)
  • US Treasury International and Capacity Utilization (May)
  • US Foreign Net Transactions (Apr)
  • BOJ: Policy Balance Rate and 10-Yr Yield Target
  • Bank of England: Bank Rate Decision

Friday

  • Housing Starts (May)
  • Building Permits (May)
  • Eurozone: New Car Registration (May)
  • Eurozone: CPI (May)
  • Russia: GDP (Q1)
  • Bank of Russia: Key Rate Decision
  • China: New Loan Growth and Money Supply (May)

 

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.

 This research material has been prepared by LPL Financial LLC.

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