Market Update: Tuesday, June 20, 2017

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Yesterday’s Market Activity

  • U.S. stocks rallied amid bargain hunting in technology shares after two-week selloff. Dow, S&P 500 Index both closed at record levels. Small caps also strong as Russell 2000 +0.8%, within 0.5% of record level.
  • Technology sector +1.7%, for its best gain year to date, though remains -0.5% for the month. Healthcare +1.1%, Nasdaq Biotech Index +2.5%.
  • U.S. Treasuries weakened on speech by NY Federal Reserve (Fed) President Dudley’s calling for gradual rate rise to continue. Yield on 10-year rose 4 basis points  (0.04%) to 2.19%.
  • Follow through saw U.S. dollar rise +0.4%, COMEX gold ($1246/oz.) fell to one-month low.

Overnight & This Morning

  • In Asia, Japanese stocks +0.8% as yen continued to weaken vs dollar. Stocks in Hong Kong, China ~-0.2% on last day of trading before MSCI announcement after U.S. trading close (details below).
  • In Europe, stocks +0.2%, led by food and beverage, media firms. Bonds in focus after Bank of England head Mark Carney suggested it was premature to tighten credit given the drop off in wages, inflation. Also, Brexit negotiations underway and given political turmoil, Carney is unlikely to trigger market anxiety.
  • Germany’s Ifo Institute lifted 2017 gross domestic product (GDP) forecast from +1.5% to +1.8%, projected 2018 growth to +2.0% from +1.7%. Bund yield rose to 0.27%.
  • Commodities – Tropical storm warning issued in SW Louisiana for today and tomorrow, which may risk operations in Gulf of Mexico, home to ~17% of U.S. crude production, 4% of natural gas production.
  • WTI oil moved above $44/bbl. amid storm warning, expectations U.S. stockpiles decline.
  • Spot gold ($1243/oz.) snapped four days of declines.
  • U.S. stocks opened lower (S&P -0.3%,Dow -0.1%, Nasdaq -0.3%), Treasury yields backing up slightly, dollar stabilizing.
  • Healthcare, insurance stocks could be under scrutiny as Senate GOP leaders plan to announce details of their Affordable Care Act repeal bill within the next few days.
  • Special elections in South Carolina, Georgia today.

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Key Insights

  • While equities continue to move higher, we want to reiterate our position that cyclical strength has historically benefited from recoveries following earnings per share (EPS) recessions.  Indeed, after essentially flat EPS of ~$118.00 in each of the past three years, we project EPS of up to $130.00 for the S&P 500 Index this year. Typically, the index climbs in the range of 10% to 12% in the year following EPS recessions, led by gains in technology, industrials, financials, and consumer discretionary sectors.
  • Small cap stocks are positioned for strong EPS gains in 2018, and are also a likely beneficiary of any proposed tax legislation. Clarity on regulatory and fiscal measures could push EPS toward or above $140.00 in 2018, which could serve to justify forward P/E multiples.

Fixed Income

  • Treasury prices were lower after the Fed raised rates. Treasury yields moved lower (prices higher) after the Fed raised rates by 25 basis points (0.25%) on June 14, 2017. The yield on the U.S. 2-year Treasury finished lower by 3 basis points to 1.32%, while the 10-year Treasury ended the week lower by 5 basis points to 2.16%. The long-end of the curve also finished the week lower by 8 basis points (0.08%) to 2.78% on the 30-year bond, the low-yield year to date for this maturity.
  • 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 84 basis points (0.84%), the flattest for the U.S. yield curve this year. The 5’s to 30’s yield slope ended the week flatter by 6 (0.06%) to 103 basis points (1.03%).
  • Breakeven inflation rates declined. The 10-year breakeven inflation rate declined 11 basis points (0.11%) to 1.67% last Friday. The 1.67% is the lowest breakeven rate year to date and well below the Fed’s 2% inflation target.
  • The Chinese fixed income market is still under pressure. Despite better economic data in May (Retail sales growth rose 10.7% and factory output grew at 6.5% in May) and the People’s Bank of China easing its tightening program, the Chinese yield curve continues to invert. The yield curve steepness, as measured by the difference between the 2-year and 10-year rates, stands at -8 basis points (-0.08%). The 1-year is also inverted to the 10-year with the shorter bond yielding 3.58% and the longer at 3.49% (higher in price). Generally, flatter yield curves signal waning economies and inverted yield curves can indicate recession, but more time is needed to draw conclusions from recent bond activity in China.
  • Market continues to expect slower trajectory of rate hikes. The Fed’s post-FOMC statement leaned hawkish in that they continued to have an upbeat view of the economy, and didn’t scale back on rate hike projections even given the announcement of the balance sheet normalization program. However, despite this hawkish bent, market expectations for rate hikes fell slightly from the beginning of the week, much of which was due to a weaker than expected consumer price index print last Wednesday. Markets are currently pricing in a 46% chance of a rate hike by the end of 2017.

 

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • Germany: PPI (May)
  • BOJ: Minutes of Apr 26-27 Meeting
  • China: Conference Board China LEI (May)

Wednesday

 Thursday

  • LEI (May)
  • Eurozone: Consumer Confidence (Jun)
  • Japan: Nikkei Japan Mfg. PMI (Jun)

 Friday

  • Markit Mfg. & Services PMI (Jun)
  • New Home Sales (May)
  • France: GDP (Q1)
  • France: Markit France Mfg. & Services PMI (Jun)
  • Germany: Markit Germany Mfg. Services PMI (Jun)
  • Eurozone: Markit Eurozone Mfg. & Services PMI (Jun)
  • Russia: GDP (Q1)
  • Canada: CPI (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.

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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.

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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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