Market Update: Thursday, June 22, 2017

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Yesterday’s Market Activity

  • U.S. stocks mixed as Dow (-0.3%), S&P 500 Index (-0.1%) experienced small losses. Nasdaq Composite +0.8%, Russell 2000 -0.3%.
  • Healthcare (+1.3%), technology (+0.7%) led S&P 500. Healthcare sector responding favorably to signals Trump Administration is softening stance on drug pricing. Energy -1.6% led market down; oil extended its losses (-2.0% to $42.50/bbl.)
  • 10-year Treasury steady around 2.15%; COMEX gold ($1245/oz.) up slightly after five consecutive declines.

Overnight & This Morning

  • Asian stocks pared gains as WTI crude oil fluctuated; stronger yen pressured Japanese exporters. Mainland China equities sold off late on loan quality concerns, decline in inflation, M2 growth estimates. Nikkei -0.1%, Shanghai Composite -0.3%.
  • European stocks fell for third day as energy selloff continued. Gilts firmed, cushioning yesterday’s weakness on mixed messages from Bank of England.
  • Most sovereigns strengthened, led by German bund, whose yield declined to 0.25%. Euro strengthened slightly to $1.11.
  • Commodities – WTI crude ($42.50/bbl.) is holding steady as worries increase that a ~$40.00 price limits profitability potential for North American drilling and production.
  • Tropical storm Cindy has curtailed natural gas production to six-week low.
  • Copper, gold both firmed.
  • U.S. stocks mixed in early trading.
  • Investors anxiously anticipating release of Fed’s stress tests on U.S. banks after the close.
  • Dollar has dropped as 2-year Treasury yield pulled back to 1.34%.

 

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Key Insights

  • The 10-year Treasury yield hovers around 2.15%. Bloomberg is reporting that hedge funds and other large speculators keep plowing money into yield curve flattening trades (pushing longer-term rates down and shorter-term rates up). So far, this has paid off, with the difference between five- and 30-year U.S. yields at the lowest since December 2007. The gap from 10 to 30 years has shrunk for 11 straight days. This has never happened in data dating back to 1992.
  • Given the stance of global monetary policy these past several years, we’re not convinced the recent flattening of the yield curve bodes poorly for the U.S. economy. While some data has come in below expectations, we’re still tracking for Q2 real gross domestic product (GDP) of ~+2.5%, which is essentially double the pace from Q1. In addition, domestic and global Purchasing Manager Indexes and Leading Economic Indexes indicate expansion. Moreover, global profits (a good lead indicator for employment and investment) are trending up, suggesting positive trends for consumption and to some extent, trade.
  • It is therefore conceivable that two issues are driving the curve flattening: 1) slowing U.S. data could limit the Federal Reserve’s (Fed) plans for higher rates, and 2) given low yields on most global sovereign bonds, global investors see the 10-year Treasury and its comparatively higher yield as a bargain on a relative valuation basis. Of course, we will continue to monitor.

 

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Click Here for our detailed Weekly Economic Calendar

 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)

 

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

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