Yesterday’s Market Activity
- U.S. equity markets post worst day in a month on broad selling pressure, Senate delay on ACA vote. 10 of 11 sectors down. Yields rose, supporting financials (+0.5%). S&P 500 -0.8%, Dow 30 -0.5%, Nasdaq -1.5%.
- Technology, healthcare lagged. 10-year Treasury jumped 6 basis points (0.06% to 2.20%).
- Fed Chair Janet Yellen remained committed to hiking interest rates in London speech; reiterated plans to gradually shrink Fed’s balance sheet, expressed concerns about asset valuations.
- This follows prior day speech by European Central Bank’s (ECB) Draghi, who indicated pricing weakness, led by energy, was transitory, suggested tighter policy going forward (details below).
Overnight & This Morning
- Asian stocks down ~0.5%, dragged lower by technology after Nasdaq selloff.
- China’s Beige Book indicated the economy stayed strong in Q2 after positive start to the year. Q2 gross domestic product (GDP) projected +6.8%, Consumer Price Index (+1.4%). Full year GDP growth expected +6.7%.
- Yen strengthened as business confidence expanded, expectations increased Bank of Japan Governor Kuroda will be reappointed.
- European stocks fell ~0.5% on tech weakness. Gilts slumped for second day, euro strengthened to one-year high of $1.139 (details below).
- Bund yield climbed to 0.38%.
- Commodities– WTI crude oil (-0.5%) fell to $44/bbl. after longest run of gains in a month as U.S. industry data showed crude stockpiles rose, exacerbating supply glut concerns. COMEX gold rallied to $1252/oz., copper -0.5%.
- U.S. stocks higher, Treasury yields extend yesterday’s surge after Yellen signaled U.S. economy can withstand higher interest rates. Nasdaq up on tentative tech rebound.
- 2-year yield up to 1.37%, though dollar slipping vs G-10 currencies.
- Light day for economic data, with pending home sales, inventories on the docket. Tomorrow’s revision for Q1 GDP should be steady at +1.2%.
- We remain favorable toward small cap stocks, which may seem odd at this point in the expansion. However, it is important to remember that this cycle, due to the effects of emergency global monetary policies, has provided an opportunity for small cap and cyclical leadership despite the length of the expansion. It is our view that the benefits of deregulation and corporate tax cuts will more directly accrue to small caps, which should also benefit from a slightly firmer dollar as U.S. monetary policy continues to decouple from global policy initiatives. Earnings per share projections over the next year also favor small caps.
- We do not see the flattening curve as a looming recession indicator at this point. Rather, it’s being driven by a drop in inflation expectations, which is mostly due to the decline in realized inflation these past few months. We also believe that the buying on the long end has been primarily driven by a global relative valuation play, rather than consensus that recession is looming. The 2-year adjusts to anticipated Federal Reserve (Fed) moves and balance sheet reductions, narrowing the spread. It should also be noted that other credit market indicators, including investment grade-to-high yield spreads and credit default swaps pricing, do not indicate stress in the credit markets.
- Tuesday was an interesting day for European markets. Both the euro (+1.4%) and the pound (+0.8%) were up against the dollar, fairly significant moves. Stocks in the region were down, with the EuroStoxx 600 falling 0.8%, so U.S. dollar investors gained in total as the currency gains more than offset equity weakness. ECB President Mario Draghi’s speech caused early weakness in the euro, only to have the currency turn positive later in the day.
- Overall, Draghi’s speech read as relatively dovish. As he has done many times in the past, he reiterated that the ECB’s policies of negative interest rates and bond purchases had been successful in reviving the European economy, even if inflation in the region remains below the bank’s target. Yet at the same time, he cautioned against reversals in current policies, noting that any changes, “have to be made gradually and only when improving dynamics that justify them appear sufficiently secure.”
- Possibly troubling markets was increased trade rhetoric. Commerce Secretary Wilber Ross suggested that the U.S. may have to fight steel dumping by trading partners. Ross addressed a Berlin meeting of German Chancellor Angela Merkel’s Christian Democratic Party via video after cancelling his trip to address the meeting in person.
- Early this morning the euro continued yesterday’s strength, rising 1.6% over the two day period since ECB President Mario Draghi’s speech. While LPL Research viewed this speech as relatively dovish, the fact that he suggested the possibility of changing monetary policy was enough to cause traders to buy the euro and also sell bonds. This morning the ECB issued a statement “clarifying” the statement, suggesting it was meant to be more balanced than the market reaction. That statement was issued about 8:15 a.m. ET and caused an immediate turn around in the markets, with the euro selling off and bond yields rising.
- Advance Report on Goods Trade Balance (May)
- Wholesale Inventories (May)
- Pending Home Sales (May)
- France: Consumer Confidence (Jun)
- Eurozone: Money Supply (May)
- Itally: PPI & CPI (Jun)
- Bank of Canada: Poloz
- Japan: Retail Sales (May)
- GDP (Q1)
- Germany: CPI (Jun)
- Eurozone: Consumer Confidence (Jun)
- BOJ: Harada
- Japan: National CPI (May)
- Japan: Industrial Production (May)
- China: Mfg. & Non-Mfg. PMI (Jun)
- Personal Income (May)
- Consumer Spending (May)
- Chicago PMI (May)
- Core Inflation (May)
- UK: GDP (Q1)
- France: CPI (Jun)
- Germany: Unemployment Change (Jun)
- Eurozone: CPI (Jun)
- Canada: GDP (Apr)
- Japan: Vehicle Production (May)
- Japan: Housing Starts (May)
- Japan: Construction Orders (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.
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