Yesterday’s Market Activity
- U.S. equity markets rebounded strongly from previous session’s weakness, which was the worst day in >1 month. Investors bid up tech sector, which is down 1.0% in June.
- Technology climbed 1.3%. Financials +1.6%, largest U.S. banks up more than 2% on anticipation of positive stress test results and the increased likelihood that banks could increase payouts.
- 10-year Treasury yield rose to 2.22% from 2.19%, further increasing attractiveness of financials.
- WTI crude oil firmed, rising for 5th straight session.
Overnight & This Morning
- Stocks in Asia were strong across the board, solid gains in banks, mining shares after S&P 500 rallied from worst selloff in six weeks.
- MSCI Asia Pacific Index rose 0.6%, Australia climbed 1.1%, boosting metals, oil.
- Japan’s Nikkei +0.4% on speculation that Bank of Japan’s (BOJ) asset purchase program may no longer weaken the yen.
- Emerging trend of investors focusing more on economic fundamentals from central banks’ balance sheet expansion. Retail sales -1.6% from previous month.
- China’s President Xi began three-day visit to Hong Kong, in a bid to show “support for Hong Kong’s development and livelihood improvement.” Saturday marks 20th anniversary of Hong Kong’s return to Chinese rule.
- European stocks slipped, most sectors fell due to increased confusion about central bank support.
- German bund yield climbed to 0.40%, pound and euro strengthened vs. dollar.
- Eurozone economic confidence hit highest level in a decade (111.1), beat expectations.
- Commodities – WTI oil +1.1% to $45.15/bbl., COMEX gold ($1247/oz.) fell, copper +1.0%.
- U.S. stocks mixed in early trading, Dow, S&P 500 +0.1%; Nasdaq -0.1%.
- Treasury yields higher for third day amid hawkish shift in leading central banks.
- Dollar weakened vs. currencies of most G-10 countries.
- In economic data, Q1 gross domestic product revised higher to +1.4%. Consumption was stronger, inflation weaker than previous readings.
- Narrow market leadership. We’ve had several questions related to the tight trading range for stocks recently and reports of narrow market leadership. Thus far in 2017, technology and healthcare have been the leading sectors of the S&P 500 Index. In particular, the “FANG” stocks have clearly been an important source of market returns YTD. However, we would not characterize this market as dangerously narrow.According to an analysis done at Strategas Research Partners, the ten largest stocks in the S&P 500 have contributed ~30% of the Index’s YTD gain, which is not a historical extreme or outlier. To be sure, in 2015 the ten largest companies accounted for all of the market’s gains. Moreover, the ten largest stocks in the S&P currently have a combined weight of just 19%, which compares favorably to 27% in 1999 (dot com bubble) and 26% in 1980 (energy’s dominance). In addition, on an equally-weighted basis, the healthcare sector has actually outperformed technology this year (20.35% vs. 17.40%), pointing to broader participation than cap-weighted returns would suggest.
- Japan. Few, if any, changes in monetary policy are expected at the July 20 BOJ meeting. It’s not clear if the current policy is working well, as the Japanese yen has strengthened 7% since the last policy change in January 2016. Overnight, retail sales in Japan disappointed, up 2% annually, vs. 2.6% expected.
- China. The government has been cracking down on excess lending for some time now, mostly smaller measures. One new policy is more important. Municipal bonds are new in China. Historically, financing of infrastructure projects was done when a government created quasi-private company, a Local Government Financing Vehicle (LGFV) that borrowed money, and then sell off land associated with a project to repay the debt. Recently the ministry of finance prohibited land sales to help repay debt. No LGFV has ever defaulted. Yield on these bonds are now rising, signaling that the market may start to price in defaults on this $800 billion market. While this sounds like a negative, we view this as positive development in creating more transparency and market discipline in country where financing had often been made for political, not economic reasons.
- German elections. These have not received the same attention as other recent elections, possibly because the issues are more conventional (there is no “Brexit” or “Withdraw from Europe” on that ballot). Angela Merkel, the de facto leader of Europe, at this point is the favorite to win and win handily, though many remain distrustful of polling data given their inaccuracy over the past few elections.
- Trade tensions. There has been increased trade tensions between the U.S. and Germany, culminating in a recent speech by Secretary of Commerce Wilbur Ross during which he was very critical of German trade practices with respect to steel. This brought a sharp rebuke from the German government. We look to next week’s G20 summit to see if this rhetoric continues or if the language from both side moderates.
- 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.
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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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