Market Update: Thursday, July 6, 2017

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Yesterday’s Market Activity

  • U.S. stocks managed slight gains yesterday, pushed higher by technology. Dow 30 flat; S&P 500 Index +0.2%; Nasdaq +0.7%. Technology still best performing sector year to date. Semiconductors led, chip sales up 22% year-over-year.
  • Energy (-1.6%) was the worst performer, pulled lower by WTI crude oil (-4.0%), to $45/bbl., ending eight-day rally as oversupply issues resurfaced.
  • FOMC members seem divided on rate increases, balance sheet reduction in Fed minutes from its June policy meeting.
  • Market reaction muted as 10-year Treasury yield held near 2.33%. Perhaps investors are now numb to policy obfuscation. Markets still expect one more hike this year, most likely in December.

Overnight & This Morning

  • Asian stocks mostly lower. Japan hit by yen strength as political rhetoric escalated with North Korea missile, U.S. and Poland defense deal ahead of Trump-Putin meeting at G-20 tomorrow.
  • MSCI Asia Pacific Index (-0.2%), lower for fourth time in five days.
  • European Central Bank (ECB) released minutes of their June meeting, which indicated policymakers considered removing pledge to increase bond-buying program if needed. Improvement in economic data, removal of several political risks, argued for removal of easing bias. Nonetheless, policymakers only changed wording on rates. Like the Fed, officials are very concerned about disinflation, messaging, and its impact on markets.
  • European stocks down ~1% while German bund yield +3 basis points (0.50%).
  • Euro holding steady around $1.13 USD.
  • Commodities – After selling off yesterday, WTI oil +1.5% after industry data showed U.S. crude, gasoline stockpiles declined.
  • COMEX Gold -0.2% to $1224/oz. on several bearish forecasts; copper +0.4%.
  • U.S. stocks lower in early trading following President Trump’s speech in Warsaw, as investors grew skittish relative to combination of geopolitical risks, valuations.
  • Treasury yields climbing ahead of Friday’s jobs report. Forecasts suggest +175k for June; 2-year yield 1.41%, 10-year 2.35%.
  • ADP Private Payrolls Report showed +158K in June, below forecasts for +188k and May’s +235k.

 

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Key Insights

  • Little reaction to Fed minutes. The minutes of the Federal Reserve’s (Fed) June 13-14, 2017 meeting were released at 2 p.m. ET yesterday. Market reaction was limited as there weren’t many surprises. We discuss the key things markets were looking for: additional detail surrounding the Fed’s inflation expectations, the start date of balance sheet normalization, and the future path of rate hikes, in more detail on the LPL Research blog.
  • We remain bullish on emerging markets after recent news and data out of China. Both public and private sector Purchasing Managers’ Index (PMI) data came in ahead of expectations and previous month figures; though growth in services is slowing, particularly from private sector sources. Overall, however, the Chinese economy seems to be growing at an acceptable rate, and without the heavy state intervention seen earlier this decade.

Macro Notes

  • Europe. PMI data in Europe continues to look strong, with data in both Germany and France better than expected. In Italy, the bailout of a number of Italian financial companies is now complete, with both the Italian government and the ECB stepping in to improve solvency for the firms acquiring assets from the failed institutions. Rules were put in place to protect taxpayers from bank failures, but these were largely ignored. Bank stocks in Europe have rallied more than 5% in the past two weeks, in part because of higher interest rates, but the potential end to bank crises in Italy (and Spain, which had a similar bailout last month) are likely contributors.
  • Events. The G20 summit begins in Hamburg, Germany on Friday, July 7. Heading into the meeting there is a sharp contrast in policy, with a heavy degree of trade skepticism from the Trump administration, compared to the expected announcement of a new EU-Japan trade deal. Steel is a major issue with respect to German exports of steel to the U.S., as well as Chinese steel exports, against which the administration has been reportedly speaking to other delegations about curtailing. The U.S. imports very little Chinese steel directly, but the degree to which China exports steel impacts the global price, and therefore can adversely impact U.S. steel companies. This comes against the backdrop of the need to engage with China over the North Korean issue. Natural resource investors, including steel, iron ore, coal, and related mining companies, will closely watch this summit. Steel stocks have been rising sharply since mid-June, due in part to partial protectionist measure.

 

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Click Here for our detailed Weekly Economic Calendar

Thursday

  • ADP Employment (Jun)
  • Initial Jobless Claims (Jul 1)
  • Trade Balance (May)
  • Germany: Factory Orders (May)
  • ECB: Account of the Monetary Policy Meeting
  • Mexico: Central Bank Monetary Policy Minutes
  • Japan: Labor Cash Earnings (May)

Friday

 

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