Market Update: Friday, July 7, 2017


Yesterday’s Market Activity

  • U.S. equities saw broad selloff, with all 11 S&P 500 sectors down. Energy (-1.8%), healthcare (-1.3%), consumer discretionary (-1.0%) led declines. Marked worst day for the index since May 11, as investors fretted about potential for further rise in bond yields despite mild economic growth.
  • Technology, biotech led Nasdaq (-1.0%) lower. Dow -0.7%.
  • Weakness in energy despite 1.0% gain in WTI crude oil ($45.50/bbl).
  • Government bond prices down in six of past seven sessions, 10-year Treasury yield closed at 2.38%.

Overnight & This Morning

  • The Hang Seng Index down ~0.5% as global sovereign bond yields continued to surge.
  • Bank of Japan (BOJ) conducted first fixed-rate bond purchase operation since February. In an attempt to offset selling pressure from bond bears, it offered to buy an unlimited amount at a fixed-rate auction. No one tendered, suggesting the BOJ’s curve control policy is still working.
  • Yen slumped to eight-week lows after BOJ move.
  • China’s foreign exchange reserves ticked up to $3.06 trillion in June, slightly below estimates, but have risen for five consecutive months, helping to stabilize the currency as investors were less eager to shift cash overseas.
  • The EuroSTOXX 600 Index down ~0.2% as sovereign bond yields slid. Stocks also lower on weakness in media companies.
  • German bund yield climbed to 0.57%.
  • Currency – Euro ($1.14 USD) little changed vs dollar, pound-sterling weakened after poor reading on industrial production.
  • Commodities – After performing well yesterday, WTI oil dropped 2.5% ($44.40/bbl.) as investors weighed expanding U.S. production vs declining crude stockpiles.
  • Oil seems stuck in a trading range as OPEC attempts to make a dent in lingering U.S. glut, hoping for a summertime peak-driving demand boost. There are no signs that Saudi Arabia is planning further production cuts.
  • COMEX Gold, copper fell ~0.2%.
  • U.S. stocks higher following June jobs report (details below).
  • Nonfarm payrolls +222k, besting expectations of +178k. Unemployment rate up to 4.4% (details below).
  • U.S. Treasuries steady, with benchmark 10-year yield +1 basis point (0.01%) to 2.39%, the 2-year flat at 1.39%.
  • According to EPFR Global, U.S. equities had outflows (-$4.7B) for the week ending July 5. Redemptions in eight of past ten weeks. Bond fund inflows of $3.9B last week.



Key Insights

  • Japan. The Japanese Central Bank bucked the trend of moving towards policy normalization by surprisingly buying bonds overnight to bring down both interest rates and the value of the yen. Japanese authorities have struggled to depreciate the yen when its policy was similar to other central banks. But now that the Federal Reserve (Fed) has been raising interest rates, and the European Central Bank (ECB) has been discussing doing so as well, Japanese policy has a greater probability of success. A lower yen is expected to be beneficial for Japanese stocks, though for U.S. based investors the currency movements may reduce, or even eliminate, any resulting outperformance of Japanese stocks. We believe that currency hedging is a viable, if not preferable way to invest in Japan.
  • Leaders from Japan and the European Union announced a trade agreement at the G20 summit in Hamburg, Germany. While not technically a free trade treaty, the agreement, assuming it is passed by national parliaments, would cover about 90% of trade between the regions. This agreement should strengthen both economic regions, particularly export-oriented countries and companies, increasing the relative attractiveness of these companies.
  • Financials. The financial sector continues to perform well, as global yields continue to rally.  More importantly, the banks, capital markets, and insurers all continue to be close to relative highs (vs. the S&P 500 Index) despite recent market hesitation. We continue to like financials.

Macro Notes

  • Strong job growth in June. The economy added 222,000 jobs in June versus consensus expectations of 178,000. An upward revision of 47,000 jobs in April and May adds to the picture of labor market strength. Hourly wages rose 0.2% versus May’s 0.1% and expectations of a 0.3% increase. Wage growth was disappointing given the strong jobs number, but modest wage growth will help limit inflationary concerns. The unemployment rate ticked up to 4.4% but for the right reason, as more job seekers came into the market. The report leans market positive, providing a strong signal on economic growth while limiting inflationary concerns from wages, but likely keeps the Fed on track to raise rates one more time in 2017 and start reducing its balance sheet by year end.



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