Market Update: Thursday, July 13, 2017

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Yesterday’s Market Activity

  • Stocks rebound on dovish Yellen testimony. U.S. and European indexes up notably after dovish takeaways from Federal Reserve (Fed) Chair Janet Yellen’s prepared remarks despite little to suggest a change in policy expectations (details below).
  • Nasdaq (+1.1%) led the way higher, S&P 500 Index (+0.7%); Dow (+0.6%) hit a new all-time high.
  • Technology (+1.3%), REITs (+1.3%) led; financials (+0.1%) lagged for a second day.
  • Treasury yields fell for third day. 10-year note +4 basis points (0.04%) to 2.32%.
  • WTI crude oil gains continued, WTI +0.9% to $45.44/bbl.
  • Precious, industrial metals up; COMEX gold (+0.4%, $1220/oz.).

Overnight & This Morning

  • Equities in Asia closed broadly higher with the exception of Nikkei which was unchanged following a report that Bank of Japan will raise its growth outlook at next week’s policy meeting.
  • European stocks rising in afternoon trading; STOXX Europe 600 +0.4%.
  • Commodities – WTI slightly lower ($45.43/bbl.), gold ($1220/oz.) near flat, copper +0.3%.
  • Treasuries little changed, 10-year yield 2.33%; U.S. dollar slightly lower.
  • Jobless claims came in at 247k vs. 245k consensus estimates, still no signal of shifting labor market conditions.
  • U.S. indexes slightly higher in early trading; Dow, S&P 500 both up 0.1%.

 

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Key Insights

  • Earnings season begins overseas. International earnings season is beginning, though most companies report a few weeks after their U.S. counterparts. As is the case with domestic earnings, we expect relatively strong earnings growth in most markets, especially Europe, particularly in the energy sector across a number of regions. After the first quarter’s strong earnings growth, the market is looking for continuation of the trend (additional details below). Overseas earnings will be the focus of next week’s Weekly Market Commentary.
  • Energy market trying to find equilibrium. There has been great volatility in the oil market and energy related stocks. Production continues to be strong in the U.S. and from OPEC members like Libya and Nigeria that had been exempted from the production freeze originally announced last November. However, the markets may have found a bid as inventories appear to be shrinking to levels that, while relatively high, are at least within recent norms.

Macro Notes

  • China. Chinese trade data, both imports and exports, were greater than forecast. In general, we look to exports as a sign of global economic health, whereas imports tend to tell us more about the country in question. Chinese exports to other emerging markets were steady, with greater improvement in shipments to developed markets. Exports were led by electronics, while steel exports declined. Technically, Chinese imports of oil were down due to lower prices, but actual volume of oil increased again, suggesting some strength in the Chinese industrial economy.
  • Europe. As noted, earnings season is beginning with reasonably high expectations. Economic data in Europe has generally been strong, which should translate into greater profits. Analysts have set high growth targets for areas like energy, consumer discretionary, and technology stocks. It’s important to remember that European stock indexes have a different composition than domestic ones, with a much higher allocation to financial and consumer stocks, and a much lower one to the technology sector. The European Central Bank (ECB) meets next week amid speculation that it will provide greater clarity on policy going forward, which will likely include a plan to purchase additional assets in 2018, albeit at a reduced pace (tapering).
  • European inflation. Both Germany and France released inflation data this morning, running at 1.5% and .7% over the past twelve months respectively. Staying below the 2% threshold reduces, though does not eliminate, pressure on the ECB to tighten monetary policy. Next week’s ECB meeting may provide answers to policy uncertainty, but no actual changes are expected until 2018.
  • Canada. On Wednesday, July 12, the Canadian Central Bank increased interest rates for the first time in seven years, from 0.50% to 0.75%. The move had been telegraphed, but was not considered certain by most market participants.
  • Oil. The oil market continues to try to find a balance. A number of OPEC oil ministers will be meeting with Russian oil officials in St. Petersburg. Libya and Nigeria may be brought under the production agreement with the intention of not increasing their production further, though not rolling back recent increases. Beyond these issues, we do not expect any major announcements from this meeting. Also notable is a major oil field that was found in the shallow part of the Gulf of Mexico. This is a victory for the Mexican government, which only recently opened its waters to exploration by companies other than state-owned PEMEX.
  • Markets respond positively to Yellen testimony. Fed Chair Yellen’s comments largely restated current policy guidelines during her twice-yearly congressional testimony yesterday: Rate hikes will be gradual, balance sheet normalization will begin soon, and the recent dip in inflation is likely due to temporary factors. But the addition of some qualifiers led market participants to view the overall tone as dovish, helping to push rates down and equity markets higher. Highlights from the testimony include comments that policy could change if soft inflation persists, that the relationship between low unemployment and wage pressures may not be as strong as in the past, and that the policy-neutral interest rate is likely lower than what we’ve seen in the past.
  • Where’s the volatility? The two hallmarks of 2017 so far have been a steady climb higher for equity prices amid historically low volatility. Think of it like this, yesterday the CBOE Volatility Index (VIX) closed at 10.30, marking the 45th time this year that the VIX closed between 10.0 and 11.0. This is already a record, topping the 32 times it closed in the 10s in 2006. Not to be outdone, the VIX has averaged 11.54 so far this year, which could be the lowest annual average ever, breaking the record of 12.42 from 1995. There’s a long way to go in 2017 and we wouldn’t be surprised at all if volatility perked up the second half of this year.
  • What do gold, copper, and Treasury rates have in common? Today, on the LPL Research blog, we explore the relationship between the copper/gold ratio and 10-year Treasury rates to see if this could be an indicator worth watching.

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Click Here for our detailed Weekly Economic Calendar

Thursday

  • PPI (Jun)
  • Monthly Budget Statement (Jun)
  • Germany: CPI (Jun)
  • France: CPI (Jun)

Friday

  • CPI (Jun)
  • Retail Sales (Jun)
  • Industrial Production & Capactiy Utilization (Jun)
  • Italy: CPI (Jun)
  • Japan: Industrial Production & Capacity Utilization (May)

 

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