Market Update: Tuesday, July 18, 2017


Yeseterday’s Market Activity

  • It was the second-lowest volume day of the year in the U.S. yesterday, as just 5 billion shares traded on the NYSE and Nasdaq.
  • Major U.S. indexes were basically unchanged from Friday’s record levels, though the Nasdaq Composite rose for the 7th consecutive session.
  • Technology stocks continued to recover from last month’s losses; after falling ~2.5% in June, the tech sector is up ~4.0% thus far in July.
  • Consumer discretionary also posted modest gains, as leading names in the beaten down retail sector found a bid.
  • The U.S. dollar held steady as the yield on the 10-year Treasury fell two basis points (0.02%) to 2.30%.

Overnight & This Morning

  • Asian stocks pulled back slightly, after a six-day run that pushed shares to their highest levels since 2008.
  • Chinese stocks (~+0.3%) managed to erase losses to finish higher, after renewed regulatory pressures announced to reduce risk and speculation.
  • Japan’s Nikkei fell 0.6%, below the psychologically important 20k level, ahead of the Bank of Japan meeting Thursday. Concerns are escalating regarding the central bank’s purchases of ETFs in their quantitative easing program, potentially leading to distortions in the markets.
  • The Aussie dollar is moving toward a two-year high vs. the greenback as metals demand surges.
  • European stocks slipped with miners leading declines as the STOXX Europe 600 is down 1.1% late in afternoon trading.
  • The euro rallied to a two-year high to $1.15, perhaps more on U.S. uncertainty than E.U. certainty.
  • German investor confidence fell for the second consecutive month and the yield on the bund fell 2 basis points (0.02%), to 0.56%.
  • UK inflation was also below expectations as gilts rose and the pound fell; Brexit negotiations are expected to get more detailed today, tackling issues such as nuclear cooperation and residency rights, according to Bloomberg.
  • Expectations have also increased that the Bank of England could hold rates steady for another two years, according to a poll of UK economists.
  • Commodities – WTI crude oil up +0.9% to $46.44/bbl. After a big run, base metals are consolidating today, with copper up just 0.2%,and gold up 0.5% to $1240/oz.
  • It appears the Republican health bill is dead, with two more Republican Senators pulling their support.
  • The dollar is broadly lower while Treasury prices gain; 10-year yield down to 2.27%.
  • U.S. indexes are down modestly as the healthcare bill weighs on sentiment.



Key Insights

  • China. Chinese gross domestic product (GDP) came in at +6.9% year over year, above expectations, while industrial production and retail sales came in at +7.6% and 11.0%, respectively. Despite that, the Shanghai Composite (-1.4%) experienced its biggest one-day sell-off of 2017 on Monday, and the Shenzhen fell 3.6%. This after, over the weekend, President Xi pledged greater efforts to reduce leverage in the economy, calling for the People’s Bank of China (PBOC) to adopt a more regulatory role toward risk reduction in his campaign against speculation and runaway debt. In addition, several small cap names issued profit warnings, further weighing on the Shenzhen Index.
  • Copper. The industrial metal known for its status as a primary indicator for future global demand growth, has quietly broken out from early year weakness and is poised to test new highs. Iron ore has also surged ~25% over the past month. Surging steel prices are propelling base metals, boosting both commodity currencies and emerging market stocks. Rising industrial metals are often consistent with higher market interest rates, yet it appears there is a crowded long trade in U.S. Treasuries, which could pose a risk for bond bulls in the coming months. Nonetheless, global growth is good while inflationary pressures are largely absent, likely providing more of a breeze, rather than a tailwind, from global monetary policymakers.
  • Summer doldrums? While volume was light yesterday, and many investors are seemingly concerned about the upcoming economic calendar, a variety of market signals continue to point toward growth. Equity markets remain firm with the Dow, S&P 500, Nasdaq Composite, and Russell 2000 Indexes all at or near record levels. Moreover, on an equal-weight basis, the S&P 500 is also near fresh highs. The strength is also global with Strategas’s equal-weighted index of the 20 largest global indexes (by market cap) also at a new high. Global macro data has been largely supportive, and credit markets are flashing few signs of risk. While we do believe we are due for a pullback, these fundamentals should provide solace.

Fixed Income Notes

  • Treasury prices were higher after the Federal Reserve Chair testified before Congress. Treasury yields moved lower (prices higher) after the market perceived Federal Reserve (Fed) Chair Janet Yellen’s commentary before the House Financial Services Committee last week to be on the dovish side. The yield on the U.S. 2-year Treasury finished lower by 5 basis points (0.05%) to 1.35%, while the 5-year Treasury ended the week lower by 8 basis points (0.08%) to 1.87%. The 10-year also moved lower in yield by 6 basis points (0.06%) to 2.33%. The long-end of the curve moved the least, lower in yield by 2 basis points (0.02%) to 2.91% on the 30-year bond.
  • Yield curve steepness measures were mixed. The Treasury yield curve flattened by .01% with the 2’s to 10’s slope, a measure of the steepness of the yield curve, ending the week at 98 basis points (0.98%). The 2’s to 30’s yield slope was steeper by 0.10% to 156 basis points (1.56%). The 5’s to 30’s curve steepened to 1.04%, the most since February. The 5-year part of the curve reacted positively to the potential that the Fed may be on hold with regards to rate hikes.
  • Breakeven inflation rate increased. The 10-year breakeven inflation rate increased 3 basis points (0.03%) to 1.78% last Friday. The 1.78% level is below the Fed’s 2% inflation target. Friday’s weaker than expected Consumer Price Index, which fell from 1.9% in May to 1.6% in June, is weighing heavily on inflation expectations.
  • U.S. Treasury long positions declined slightly but remain elevated. The latest Commitments of Traders report, released by the CFTC (data July 14, 2017) shows that net-long bets in 10-year Treasury notes declined somewhat as traders sold into the higher prices. The net-longs are still elevated however.
  • Corporate spreads tighten. The option adjusted spread (OAS), which measures the yield differential between high-yield corporate bonds and comparable U.S. Treasuries, tightened from 3.70% to 3.65% on the week (based on the Bloomberg Barclays High Yield Index). Investment-grade corporates tightened as well from 1.07% to 1.05% on the week (based on the Bloomberg Barclays Investment Grade Corporate Index). Oil price stabilization is likely helping corporates to remain well bid.

Macro Notes

  • The euro rallied to nearly a two year high, reaching a level not seen since August, 2015. The currency was helped by the release of the European Central Bank’s (ECB) bank lending survey, which suggested that banks were relaxing loan standards and that lending to the private sector was growing. Stocks were lower this morning for most European countries, with U.K. equities being flat.
  • The German ZEW survey of investment professionals showed a reduction in confidence regarding both current conditions and expectations. Financial professionals are seen to be worried about the eventual reversal of ECB monetary policy and the prospects for unwinding the huge ECB balance sheet. Survey participants also noted declining confidence in U.S. economic growth, but an overall approval of the election of Emmanuel Macron as French president.
  • VIX beneath 10 again. The CBOE Volatility Index (VIX) closed at 9.82 yesterday, once again closing beneath 10. Incredibly, this is the 10th time so far in 2017 the VIX has closed beneath the 10 level, besting the previous record of four times from 1993. In fact, the total sub-10 closes going back to 1990 was only nine, so there have been more sub-10 VIX closes this year than the previous 27 years combined. Last, the VIX has closed sub-10 for three consecutive days for only the second time in history and it has only once made it to four straight days (December 1993).



Click Here for our detailed Weekly Economic Calendar



  • Housing Starts (Jun)
  • UK: Inflation Report Hearings
  • BOJ: Interest Rate Decision
  • BOJ: Monetary Policy Statement
  • Japan: Machine Tool Orders (Jun)
  • Japan: Trade Balance (Jun)
  • Japan: Imports & Exports (Jun)


  • Philadelphia Fed Business Outlook (Jul)
  • Leading Index (Jun)
  • Eurozone: Current Account Balance (May)
  • UK: Retail Sales (Jun)
  • Eurozone: Consumer Confidence (Jul)
  • ECB: Deposit Facility Rate (Jul 20)
  • ECB: Main Refinance Rate (Jul 20)
  • ECB: Marginal Lending Facility (Jul 20)
  • BOJ: Kuroda
  • Japan: All Industry Activity Index (May)


  • UK: Public Sector Net Borrowing (Jun)
  • Canada: CPI (Jun)
  • Canada: Retail Sales (May)


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