Market Update: Wednesday, July 19, 2017

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Yesterday’s Market Activity

  • Stocks initially under pressure as investors processed failed ACA negotiations. S&P 500, Nasdaq each climbed fractionally to new record levels, Dow -0.3%.
  • Investors seemed relatively calm as trading progressed, despite focus on ACA effects on the rest of the Administration’s agenda.
  • U.S. Treasury yields, dollar both fell. U.S. dollar down ~0.5% to 11-month low, 10-year yield dropped to 2.26%.

Overnight & This Morning

  • Asian stocks up across the board, led by China; materials, financials in particular. Shanghai Composite +1.4% to highest close in two years, MSCI Emerging Markets Index +0.6%.
  • China increased holdings of U.S. Treasuries for a fourth consecutive month in June, rebuilding foreign currency reserves as yuan stabilizes.
  • Japan’s Nikkei +0.1% ahead of tomorrow’s Bank of Japan meeting. Investors expect reiteration of need for continued stimulus and lowered economic forecasts.
  • European stocks up; technology again leading gains. STOXX Europe 600 +0.5%. Gilts falling while most other sovereigns rising. 10-year bund yield at 0.53%.
  • Greece’s long-awaited return to bond markets delayed, partly due to ceiling set by the International Monetary Fund on country’s debt limit. It must now wait until at least July 20th, when another 4 billion euro payment on bonds held by European Central Bank (ECB) is scheduled.
  • Euro ($1.15), pound ($1.30) down slightly vs dollar ahead of tomorrow’s ECB meeting, where investors expect announcement regarding possible tapering of quantitative easing.
  • Commodities – WTI crude oil ($46.77/bbl.) steady amid mixed signals from U.S. crude inventories. Copper, gold unchanged.
  • U.S. stocks slightly higher after yesterday’s recovery from initial disappointment on health care, uncertain prospects for enactment of pro-growth legislation.
  • Treasuries down slightly, with 10-year yield +1 basis point (0.01%) to 2.27%, 2-year at 1.35%.

 

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Key Insights

  • Healthcare bill fails in the Senate. The Senate’s attempt to “repeal and replace” has failed. Moreover, a vote scheduled for next week to simply repeal also appears dead on arrival, with several Senators objecting. After eight years of Republicans campaigning against the Affordable Care Act (ACA), and the strengthened Republican majorities in the House and Senate after last November’s elections, this is a stunning development. From a legislative perspective the finality on healthcare opens the door to tax reform negotiations starting with the House passing a budget bill this week. If budget negotiations progress, then tax reform talks can begin. Considering the 2018 midterms are just 15 months away, pressure is on legislators to act on plans to improve economic growth. We believe that a combination of repatriation relief and a reduction in the corporate tax rate could potentially propel 2018 S&P 500 Index earnings per share above $140.00, suggesting that current forward valuation metrics have yet to price in fiscal relief.
  • U.S. dollar weakness. The combination of slower than expected growth in gross domestic product (GDP) and inflation, along with political wrangling, has pressured the dollar, which fell another 0.5% yesterday. The DXY Index (dollar vs. basket of currencies) dropped to an 11-month low and is now down around 7% year to date. The failed Senate vote on the ACA has decreased investor confidence in the ability of the Administration to enact its pro-growth agenda, including infrastructure spending, regulatory relief and tax reform. Yet confidence surveys have remained solid, pulling back slightly from elevated levels. A variety of U.S. equity indexes also remain at, or near, record levels. Dollar weakness may also signal the market does not believe the Federal Reserve (Fed) will act again until December, and that is only if inflationary pressures, led by wages, begin to surface in the coming months. In the meantime, the lower dollar should boost domestic corporate profits, emerging market stocks, and commodity prices, while longer-term we believe the combination of gradually higher wages, slightly improved inflation readings, Fed balance sheet reduction, and expectations for a December rate hike will ultimately prove to support the dollar.

Macro Notes

  • You are here. It has been a strong month for equities, with multiple major indexes at or near all-time highs. Here’s the catch, we could be at an inflection point, at least in the near term. We take a closer look today on the LPL Research blog.
  • Another record for the VIX. The CBOE Volatility Index (VIX) closed beneath 10 for the fourth day in a row, trying the all-time record set in late 1993. For the year, the VIX has averaged only 11.5, which would be the lowest average for a year ever – besting the previous record of 12.4 in 1995.
  • Nasdaq joins the party. The Nasdaq finally made a new high for the first time since June 8 and did so in impressive fashion, as it was also the eight consecutive green close for the tech-heavy index. This is the longest win streak since 10 in a row back in February 2015. Going back to 1990, the longest win streak was 13, which ended in January 1992. Last, since 2000, this is only the 11th time it was up eight days in a row and in only three of those previous 10 times did it gain on the ninth day.

 

 

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Click Here for our detailed Weekly Economic Calendar

Wednesday

  • 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)

Thursday

  • 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)

Friday

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

 

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