Market Update: Thursday, July 27, 2017

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Yesterday’s Market Activity

  • S&P 500 Index ended flat Wednesday as stocks gave up early gains; strong earnings drove Dow up 0.45%. Focus still on earnings, healthcare votes, and tax reform implications.
  • No surprises from the Federal Reserve (Fed) statement though bonds rallied on the news, in part due to acknowledgement of weaker inflation and so-slow approach to balance sheet normalization.
  • Treasuries strong across the curve; 10-year yield fell 5 basis points (0.05%) to 2.28% and weighed on the U.S. dollar.
  • WTI crude oil (+1.8%) added to recent gains on bullish U.S. inventory data and Saudi production curbs.
  • Strong earnings drove telecom (+3%) leadership. Lower interest rates weighed on financials (-0.6%), policy uncertainty hurt healthcare (-0.3%).

Overnight & This Morning

  • U.S. stocks up slightly as busiest day of earnings barrage begins.
  • European markets mixed. German DAX -0.6%, U.K. FTSE and France CAC near flat.
  • Major Asian markets higher, Japan’s Nikkei +0.2%, Hong Kong +0.7% and Shanghai Composite +0.1%. South Korea gross domestic product (GDP) +0.6% quarter over quarter as expected (details below).
  • Treasuries giving back some of yesterday’s gains; 10-year yield is up slightly (2.31%) which is supporting the U.S. dollar.
  • COMEX Gold (+1%) to $1262/oz. seemed to like the subtle dovish signal from the Fed statement.
  • Oil (-0.6%) to $48.74/bbl. down for the first time in four days, but up 19 of 24 sessions in rallying from $42/bbl. since June 22.
  • Copper at highest levels since early 2015, a positive China signal.
  • Today’s economic calendar includes claims and durable goods. Claims +10K to 244K, impacted by auto plant retooling. Still a solid number. Durable goods orders rose strongly, revisions to prior months were positive, and core (ex-aircraft) non-defense shipments (a proxy for capital goods spending), rose slightly. But aircraft orders drove most of the headline increase and some internal components missed consensus forecasts (more below).

 

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Key Insights

  • Markets continue to follow healthcare vote wrangling. Senate Republicans’ attempts to pass repeal and replace ACA bills have been unsuccessful this week but momentum is reportedly building for a “skinny version” that only removes the more controversial elements of the law such as the individual mandate, which may have the best odds of passage. Passage, though unlikely, is possible and would be negative for health insurers though positive for medical device makers that would see their special tax eliminated.
  • Tax reform headlines are picking up. We expect an updated tax framework from policymakers very soon. Odds of a slimmed down version of tax reform (really just tax cuts) have increased as more potential areas of disagreement emerge, with the latest example being upper income tax rates.

Macro Notes

  • The reaction to yesterday’s Fed announcement was largely negative for the U.S. dollar. The DXY Index declined as much as 1% yesterday and overnight, but has recovered more than half of that as trading began this morning. The British pound remains strong, hitting a nearly 11-month high against the dollar, despite continuing concerns over Brexit negotiations. Yields on European bonds fell overnight, while yields on U.S. treasuries are up this morning, providing some lift to the dollar.
  • South Korea projects an increase in exports and GDP. South Korea is not often in the headlines, somewhat surprising given that it has the 11th largest economy and is a major exporter of both industrial goods, including steel, drill rigs and equipment, as well as more modern goods like electronic components. Therefore, South Korean exports can be seen as a good indicator of global growth. Although its second quarter GDP figure was relatively weak (2.7% over the past 12 months), due in part to reduced exports, the South Korean government and many companies are projecting an increase in GDP and exports for the second half of 2017. Business investment on plant and equipment increased 5.1% in the quarter as companies ramped up for greater exports. Much of the growth is expected in trade with China, as well as electronics components overall.
  • Durable goods orders rise sharply. Durable goods orders for June rose 6.5%, well ahead of consensus expectations of 3.9%, helped by the volatile aircraft category, but even the underlying details were solid. Ex-transport, durable goods rose a modest 0.2%, but add in a 0.3% upward revision to the May data and the number looks pretty good. Shipments of non-defense capital goods ex-aircraft, which flows directly through to GDP as capital goods spending, also rose 0.2% with a 0.3% upward revision to May. While business spending in the second quarter GDP report, which will be released tomorrow, is unlikely to be as strong as the robust first quarter, we should see signs that businesses have continued to increase investment in future growth and innovation.
  • Low expectations for the Fed were largely met. Markets’ expectations for any changes in Fed policy were low heading into this month’s FOMC meeting, and the Fed didn’t disappoint. As was widely expected, the Fed chose to leave the overnight discount rate at its current level of between 1.0% and 1.25%. The language of the statement was also little changed, as discussed in our latest blog post.
  • New all-time low for the VIX. The CBOE Volatility Index (VIX) hit an intraday low of 8.84, breaking the 9 level on an intraday basis for the first time ever. In the end, it did bounce and close at 9.60, which is the 8th lowest closing price ever. Going back to 1990, the past four days rank as the lowest four intraday lows ever, besting the previous record from late December 1993. So far this year the VIX has averaged 11.4 on a closing basis, well beneath the previous low of 12.4 from 1995. We’ve talked a lot about the lack of volatility, and this week on the LPL Research blog we noted how this is actually a global phenomenon.

 

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Click Here for our detailed Weekly Economic Calendar

Thursday

Friday

  • GDP (Q2)
  • Core PCE (Q2)
  • France: GDP (Q2)
  • France: CPI (Jul)
  • Germany: CPI (Jul)
  • UK: Nationwide House Prices (Jul)
  • Eurozone: Consumer Confience (Jul)
  • Canada: GDP (May)

 

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