Yesterday’s Market Activity
- Stocks had a mixed day, S&P 500 Index -0.1%, Dow +0.3% (another record high, 4th in a row), Nasdaq -0.4%.
- Financials (+0.6%), telecom (+0.4%), utilities (+0.4%) led the way higher. Materials (-0.8%), tech (-0.5%).
- S&P 500 +2.1% in July. Telecom (+6.4%), Tech (+4.3%) were big sector winners for the month; industrials (+0.1%) lagged.
- WTI crude oil higher for sixth straight day, and broke the $50 level, closing at $50.02/bbl. Crude higher by 9% in July.
- News out of Washington yesterday that Anthony Scaramucci is out as White House Communications Director, but market didn’t show much interest.
- 10-year Treasury yield ended flat at 2.29%.
Overnight & This Morning
- Major overseas indexes higher. Traders likely see lackluster Purchasing Managers’ Index (PMI) data in Japan, Eurozone as “bad news is good news” scenario with tepid data suggesting continuation of loose monetary policy (details below).
- Asia ended green across the board, led by KOSPI (+0.8%), Hang Seng (+0.8%), Shanghai Composite (+0.6%); Nikkei (+0.3%).
- European stocks at session highs, STOXX 600 (+0.7%) after Q2 gross domestic product (GDP) met expectations at 0.6%, 2.1% year over year. DAX (+1.0%) leading major indexes in the region.
- Commodities mixed with COMEX gold ($1272/oz.) near flat, oil ($49.69/bbl.) down ~1%, industrial metals up.
- Dollar broadly firmer after recent weakness, though euro strengthening on GDP data.
- Treasuries slightly lower, benchmark 10-year yield little changed at 2.30%.
- Treasuries yields inch higher for the week, with the 10-year yield ending 0.04% higher at 2.29%. Two-year yields were 0.02% higher at 1.36%, leading to a slight steepening in the two year/10-year yield curve. Five-year Treasuries were 0.03% higher at 1.83%. The five year/30-year measure of steepness increased by 0.06%, as 30-year Treasuries saw more weakness, moving 0.09% higher, compared to a move of just 0.03% for five-year Treasuries.
- Breakeven inflation rates move higher. The 10-year breakeven inflation rate increased by 0.07% to end the week at 1.82%. This level remains below the Federal Reserve’s (Fed) 2% inflation target, but has shown a noticeable uptick in recent weeks, largely driven by increasing oil prices.
- U.S. Treasury long positions remain elevated. The latest Commitments of Traders report, released by the CFTC (data July 25, 2017) shows that net-long bets in 10-year Treasury notes increased slightly over the past week, with net longs remaining elevated relative to history. This indicates that on balance futures traders expect rates to fall. However, past experience has shown that when levels become elevated in either direction, it can represent a contrarian opportunity. If economic data starts to suggest that rates may move higher, it could cause a rapid unwinding of positions that could end up putting additional upward pressure on rates.
- High-yield spreads continue to compress. The option adjusted spread (OAS), which measures the yield differential between high-yield corporate bonds and comparable U.S. Treasuries, tightened from 3.56% to 3.49% on the week (based on the Bloomberg Barclays High Yield Index). The Fed Senior Loan Officer Survey also came out yesterday, which tends to be a pretty good indicator of high-yield default rates. The report showed a little easing on balance, which is a positive (banks wouldn’t be lending more if they didn’t think people could make payments).
- Investment-grade corporate bonds show continued strength. Investment-grade corporate spreads tightened from 1.04% to 1.03% on the week (based on the Bloomberg Barclays Aggregate Corporate Index). In this week’s Bond Market Perspectives piece, we check in on investment-grade corporates, why we continue to like them relative to Treasuries, and risks to the asset class including the potential for another year of record new issue supply.
- PMI data comes in mixed overnight. A lot of PMI data was released overnight, with China and the UK seeing stronger readings, and the Eurozone and Japan seeing weaker readings. China’s Caixin manufacturing PMI rose to 51.1 after falling to 50.4 in June, while UK PMI increased to 55.1 in July from 54.2 in June. Both Eurozone (56.6 vs 57.4 in June) and Japan PMIs (52.1 vs 52.4 in June) fell from last month, but remain in expansionary territory. Given that the European Central Bank and Bank of Japan are both still in the midst of quantitative easing programs, markets in these areas may be following a “bad news is good news” narrative on the idea that weaker readings could keep central banks accommodative for longer.
- Market breadth. A narrative in the market over the past year is the idea that large cap strength is attributable to only a handful of growth technology companies, namely, the “FANG” stocks. If it was actually the case that the major technology stocks were providing outsized returns in comparison to the rest of the index, it could be a reason to worry, given the historical association with narrow market breadth during bull runs, and bubbles – the dot-com bubble of the late 1990s being a prime example. We take a look at the current situation today on the LPL Research blog.
- Personal Income & Spending (Jun)
- Marking Mfg. PMI (Jul)
- ISM Mfg. Index (Jul)
- Construction Spending Jun)
- Italy: Markit Mfg. PMI (Jul)
- France: Markit Mfg. PMI (Jul)
- UK: Markit Mfg. PMI (Jul)
- Germany: Unemployment Rate
- Germany: Markit Mfg. PMI (Jul)
- Eurozone: Markit Mfg. PMI (Jul)
- Eurozone: GDP (Q2)
- Japan: Vehicle Sales (Jul)
- ADP Employment Report (Jul)
- Japan: Nikkei Services PMI (Jul)
- China: Caixin Services PMI (Jul)
- Markit Services PMI (Jul)
- ISM Non-Mfg. (Jul)
- Durable Goods Orders (Jun)
- Capital Goods Shipments & Orders (Jun)
- Germany: Retail Sales (Jun)
- Italy: Markit Services PMI (Jul)
- France: Markit Services PMI (Jul)
- Germany: Markit Services PMI (Jul)
- Eurozone: Markit Services PMI (Jul)
- UK: Markit Services PMI (Jul)
- Eurozone: Retail Sales (Jun)
- Change in Nonfarm, Private & Mfg. Payrolls (Jul)
- Unemployment Rate (Jul)
- Average Hourly Earnings (Jul)
- Labor Force Participation & Underemployment Rates (Jul)
- Trade Balance (Jun)
- Germany: Factory Orders (Jun)
- Italy: Retail Sales (Jun)
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