Market Update: Friday, August 11, 2017

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Yesterday’s Market Activity

  • Stocks fell for third consecutive day; Dow -0.9%, S&P 500 Index -1.5%, Nasdaq -2.1%. Large cap tech shares, the year’s biggest winners, dragged Nasdaq lower.
  • It can be argued markets due for a pullback, given unusual period of uninterrupted gains, low volatility.
  • North Korea fears, weak retail earnings are the likely catalysts, but neither considered new news.
  • Producer price index came in weaker than expected.
  • Spike in VIX (+40%) yesterday to 16 likely triggered selling by quantitative programs.
  • 10-year Treasury yield -5 basis points (-0.05%) to 2.20%. Corporate spreads held up relatively well, suggesting lack of distress in credit markets.

Overnight & This Morning

  • Escalating rhetoric between U.S., North Korea weakened stocks. Japan’s Nikkei was closed while stocks in China, South Korea off ~1.5% on average.
  • European stocks also lower (STOXX Europe 600 -1.0%) on declining sentiment; basic materials stocks lagged.
  • Oil prices lower after IEA said market rebalancing taking longer than expected despite strong demand. Cited weak OPEC compliance with output cuts. WTI -0.4% to $48.35/bbl.
  • COMEX Gold hit two-month high ($1285/oz.), headed for biggest weekly gain since April.
  • U.S. markets down slightly, with stocks poised for fourth consecutive drop.
  • Safe havens in demand as 10-year Treasury yield slipped to 2.18%; yen strengthened to 109 USD.

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Key Insights

  • Tensions with North Korea may have started to take their toll on Asian markets. Korean equities were down 1.7% overnight, though the Korean won, which had been declining for the past few days, has shown more stability this morning. The Nikkei was closed, but Chinese and Hong Kong indexes were down 1.5%-2% overnight. A Chinese government newspaper suggested that China would remain neutral in a conflict between North Korea and the U.S. but would support North Korea in the event of a U.S. preemptive strike. Our base case continues to be that fully armed conflict on the Korean peninsula can be avoided, but the markets are beginning to show signs of stress. We should note though, that none of this price action is consistent with weakening economic or corporate fundamentals, and appears purely sentiment driven.

Macro Notes

  • European markets dominated by Korean tensions. Broad market indexes are down about 1% late in afternoon trading, with defensive sectors like utilities and staples relative outperformers, but still in the red on an absolute basis. France and Germany released inflation data, up 0.8% and 1.5% respectively, both in line with expectations. European investors are focused intently on the September 7 meeting of the European Central Bank (ECB), at which time the ECB is expected to provide further clarification on its plans for quantitative easing.
  • Second worst day of the year. The S&P 500 dropped 1.45% on the session yesterday, coming in at the second worst drop of the year only to a 1.82% sell-off in May. To put things in perspective, this would be the ‘best’ second worst day of the year since 1995. Additionally, one thing we’ve seen since the February 2016 lows is that the day after a 1% drop markets tend to bounce back. In fact, since the February 2016 lows, there have been 12 other 1% drops and the following day was higher 10 of those times.
  • Fear the unlucky number “7”? As strange as this might sound, years that end in the number “7” tend to be very weak from August until the end of the year. We’ve noted before that seasonality is one of the major near-term concerns and today on the LPL Research blog we will take a closer look at this very peculiar market stat.

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Friday

  • CPI (Jul)
  • Germany: CPI (Jul)
  • France: CPI (Jul)
  • Italy: CPI (Jul)
  • Russia: GDP (Q2)

 

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