Last Week’s Market Activity
- Stocks closed mixed yesterday in a slow session. Dow, S&P 500 Index +0.1%, Nasdaq -0.1%.
- Rate-sensitive sectors outperformed as Treasury yields fell; real estate (+1.1%), telecommunications (+0.7%), utilities (+0.3%).
- Energy (-0.5%) was the laggard as oil prices dropped 2.4%. News of Libya working to reopen an export terminal, and a report of slightly lower compliance to OPEC’s output reduction deal in July were blamed for the fall.
Overnight & This Morning
- Stocks in Asia up overnight. Hang Seng +0.9%, Shanghai Composite +0.1%. Japan bucked trend (Nikkei -0.1%). No economic news, though today marks opening talks to revise Korus agreement-trade deal between U.S., South Korea.
- Generally positive in Europe, STOXX Europe 600 +0.6%, most countries positive (Italy the exception -0.5%). Euro down ~0.4% vs. dollar after >10% gain over past five months. Market will be focused on the European Central Bank (ECB) President Mario Draghi’s Jackson Hole speech Friday, and the September 7 ECB meeting for clues on possible tapering of current bond buying program.
- German ZEW survey data showed high confidence in current economic conditions, but showed weakening, and weaker than expected, confidence in the future by German investors. Germany’s ongoing emissions cheating scandal (auto industry historically a source of pride in German economic model), combined with upcoming elections, potentially soured investor sentiment.
- Treasuries fall after recent strength. 10-year yield +3 basis points (0.03%) to 2.21%.
- Commodities – WTI crude oil ($47.40/bbl.) adding to prior losses, COMEX gold shedding prior day gains (-0.5% to $1290/oz.), industrial metals higher.
- U.S. indexes are modestly higher in early trading, potentially boosted by reports that the Trump administration is making strides on tax reform.
- Markets may be more susceptible to volatility this month. We’re starting to enter a slower period of news flow, which along with weak August seasonals could make markets more susceptible to volatility from things like political discussions (budget, debt ceiling), geopolitical factors (North Korea), or other unexpected events in the near term. Earnings season is over and the economic calendar is slow. Expectations for the Kansas City Federal Reserve Bank’s annual Jackson Hole Economic Policy Symposium, attended by representatives from the central banks of more than 40 countries, are lower than they were a week ago, though markets will be watching closely, and it still has the potential to generate some news.
- U.S. Treasury rallied back at weeks end. Political issues, central banks, and Barcelona all combined to lead risk-off assets lower. Despite higher yields (lower prices) early in the week, the U.S. Treasury 10-year bond rallied back from a 2.27% on Tuesday, to a 2.19% on the week. Year to date, the U.S. 10-year Treasury is higher in price, but lower in yield by 0.26%. The 30-year bond finished the week at a 2.78% yield, lower by 0.01% from the beginning of the week (2.79%). The 2-year Treasury yield rose 0.03% on the week, underperforming the longer maturities. This brought the 2’s to 10’s slope, a measure of the steepness of the yield curve, flatter by 0.03% to 86 basis points (0.86%). Yields have traded in a tight range for months, and in this week’s Bond Market Perspectives piece, we take a look at why rates have been complacent and what may drive them higher or lower.
- International bond prices were slightly lower in Germany. The German Bund 10-year prices were lower on the week from 0.38% to 0.39%. This brings the spread between the U.S. 10-year Treasury and the comparable German Bund to 1.80% (0.39% vs. 2.19%).
- Municipal bond supply is lower. The Bond Buyer’s 30-day visible supply totaled $7.7 billion, below the 5-year average of $9.7 billion. Lower new issuance has led to municipal bond outperformance relative to the Bloomberg Barclays Aggregate Index. Month to date, the Bloomberg Barclays Municipal Bond Index is returning 0.82% vs. the Aggregate Index which is returning 0.50%. Year-to-date intermediate municipals are at 5.34% while the Aggregate Index is at 3.21%.
- Municipal to Treasury ratios cheapen with the exception of shorter maturities. The 10-year municipal to Treasury ratio cheapened from 85.1% to 85.9% as measured by the Bloomberg BVAL AAA Muni Yield % of Treasury Index. Month to date, a similar pattern has emerged with 10-year ratios cheapening from 82.7% on July 31, 2017 to 85.9% today. The 5-year ratio is more expensive however, moving from 67.3% to 65.7% last week. It is important to note that 65.7% is approaching the 16-year low for the 5-year Index (2001-2017) of 63% reached on December 31, 2009. Generally, as ratios move lower or tighten, demand for municipals can decrease as prices relative to Treasuries become more expensive.
- High-yield corporate bonds begin to show stress. Despite year-to-date returns of 4.79% as measured by the Bloomberg Barclays High Yield Corporate Index, the sector is underperforming the Bloomberg Barclays Aggregate Index by 0.70% month to date with returns of -0.20%. Pressure in the lower rated credit spreads is leading to underperformance this month.
- Richmond Fed Mfg. Report (Aug)
- Germany: ZEW Survey (Aug)
- Mexico: GDP (Q2)
- China: Conference Board LEI (Jul)
- Markit Mfg. and Services PMI (Aug)
- New Home Sales (Jul)
- France: Markit France Mfg. & Services PMI (Aug)
- Germany: Markit Germany Mfg. & Services PMI (Aug)
- Eurozone: Markit Eurozone Mfg. & Services PMI (Aug)
- Eurozone: Consumer Confidence (Aug)
- ECB: Draghi
- Japan: Machine Tool Orders (Jul)
- Japan: Nikkei Japan Mfg. PMI (Aug)
- Existing Home Sales (Jul)
- Kansas City Fed Hosts Annual Jackson Hole Policy Symposium (8/24-8/26)
- UK: GDP (Q2)
- Germany: Import Price Index (Jul)
- France: Business & Mfg. Confidence (Aug)
- Bank of Italy: Visco
- Japan: Leading Index (Jun)
- Japan: CPI (Jul)
- Durable Goods Orders (Jul)
- Capital Goods Shipments and Orders (Jul)
- Germany GDP (Q2)
- Germany: Ifo (Aug)
- France: Consumer Confidence (Aug)
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