Yesterday’s Market Activity
- U.S. stocks up sharply after anticipated re-ignition of U.S.- North Korea tensions failed to materialize over the weekend and impact of Hurricane Irma was less than feared. Dow +1.2%, S&P 500 Index +1.1%, Nasdaq +1.1%.
- Above-average volume on the NYSE with advancers handily outpacing decliners 3.7:1.
- All sectors gained with financials again leading as the 10-year Treasury yield jumped 8 basis points (0.08%) to 2.13%; telecom stocks lagged.
- Treasuries’ selloff continued as prices fell across the curve, pushing yields higher.
- Commodities – WTI Crude Oil (+1.2%) bounced back amid choppy trading; COMEX gold -1.1% near $1331/oz. on dollar strength and general risk-on sentiment; industrial metals mixed.
Overnight & This Morning
- Asian markets higher overnight Nikkei +1.2%, Hang Seng (+1.0%), Shanghai Composite +0.1%.
- Generally positive tone in European equities, STOXX Europe 600 Index +0.7%. U.K.’s FTSE 100 the exception, -0.2% after inflation data came in slightly higher than expected (details below).
- Treasuries lower for second day, 10-year yield +3 basis points (+0.03%) to 2.15%.
- Commodities – metals down sharply, copper -1.5%, gold -0.4%. WTI crude +0.3% to $48.21/bbl.
- U.S. stocks at new record highs following Monday’s gains. S&P 500 +0.3% to 2494.
- It is always difficult to separate the human tragedy from major events such as Hurricane Irma. What was once a worst case scenario of an estimated ~$200 billion in damages has now dropped to ~$50 billion. Consequently, the reinsurers that lost almost 2% in market cap last week gained almost all of that back yesterday. Thus far, it appears that economic growth this quarter, Q3, could see a hit of -0.5% to -1.0% to gross domestic product, bringing output growth down to ~2.0%. The rebuilding process, though, will last for some time, boosting output by a similar magnitude in ensuing quarters. Material, energy, and home improvement retailers are among those poised to potentially benefit.
- U.S. Treasury bond prices were higher last week. The U.S Treasury 10-year bond rallied back from a 2.16% yield on Monday, to a year-to-date low of 2.05% on Thursday. The 30-year bond finished the week at a 2.75% yield, lower by 0.02% from the beginning of the week’s 2.77%. The 2-year Treasury yield rose 0.03% on the week.
- Inflation expectations rose slightly. Last week saw higher inflation expectations as measured by the 10-year breakeven inflation rate rising from a 1.79% to a 1.81%, according to Federal Reserve Economic Data. This is lower than the year-to-date average of 1.89%, but higher than the June 20, 2017 low of 1.67%.
- The yield curve was steeper on the week. The 2’s to 10’s slope, a measure of the steepness of the yield curve, was wider by 0.01% to 82 basis points (0.82%). The 2’s to 30’s yield slope was wider on the week higher by 0.01% to 143 basis points (1.43%).
- High-yield spreads near fair value. The yield spread that investors demand for high-yield bonds over similar maturity Treasuries reflects investor expectations for defaults, the amount of money investors expect to recover in the case of default (known as the recovery rate), and a liquidity premium given that high-yield bonds may be less liquid than higher-quality counterparts. High-yield spreads have been on the expensive side of fair value most of this year, but as spreads have widened and default expectations have fallen, spreads are now closer to fair value. We explore this concept more in this week’s Bond Market Perspectives, due out later today.
- International bond prices were slightly higher in Germany. The German bund 10-year yields were lower on the week from 0.38% to 0.31%. This brings the spread between the U.S. 10-year Treasury and the comparable German bund to 179 basis points of spread (0.37% vs. 2.16%).
- Bullish tone continued in Asia overnight. While there was little economic data released, all markets gained overnight after the UN Security Council stopped short of a North Korean oil embargo. Also helping sentiment were steps the Chinese government took to weaken the Chinese yuan after its recent unprecedented rally. The yuan had gained over 6% since mid-May, apparently too much for the Chinese authorities, who changed regulatory rules overnight to make it easier for traders to bet on a weakening yuan. The yuan has lost about 0.9% over the past three days as these rules have been put in place, and traders have decided not to test the Chinese government’s resolve on this issue.
- The U.K. released inflation data, which generally came in slightly higher than expected. Core CPI was 2.7% compared to expectations of 2.5%, while producer input prices gained 7.6% against expectations of a 7.3% gain. Inflation has been a major concern for the U.K. as the pound has declined 11% against the dollar and 15% against the euro since the Brexit vote. The currency weakness creates the possibility of more severe inflationary pressures than we have seen thus far, and also puts some pressure on the U.K. to raise interest rates, though rate increases are not expected until at least the spring of 2018.
- Big day to new highs. The S&P 500 gained 1.1% for its third largest gain this year and only the fourth time in 2017 it gained more than 1%. Only a period in the 1960s saw full calendar years (1963, 1964, and 1965) with fewer than four days with at least a 1% gain. The last time the S&P 500 gained at least 1% and closed at a new high was on March 1, 2017. New highs in September are rather rare, as since 1928, only 4.1% of days during the month of September have closed at a new high, second only to August at 3.6%. The most is November at 8.0%. Last, the S&P 500 has closed above its 200-day moving average for 304 days in a row (only the 15th time it ever made it more than 300 days) and marks the longest streak since 477 consecutive days that ended in October 2014.
 Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.
- Five consecutive monthly gains has bulls smiling. The S&P 500 has (rather quietly) gained for five consecutive months. Of course, it is up only 4.6% during this win streak, which is the weakest return ever for a five-month win streak. Nonetheless, history has been very kind to future returns after five-month win streaks. Today on the LPL Research blog we will take a closer look at this potentially bullish phenomena.
- NFIB Small Business Optimism (Aug)
- Jolts Job Openings (July)
- Italy: Unemployment Rate (Q2)
- UK: CPI & PPI (Aug)
- Germany: Manpower Survey (Q4)
- BOJ: Outright Bond Purchase
- Japan: PPI (Aug)
- MBA Mortgage Applications (Sept 8)
- PPI (Aug)
- Monthly Budget Statement (Aug)
- Germany: CPI (Aug)
- UK: Jobless Claims (Aug)
- UK: Unemployment Rate (July)
- Eurozone: Industrial Production (July)
- Eurozone: Employment (Q2)
- Sweden: GDP (Q2)
- Japan: Bloomberg Japan Economic Survey (Sept)
- China: Retail Sales (Aug)
- China: Industrial Production (Aug)
- France: CPI (Aug)
- UK: Retail Sales (Aug)
- Bank of England: Bank Rate
- Bank of England: Asset Purchase Target (Sept)
- Eurozone: Weidmann
- BOJ: Outright Bond Purchase
- Japan: Industrial Production and Capacity Utilization (July)
- China: Foreign Direct Investment (Aug)
- Empire State Manufacturing Index (Sept)
- Retail Sales (Aug)
- Industrial Production and Capacity Utilization (Aug)
- of Mich. Sentiment (Sept)
- Business Inventories (July)
- Eurozone: Trade Balance (July)
- Eurozone: Labor Costs (Q2)
- ECB: Nuoy
- Bank of Russia: Key Rate
- China: New Loan Growth and Money Supply (Aug)