Market Update: Monday, September 25, 2017

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Market Recap

  • Quiet Friday session with major averages flat, small cap Russell 2000 Index (+0.5%) strength continued. Consensus view remains that North Korean threats unlikely to escalate into military engagement. Latest healthcare reform attempt faces tough odds. S&P 500 Index (+0.1%), Dow flat, Nasdaq (+0.1%).
  • Merger talk boosted telecommunications sector, oil services strength fueled energy gains. Utilities, REITs trailed despite slight drop in rates.
  • Treasuries rose, pushing 10-year yield down 2 basis points (-0.02%) to 2.26% and weighing some on U.S. dollar.
  • WTI crude oil rose slightly after OPEC’s compliance committee made no specific recommendations at its Vienna meeting.
  • Major averages up slightly last week, led by telecommunications, financials, industrials, energy. Cyclical sectors led, oil rose, Treasuries sold off, sparking renewed talk of reflation trades. Key narratives included synchronized upswing in global growth, earnings optimism, and ongoing support from central banks.

Overnight & This Morning

  • U.S. stocks opened slightly lower with politics and central banks in focus.
  • European equities slightly higher, euro lower. European market-watchers focused on currencies post-German election, which saw Merkel win but lose power to nationalist AfD party, making coalition building difficult (details below). German DAX +0.1%, STOXX Europe 600 +0.2%.
  • Asian markets mostly lower as weakness in property developers weighing on Chinese, Hong Kong markets amid increasing government real estate controls. Nikkei bucked the trend after news that Japan will hold a snap election, likely in October.
  • Treasury yields flat, 10-year at 2.25%, dollar higher on euro weakness ($1.19).
  • Crude oil edging lower, still above $50/bbl. at $50.51.

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Key Insights

  • Tax reform “blueprint” expected this week. Highlighting this week’s calendar, a more detailed tax framework will be released mid-week by the Big Six (key Republican tax policy players), and details are already trickling out. The path to an agreement was always going to be difficult, but we have seen nothing so far that suggests a deal cannot be reached. The biggest stumbling block remains getting a 2018 budget deal done, without which tax law changes become virtually impossible.
  • Big week for central banker speeches. We will hear from Federal Reserve Bank (Fed) Chair Janet Yellen and a variety of regional Fed Presidents this week, in addition to European Central Bank (ECB) Chief Mario Draghi, Bank of Japan (BOJ) head Kuroda, and Bank of England (BOE) head Carney. Other data of note includes U.S. housing (home prices, new home sales, pending home sales), U.S. capital goods orders, and manufacturing surveys in China and Japan.

Macro Notes

  • Merkel likely to secure fourth term after German election. As expected, Angela Merkel’s center-right party won the plurality of seats, almost ensuring that she will serve her fourth term as Chancellor. However, her party (as well as the center-left party) performed worse than expected. The likely result is a coalition of Merkel’s Christian Democratic Union, the conservative FDP party, as well as the left-leaning Green party. This coalition is likely to weaken Merkel’s perceived power; though she may still be the most important political figure in Europe, her position is shakier than it was 48 hours ago.
  • Japanese Prime Minister Abe called for early elections as he seeks to capitalize on his increased popularity due to the positive perception of his handling of North Korean tensions. Several European leaders have called early elections only to be disappointed, though Abe appears confident that this election will be a victory for him and his Liberal Democratic Party, which has dominated Japanese politics since World War II. Like other Prime Ministers before him, Abe has struggled to pass meaningful reforms to stimulate the Japanese economy, which is still largely dependent on large multi-national corporations and is seen as hostile to smaller companies and start-ups that may accelerate Japanese economic growth.
  • A check in on technicals. This week in our Weekly Market Commentary we look at continuing strength in market technicals which suggests the second largest bull market since World War II, could have legs. Overall, multiple global indexes are breaking out, market breadth is solid, and market sentiment isn’t over-the-top optimistic. At the same time, it has been 10 months since even a modest 3% correction, so some normal volatility could be expected as we enter the fourth quarter.
  • Will oil’s bullish momentum continue? Over the past three months, the crude oil (WTI) spot price has been gaining momentum. Today on the LPL Research blog we assess a few technical analysis factors that we are monitoring to measure the likelihood of oil continuing to move higher over the next 3-12 months.

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Click Here for our detailed Weekly Economic Calendar

Monday

  • Chicago Fed National Activity Index (Aug)
  • Dallas Fed Manufacturing Activity Index (Aug)
  • Dudley* (Dove)
  • Evans* (Dove)
  • Kashkari* (Dove)
  • Germany: IFO (Sept)
  • Germany: Import Price Index (Aug)
  • BOJ: Kuroda
  • ECB: Draghi
  • BOJ: Minutes of July 19-20 Meeting
  • Japan: Business Cycle Indicators Leading Index (July)
  • China: Conference Board China Leading Economic Index (August)
  • Japan: PPI (Aug)

Tuesday

Wednesday

  • MBA Mortgage Applications (9/22)
  • Durable Goods Orders (Aug)
  • Core Capital Goods Orders (Aug)
  • Pending Home Sales (Aug)
  • Bullard (Dove)
  • Rosengren (Hawk)
  • France: Consumer Confidence (Sept)
  • Germany: Retail Sales (Aug)
  • Eurozone: Money Supply (Aug)
  • China: Current Account Balance (Q2)

Thursday

  • Personal Consumption Core Price Index (PCE) (Q2)
  • Weekly Jobless Claims (9/23)
  • GDP (Q2)
  • Wholesale Inventories (Aug)
  • Kansas City Fed Manufacturing Activity Index (Sept)
  • George* (Hawk)
  • Fischer* (Dove)
  • Germany: Consumer Confidence (Oct)
  • Germany: CPI (Sept)
  • Eurozone: Consumer Confidence (Sept)
  • UK: Consumer Confidence (Sept)
  • Japan: Jobless Rate (Aug)
  • Japan: CPI (Aug)
  • Japan: Retail Sales (Aug)
  • China: Caixin China Manufacturing PMI (Sept)

Friday

  • Personal Income and Spending (Aug)
  • PCE Core Price Index (Aug)
  • Chicago PMI (Sept)
  • U of Mich. Consumer Sentiment (Sept)
  • Harker* (Hawk)
  • UK: GDP (Q2)
  • France: CPI (Sept)
  • France: PPI (Aug)
  • Germany: Unemployment Change (Sept)
  • UK: Current Account Balance (Q2)
  • UK: Money Supply (Aug)
  • Italy: CPI (Sept)
  • Eurozone: CPI (Sept)
  • Canada: GDP (July)
  • ECB: Draghi
  • BOE: Carney
  • IMF: Lagarde
  • Japan: Vehicle Production (Aug)
  • Japan: Housing Starts (Aug)
  • China: Manufacturing & Non-Manufacturing PMI (Sept)

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

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