Market Update: Thursday, October 19, 2017

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Market Recap

  • Major averages rose, led by Dow. Earnings results provided support. S&P 500 Index +0.1%, Dow +0.7%, Nasdaq flat, Russell 2000 +0.5%.
  • Breadth on NYSE was positive (1.1:1), trading volume light again (~90% of 30 day average).
  • Financials (+0.6%) led while technology (+0.3%) also outperformed. Particular strength in investment banks, semiconductors; energy (-0.7%), telecom (-0.6%) lagged.
  • 10-year Treasuries sold off, pushing the yield +4 basis points (+0.04%) to 2.34%; U.S. dollar index slightly lower on euro gains.
  • WTI crude oil finished higher (+0.3%) after inventories showed unexpectedly large draw, COMEX gold dipped (-1.2% to $1288/oz.) in response to dollar strength.
  • Fed Beige Book cited modest to moderate growth across all districts while highlighting increasingly tight labor market. September housing starts, building permits missed expectations.

Overnight & This Morning 

  • U.S. stocks following Europe lower after another S&P 500 record high yesterday; markets’ focus is on Spain, latest wave of earnings, next Fed Chair speculation, Senate budget deal progress, and ACA fix.
  • Asia mixed overnight; Nikkei (+0.4%) advanced for 13th straight session; Shanghai Composite (-0.3%), Hang Seng (-1.9%) fell despite China’s gross domestic product (GDP) meeting expectations as continued reliance on credit remains a concern.
  • European equities lower midday as Spanish-Catalan deadline passes. Spain’s IBEX (-1.0%) fell after Madrid-imposed deadline passed with nothing but a call for more talks. STOXX Europe 600 (-0.6%), FTSE 100 (-0.3%), DAX (-0.6%).
  • Treasury yields slide lower, 10-year yield -3 basis points (0.03%) to 2.31%.
  • Commodities – WTI crude rolls back gains (-1.6%) to $51.40/bbl., metals mixed with gold up +0.4% to $1287/oz., copper -1.0%.
  • Today’s economic calendarJobless claims down 22K to 222K (240K expected); Philly Fed 27.9 vs. 22 expected; Yellen interview for second term; China GDP in line with consensus (+6.8%), down from 6.9% in Q2.

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Key Insights

  • A not so happy anniversary. Today marks the 30th anniversary of what could be considered the worst day in stock market history. We look back on this historic event in our latest Weekly Market Commentary, published on Monday, and make the case that stocks currently stand on much stronger fundamentals, and markets are less susceptible to crashes now than they were then. Although volatility will likely pick up before long (how could it go any other way?) and corrections will happen, we do not see the makings of a big downturn anytime soon.
  • Solid start to earnings season. With 52 S&P 500 Index companies having reported, beat rates for earnings (82%) and revenue (73%) are excellent so far, with the average company reporting a 5% upside earnings surprise according to Thomson data. While the pace of earnings gains is slowing–largely hurricane driven–we are encouraged by the slight increase over recent weeks of S&P 500 consensus earnings estimates and expect re-acceleration in Q4. More to come with our next earnings season dashboard on Monday.

Macro Notes

  • Dow 23,000. The Dow closed above 23,000 for the first time in history yesterday. Along the way it was the 51st new all-time high of the year; only one away from the 52 new highs made in 2013. Looking at milestone 1,000 point intervals, the Dow has now cracked 20,000, 21,000, 22,000, and 23,000 so far in 2017. No other year ever made more than two milestones, making the four this year a new record. Of course, as the Dow goes higher the percentage move needed to make new highs gets smaller–still, this is yet another way of showing how rare and strong 2017 has been.
  • China’s National Communist Party Congress Underway. China’s 19th National Congress of the Communist Party, which takes place every five years, started yesterday. A lot of topics were discussed, including a continuation of China’s drive to be a global power and how to improve the lives of Chinese citizens, but one key point that markets were watching was whether President Xi’s speech would mention reform related to financial markets and debt levels. Xi did talk about financial reforms, but stopped short of calling for reform in one of the major areas of debt growth in recent years: state-owned enterprises (SOE). Instead, Xi said that SOEs would continue to be important to China moving forward and seemed to reassert the power of the government in the economy rather than pulling it back. The Congress lasts until October 24th, so we are likely to see further headlines, especially related to party reshuffling and consolidation of President Xi’s power base.
  • Why Does Catalonia Matter so Much? Catalonia is back in the news again this morning, as headlines around the autonomous region’s bid for independence from Spain continue. Spain’s economy has been seeing relatively strong growth over the past few years, with GDP increasing, unemployment decreasing (though it remains high at 17%), and its debt-to-GDP level flattening. Catalonia, which includes the major city of Barcelona, is one of Spain’s most affluent regions and makes up about one-fifth of Spain’s GDP. If it were to achieve independence, it could be disruptive to the growth Spain has seen in recent years. This isn’t to say that the only reason Spain wants Catalonia to stay is economic, but it is certainly a factor.

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Click Here for our detailed Weekly Economic Calendar

Thursday

  • Philadelphia Fed Mfg. Report (Oct)
  • Leading Economic Index (Sep)
  • UK: Retail Sales (Sep)
  • Japan: All Industry Activity Index (Aug)
  • Japan: Machine Tool Orders (Sep)

 Friday

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