Market Update: Wednesday, October 25, 2017

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Market Recap

  • Stocks rebounded modestly after Monday declines. Corporate earnings in focus, Purchasing Managers’ Index (PMI) data helped (details below). S&P 500 Index +0.2%, Dow +0.7%, Nasdaq +0.2%.
  • Advancers outpaced decliners on both NYSE and Nasdaq amid above-average volume (~103%).
  • Cyclicals lead with financials topping sector performance, helped by banks in reflation trades; healthcare lagged.
  • Treasuries fell across the curve with 10-year note +5 basis points (0.05%) to 2.42%.
  • Commodities: WTI crude oil (+1.0% to $52.44/bbl.) rose while COMEX gold was little changed; industrial metals strength continued.

Overnight & This Morning 

  • U.S. stocks open down slightly following disappointing earnings from a string of high-profile names.
  • Japan breaks winning streak. The Nikkei (-0.5%) closed lower for the first time in 17 sessions. Chinese stocks higher overnight; Hang Seng +0.5%, Shanghai Composite +0.3%.
  • European stocks little changed amid flurry of economic data. STOXX Europe 600 +0.2%, Spain’s IBEX (+0.5%) outperforms.
  • Treasuries continue to fall. 10-year yield +5 basis points (+0.05%) to 2.47%.
  • Commodities: Oil (-0.4%) dips to $52.26/bbl. Metals broadly lower, gold (-0.4%), copper (-0.5%).
  • Today’s economic calendar includes September Durable Goods and New Home Sales, and the August Federal Home Finance Agency Housing Price Index.

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Key Insights

  • Despite internal divisions among Republicans, we still see a strong likelihood of a tax package passing in 2018. Both Republican unity and internal divisions were on display yesterday. President Trump met with Senate Republicans in a conciliatory move on both sides, while explicit rebukes of the President by Senators Bob Corker and Jeff Flake highlighted division. The legislative process is never pretty, but we continue to believe that tax reform is where Republicans are likely to find common ground, and failure to pass legislation would be the most damaging. We believe small caps‘ performance has not yet fully priced in tax reform prospects and should benefit due to their higher average tax rate.
  • Budget process may accelerate. Congress cannot even take up tax reform until it passes a budget, which will include reconciliation instructions that will allow a tax bill to pass with a simple majority. The Senate has passed a budget bill, which the House may vote on directly without seeking a compromise between the Senate bill and the House version passed earlier this month. The move would likely accelerate the legislative process by about two weeks. The Senate bill allows tax reform to add $1.5 trillion to the deficit. House deficit hawks have objected to the provision but seem willing to prioritize moving the legislative process forward.

Macro Notes

  • Preliminary October PMIs point to continued growth. Markit’s preliminary October PMIs for services and manufacturing both topped consensus expectations and accelerated from September, supporting expectations for growth near 2.5% in the third quarter with further potential acceleration in the fourth quarter as regions impacted by Hurricanes Harvey and Irma recover and rebuild. The first estimate of third quarter gross domestic product will be released on Friday.
  • MLPs have struggled this year as income vehicles have mostly been out of favor, oil prices have been up and down, and concerns about distribution cuts have become more widespread. Less visible has been the group’s transition to better position itself for sustained growth, including stronger balance sheets, more focus on returns on capital, and less reliance on external capital. This transition has been bumpy; but rich yields, attractive valuations, deregulation, and improved longer-term growth prospects support the group’s outlook.

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Click Here for our detailed Weekly Economic Calendar

Wednesday

Thursday

  • Wholesale Inventories (Sept)
  • Weekly Jobless Claims (Oct 21)
  • Advance Report on Goods Trade Balance (Sept)
  • Retail Inventories (Sept)
  • Kansas City Fed Manufacturing Index (Oct)
  • Germany: Consumer Confidence Index (Nov)
  • Eurozone: Money Supply (Sept)
  • Italy: Consumer Confidence (Oct)
  • BOJ: Outright Bond Purchase
  • Japan: CPI (Sept)

Friday

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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Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

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