Market Update: Thursday, October 26, 2017

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Market Recap

  • Stocks fell but finished off worst levels. S&P 500 Index, Dow, Nasdaq fell ~0.5% despite upbeat economic data; declines potentially attributed to profit-taking amid mixed earnings, void in political news flow.
  • Defensive sectors held up best, only modest (<0.3%) declines in healthcare, REITs, consumer staples; telecommunications (-2.3%), industrials (-1.0%) lagged.
  • Negative NYSE breadth, decliners outpaced advancers 3:1 with above-average (120% of 30-day average) volume.
  • Treasuries mostly weaker, pushing 10-year yield 2 basis points (0.02%) to 5-month high at 2.44%. Dollar slightly lower.
  • Commodities – WTI crude oil -0.5% to $52.20/bbl. on bearish inventory data; COMEX gold little changed at $1278/oz.
  • Strongest monthly gain in new home sales since 1992 (+18.9% month over month). Better-than-expected durable goods orders (+2.2% month over month).

Overnight & This Morning 

  • U.S. stocks opened slightly higher (S&P 500 +0.1%) on busy earnings day.
  • European stocks mostly higher, adding to gains after ECB kept rates unchanged, cut monthly bond-buying target in half; euro -0.5% vs. dollar. Spain (IBEX 35 +1.9%) among biggest European gainers after call for elections in Catalonia boosted sentiment. STOXX Europe 600 +0.7%.
  • Asian markets mixed. Nikkei +0.2%, Shanghai Composite +0.3% led amid generally uneventful session. Korean stocks fell despite strong Q3 gross domestic product (GDP) data. Hang Seng -0.36%.
  • Treasuries little changed, 10-year yield at 2.42%.
  • Commodities – Crude oil, gold little changed. Saudi’s crown prince backed an extension of OPEC cuts beyond March 2018 in an interview.
  • Today’s economic calendar highlighted by weekly jobless claims (233K vs. 235K consensus, 223K prior week), pending home sales.

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Key Insights

  • ECB taper in line with expectations. As expected, the European Central Bank (ECB) announced this morning that it will taper bond purchases to 30 billion euro per month (currently 60 billion), starting in January 2018. However, the softening of its language around the expected cutoff date of purchases (September 2018) and the addition of new guidance that it will reinvest proceeds of maturing debt “for as long as necessary” gave the overall message a dovish tilt relative to expectations. So what does this all mean for markets? The main takeaway is that we continue to move away from the time when asset purchases by global central bank drove markets, and toward a period of slowing accommodation and eventual normalization of monetary policy. Fundamentals may take on renewed importance in such an environment, which may lead to less correlation between asset prices (less of a rising tide lifts all boats mentality), and an uptick in volatility from current historically low levels.

Macro Notes

  • Week of central bank action ahead. There is plenty of action for central bank watchers as nearly every major central bank will meet over the course of the week. The Bank of Japan will announce the details of its latest monetary policy meeting on Tuesday, October 31. No changes are expected, though Abe’s recent election win may help bolster support for quantitative easing to remain at current levels, or even increase, at some point in the future. The Federal Reserve is up next and meets October 31 – November 1, though this meeting does not include updated economic projections or dot plots, and markets aren’t expecting a rate hike until December. Lastly, the Bank of England (BOE) meets November 2. The United Kingdom recently saw third quarter GDP come in a little above expectations (+0.4% month over month vs. +0.3% expected), which along with an inflation reading of 3% earlier in the month, is likely to push the BOE toward a rate hike in November (markets are currently pricing in an 90% chance), though we don’t expect a prolonged period of tightening policy given the headwind of ongoing Brexit negotiations. So what does this all mean for markets? The main takeaway is that we continue to move from a period where monetary policy drove markets, to one where central banks are starting to turn off the liquidity firehose, which could spur a pickup in volatility.
  • Solid beat rates and estimates holding steady. With about one-third of S&P 500 companies having reported third quarter results, revenue and earnings beat rates, at 71% and 72% respectively, remain solid. Though growth is subdued, S&P 500 earnings growth is tracking to about 5% year-over-year estimates for the next four quarters have held steady, outpacing their historical norm and buoying the near-term earnings outlook; which looks good given the potential for a rebound from the hurricane drags, a corporate tax cut, and continued steady global growth.
  • House to vote on a budget today. Despite distractions, Congress remains on track to approve a budget in short order to set the stage for tax proposals to be released and debated in early November. We put the odds of a tax agreement to lower the corporate rate (either reform or a basic cut) remain over 50%, but we acknowledge that the road to a deal is a difficult one; though the pace is starting to quicken. Stay tuned.
  • Putting yesterday’s ‘big’ drop in perspective. Yesterday, the S&P 500 fell 0.47% for the biggest one-day drop in more than six weeks. Should the month end without a larger one-day decline, it would be the smallest worst day of October since a 0.34% drop in 1965. Also, a late rally extended a streak of 36 days in a row without a close down more than 0.5%, the longest since 44 in 1995.

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Click Here for our detailed Weekly Economic Calendar

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

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