- Major indexes hit fresh record highs, though gains were marginal as tax reform efforts to reconcile House, Senate bills remains a concern. S&P 500 Index +0.1%, Dow flat, Nasdaq +0.3%, Russell 2000 +0.2%.
- Consumer staples, technology sectors outperformed on better-than-expected earnings; financials extended this week’s selloff as yield curve continues to flatten.
- 10-yr. note little changed (+1 basis point [+0.01%] to 2.33%), dollar down modestly.
- Commodities– WTI crude oil (-0.7% to 56.82/bbl.) continued to retrace Monday spike, COMEX gold +0.3% to $1287/oz., industrial metals down across the board.
- Tax reform jitters. With details starting to leak on Senate version of the bill, investors see high hurdle for reconciliation with House version. Timing of reducing corp. tax rate; state/local, other tax deductions among key sticking points.
Overnight & This Morning
- U.S. stocks moving lower, following global weakness on little headline news, but big earnings day as season winds down.
- Europe broadly lower; as 2017 Eurozone growth forecast raised to a decade high. DAX -1.5%, STOXX Europe 600 -1.2%, FTSE 100 +0.2%
- Asia mixed but volatile. Nikkei traded in ~4% range before closing -0.2% (details below). Chinese producer inflation data stronger than expected. Shanghai Composite +0.4%, Hang Seng +0.8%.
- 10-yr. Treasury flat (2.33%), while U.S. dollar weaker versus euro, yen.
- Commodities- Oil +0.2% to $56.93/bbl., COMEX gold bouncing again (+0.3% to $1287/oz.), industrial metals lower across the board.
- Economic data- Quiet day as weekly jobless claims (239K vs. 232K consensus, 229K prior week), wholesale inventories are the big events.
- Earnings overseas remain supportive of global equities. With about 70% of the MSCI EAFE Index constituents having reported, earnings for the index are only tracking to about a 4% year-over-year increase in Q3, dragged down by sharp declines in telecom and utilities. However, 2017 and 2018 consensus estimates are still calling for very strong 22.1% and 7.6% increases and those estimates have both edged higher since July 1, a positive development.With about 43% of MSCI Emerging Markets Index constituents having reported, Q3 earnings for the index are tracking to a strong 27% year-over-year growth rate. Consensus estimates are calling for 24% growth year over year in 2017 and 12.5% in 2018. Perhaps most impressively, 2018 estimates have risen more than 2% since Q3 began on July 1, supportive of the outlook for Emerging Markets (EM). We continue to prefer EM over developed foreign equities due to more attractive valuations and structural challenges in Europe, while the outlook in Japan has brightened, as we discussed in a recent Weekly Market Commentary.
- Global economic growth story continues. Consensus projections continue to point to economic growth for both developed and emerging markets next year (Europe [1.8%], Japan [1.1%], US [2.4%]), though emerging markets are expected to grow at the fastest pace (4.9%). While economic growth is important, earnings can be even more impactful for markets.
- What does Saudi Arabia political volatility mean for markets? For some time there has been talk of reform in Saudi Arabia. Mainly, that means getting the country away from a reliance on oil, which is why Saudi Arabia has taken steps to open their capital markets to foreign investors in recent years and is also moving to sell a portion of the state owned Saudi Aramco in an IPO. Lower oil prices have caused the kingdom to burn through reserves, so these moves are aimed at finding ways to fuel growth that isn’t dependent on oil revenues. The recent anticorruption drive can be seen as another way of trimming the power of the old guard in the economy, potentially opening up new opportunities for businesses and growth. However, if the moves turn out to be a simple consolidation of power, it could be a negative for the Saudi economy moving forward. The impact on oil makes the situation worth watching for investors, though it is important to remember that higher prices could also lead to a ramp up in U.S. shale production, potentially limiting the impact of the Saudi situation on oil markets.
- More new highs again. The Dow, S&P 500, and Nasdaq all closed at new highs yet again, the 27th time this year all three closed at new highs on the same day. For the year, the Dow has made 59 new highs, the S&P 500 53, and the Nasdaq 64.
- Putting the Japanese Nikkei volatility in perspective. The Nikkei has been on fire, up 23 out of 25 days before being down the previous two days. It traded in a daily range of 3.8% overnight, the most since exactly a year ago (U.S. Election Day). Given the run it has had, some type of volatility and potential pullback could be more than warranted at these levels.
- Balance sheet normalization is underway. The Federal Reserve’s program to reduce the size of its holdings in Treasuries and mortgage-backed securities began in October, and the impact has already begun to show up in the data. Later today on the LPL Research blog, we put the process into perspective.
- Weekly Jobless Claims
- Wholesale Sales & Inventories (Sept)
- Germany: Trade Balance (Sept)
- Germany: Imports & Exports (Sept)
- UK: Industrial Production (Sept)
- UK: Trade Balance (Sept)
- UK: Nat’l Institute of Economic & Social Research GDP Estimate (Oct)
- ECB: Economic Bulletin
- ECB: Villeroy de Galhau
- Japan: Money Supply (Oct)
- Japan: Tertiary Industry Index (Sept)
- China: New Loan Growth & Money Supply (Oct)
- Monthly Budget Statement (Oct)
- of Michigan Sentiment (Nov)
- France: Industrial Production (Sept)
- Italy: Industrial Production (Sept)