Market Update: Tuesday, November 21, 2017

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Market Recap

  • Domestic markets finished broadly higher in quiet pre-holiday trading session; small caps led major indexes. S&P 500 Index +0.1%, Dow +0.3%, Nasdaq +0.1%, Russell 2000 Index +0.7%.
  • Telecommunications, financials outperformed. Healthcare, utilities lagged.
  • 10-year Treasury lower; yield +1 basis point (+0.01%) to 2.36%.
  • NYSE breadth positive (1.5:1); light exchange volume (86% of 30-day avg.).
  • Commodities – WTI crude oil finished -0.6% to $56.23/bbl., COMEX gold -1.5% to $1277/oz., industrial metals closed mixed.

Overnight & This Morning 

  • U.S. stocks opened higher following broad advance in Asian markets.
  • European equities up as well. Markets paying close attention to political developments in Germany. STOXX Europe 600 +0.2%, DAX +1.0%, CAC 40 +0.7%.
  • Asian markets swung higher despite light news flow, major driver attributed to overnight follow-through momentum. Nikkei +0.7%, Hang Seng +2.0%, Shanghai Composite +0.5%.
  • 10-year Treasury strengthening; yields -1 basis point (0.01%) to 2.35%.
  • Commodities – Crude higher after multi-day slide (+1.2% to $57.12/bbl.), gold +0.6% at $1282/oz., industrial metals mixed.
  • Economic data – U.S. existing home sales topped consensus (5.43m), prior month (5.37m).

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Key Insights

  • Yellen confirms she is leaving, opening up fourth Board of Governors seat. Federal Reserve (Fed) Chair Janet Yellen confirmed yesterday that she will be leaving the Fed once her successor Jerome Powell is sworn in. This step was widely expected, though she technically could stay on as a Fed governor until her term expires in 2024. Her pending departure means that there will now be four vacant seats on the Fed’s seven-member Board of Governors, the largest number of vacancies since the Board was originally created in 1913. President Trump’s recent nomination of Powell was widely seen as a dovish move, but Trump’s picks for the four vacant seats will likely be even more important in determining the path of monetary policy moving forward.

Macro Notes

  • Yield curve flattens further as short-term rates rise. The 10-year Treasury remained range-bound last week, though the yield curve flattened further as short-term rates moved higher (we discussed the yield curve in more detail in last week’s Bond Market Perspectives). The yield advantage of Treasuries relative to other major developed government bonds is likely one factor that has helped keep long-term rates lower (and the yield curve flatter) than they otherwise would be. However, hedging costs for Japanese investors have been increasing in recent months, which may lead to less demand from at least one major foreign market and the potential for rates to move somewhat higher in the U.S., as discussed in yesterday’s blog.
  • High-yield spread near fair value. The spread of high-yield bonds to comparable maturity Treasuries peaked last Wednesday near 3.8% before falling to end the week near 3.6%. We continue to believe that a lack of weakness in the lowest-quality CCC-rated bucket of the index during the early-November selloff, combined with the fact that much of the weakness was confined to a few specific sectors, showed that the selloff was more likely driven by sector and company specific-factors than concerns about broad economic weakness. Profit taking may also be occurring after strong year-to-date performance (The Bloomberg Barclays U.S. High Yield Index was up 7.5% year to date through November 6, 2017).

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Click Here for our detailed Weekly Economic Calendar

Tuesday

  • Chicago Fed Nat’l Activity Index (Oct)
  • Existing Home Sales (Oct)
  • Yellen (Dove)
  • Italy: Italian Nat’l Institute of Statistics Economic Forecasts
  • BOJ: Outright Bond Purchase

Wednesday

  • MBA Mortgage Applications (Nov 17)
  • Weekly Jobless Claims (Nov 18)
  • Durable Goods Orders (Oct)
  • Cap Goods Shipments & Orders (Oct)
  • of Mich. Sentiment (Nov)
  • FOMC Meeting Minutes
  • Eurozone: Consumer Confidence (Nov)

Thursday

  • Thanksgiving Day Holiday
  • Germany: GDP (Q3)
  • Germany: Imports & Exports (Q3)
  • France: Markit France Manufacturing PMI (Nov)
  • Germany: Markit Germany Manufacturing PMI (Nov)
  • Eurozone: Markit Eurozone Manufacturing PMI (Nov)
  • ECB: Account of the Monetary Policy Meeting
  • Mexico: Central Bank Monetary Policy Minutes
  • BOJ: Outright Bond Purchase
  • Japan: Nikkei Japan Manufacturing PMI (Nov)

Friday

  • Markit US Manufacturing & Services PMI (Nov)
  • Germany: Import Price Index (Oct)
  • Italy: Industrial Orders (Sep)
  • Mexico: GDP (Q3)
  • Japan: Leading Index (Sep)

Past performance is no guarantee of future results.

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

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

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.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

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