Market Update: Thursday, December 14, 2017

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Market Recap

  • Stocks finished near session lows after initial strength following the Fed’s rate hike announcement stalled, news of a tentative agreement on final tax reform bill failed to spur buying.
  • Most sectors gained; consumer staples led, financials lagged after dovish-leaning takeaways from Fed meeting pushed rates lower.
  • Market breadth positive on NYSE (1.3:1), Nasdaq (1.6:1), volume ~104% of 30-day average.
  • Treasury yields dropped with some curve flattening; 10-yr. note yield -5 basis points (-0.05%) to 2.34%.
  • Commodities: WTI crude oil continued Tuesday slide (-1.0% to $56.60/bbl.), COMEX gold +0.6% to $1249/oz., copper +1.0%.

Overnight & This Morning

  • U.S. stocks opened slightly higher; global central banks, home stretch for the tax bill in focus.
  • European markets lower following the ECB decision. Record high Eurozone “flash” Purchasing Managers Index, led by Germany. Strong U.K. retail sales. STOXX Europe 600 -0.3%, DAX -0.4%.
  • Asian markets mostly lower overnight. China slightly raised several short-term benchmark lending rates to help contain financial system leverage. Nikkei -0.3%, Shanghai Composite -0.3%, Hang Seng -0.2%.
  • Treasuries giving back some of Wednesday’s gains (10-year yield 2.36%), supporting U.S. Dollar Index (+0.1%).
  • Commodities: Gold higher despite firm dollar. Strong U.S. production outlook, slightly bearish weekly inventory data weighing on crude oil (~$56.30/bbl.), tight supply is supporting copper.
  • Today’s economic calendar includes weekly jobless claims (225K vs. 236K consensus, 236K prior) and retail sales (+0.8% vs. +0.3% consensus, +0.8% ex. autos and gas vs. +0.4% consensus).

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Key Insights

  • This is a busy week for central banks, with 16 of them scheduled to meet between Wednesday and Friday. So far, the Federal Reserve (Fed) raised rates by 0.25% yesterday (see our recent blog post for more details on the Fed’s decision), China’s central bank followed suit a few hours later with a small 0.05% rate hike, and the Bank of England and European Central Bank (ECB) left rates and bond purchase plans unchanged this morning as expected. Both the Fed and the ECB updated their economic outlooks, and both upgraded their growth outlooks for 2018 and beyond; however, neither made changes to forward guidance for the path of monetary policy, indicating that central banks continue to be unsure about whether slightly stronger growth will have any impact on persistently below-target inflation. We continue to expect that central banks will move in the direction of policy normalization, allowing fundamentals to be more of a driving force for markets in the year ahead, as noted in our Outlook 2018.

Macro Notes

  • Tax deal done? While the Democrats taking the senate seat in Alabama probably has no impact on tax reform’s prospects, headlines this morning suggest that Susan Collins (ME) and Marco Rubio (FL) are withholding support because of the reduction in the top individual tax rate from 39.6% to 37%. John McCain’s health is also a risk. While a House-Senate compromise is still very likely, the House could always pass the Senate version as a last resort.
  • Strong global earnings picture. With third quarter earnings season wrapped up around the globe, we continue to be impressed with the breadth of global earnings. Year-over-year increases in Q3 2017 from the U.S. (+8.4% based on the S&P 500), MSCI EAFE (+5.2%), and MSCI Emerging Markets (+26.6%) may be followed by double-digit gains in Q4 for each of these indexes based on consensus estimates. Earnings revisions for the U.S. in 2018 have held steady in recent months and may go higher as tax reform is factored in; meanwhile, estimates in developed foreign and emerging markets (EM) have risen slightly since the end of the third quarter, led by EM. Although the earnings picture has brightened some in developed foreign markets, we see slightly larger increases in the U.S. and EM in 2018 and continue to favor those exposures from a tactical basis perspective.
  • Outlook 2018 video. View and share a video presentation of Outlook 2018: Return of the Business Cycle featuring LPL Financial’s Managing Director, Investor and Investment Solutions and Chief Investment Officer Burt White and Chief Investment Strategist John Lynch, as they discuss our views on the economy, fixed income and stock markets, the global environment, and more!

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Click Here for our detailed Weekly Economic Calendar

Thursday

  • Weekly Jobless Claims (Dec 9)
  • Import & Export Price Indexes (Nov)
  • Retail Sales (Nov)
  • Markit Mfg & Svs PMI (Dec)
  • Business Inventories (Oct)
  • France: CPI (Nov)
  • France: Markit France Mfg PMI (Dec)
  • Germany: Markit Germany Mfg & Svs PMI (Dec)
  • Italy: CPI (Nov)
  • Eurozone: Markit Eurozone Mfg & Svs PMI (Dec)
  • UK: Retail Sales (Nov)
  • BOE: Bank Rate
  • ECB: Main Refinancing Rate
  • ECB: Draghi
  • Bank of Canada: Poloz
  • Bank of Mexico: Overnight Rate
  • Japan: Tankan Survey (Q4)
  • China: Foreign Direct Investment (Nov)

Friday

  • Empire Manufacturing Index (Dec)
  • Industrial Production & Capacity Utilization (Nov)
  • Manufacturing Production (Nov)
  • Total Net Treasury Int’l Capital Flows (Oct)
  • Eurozone: Trade Balance (Oct)
  • ECB: Nowotny
  • Bank of Russia: Key Rate

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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