Market Update: Thursday, December 21, 2017

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Market Recap

  • Stocks failed to hold early gains as traders contemplated next steps after tax reform bill made it out of Congress; small caps were positive; S&P 500 Index -0.1%, Dow -0.1%, Nasdaq flat, Russell 2000 +0.2%.
  • Energy sector (+1.4%) handily outperformed amid WTI crude oil’s rise to two-week highs; rate-sensitive utilities, REITs lagged as rates continued higher.
  • Treasury curve steepened with short end yields ticking lower; long-end moving higher; 10-yr. yield +3 basis points (0.03%) to 2.50%.
  • Commodities: Oil hit three-month highs (+0.9% to $58.08/bbl.) on outsized U.S. inventory drop, COMEX gold +0.4% to $1268/oz., industrial metals mostly higher.
  • Economic data: Energy Information Administration reported 6.5m crude inventory drawdown (-5.1m prior); existing home sales hit 11-yr. high (5,810k vs. 5,540k consensus).

Overnight & This Morning

  • Major indexes look to halt two-day slide as traders eye economic data (see below).
  • European equities mixed midday though STOXX Europe 600 (+0.1%) near session highs; focus on tight Catalonia election, U.K. government borrowing data lighter than expected.
  • Asia mostly lower; China indexes rebounded with regulator’s policy announcement easing verbiage on hardline deleveraging stance (Shanghai Composite +0.4%, Hang Seng +0.5%); Bank of Japan (BOJ) kept status quo on monetary policy (Nikkei -0.1%).
  • Treasury yields dip after recent run-up. 10-yr. yield -2 basis points (-0.02%) to 2.48%.
  • Commodities: Oil -0.5% to ~$57.80/bbl., gold flat at ~$1269/oz., industrial metals up sharply.
  • Economic data: Q3 gross domestic product data revised down to annualized 3.2% vs. 3.3% prior; leading economic indicators +0.4% vs. 0.4% expected, 1.2% prior; initial jobless claims 245k vs. 235k expected, 225k prior; Philly Fed Index 26.2 vs. 21.5 expected, 22.7 prior.

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Key Insights

  • Tax reform bill passed through Congress, but President Trump may hold off on signing it until next year. Having made it through both houses of Congress, the bill now only requires the president’s signature to become law. Originally expected to take place this week, indications are that the president may wait until January 3 to put his name on the bill to ensure automatic spending cuts to Medicare and other programs do not take effect until 2019. The delayed signing can be attributed to the “Pay-As-You-Go” Act (PAYGO), which requires that new debt be offset by spending cuts. PAYGO can be waived with 60 votes in the Senate, but that would require Democratic support, which is highly unlikely. It’s important to note that the delayed signing of the bill would not impact the tax law changes, which will still take effect in 2018.

Macro Notes

  • Catalonia deciding its fate in close election. Catalonians are voting today to decide whether to remain in the European Union. Recent surveys indicate the vote will be very close, while some are suggesting the potential for an inconclusive outcome, which will mean the political crisis won’t be resolved in the near term. In the meantime, Madrid will continue to control the Catalan region, which it has done since Catalonia’s illegal referendum in October. The recent upheaval notwithstanding, economic fundamentals remain upbeat in Spain despite the regional impact on activity.
  • BOJ leaves policy unchanged as expected. The BOJ maintained the status quo on its monetary policy as expected, leaving short-term rates at minus 0.1% and long-term rates at around 0%, while also unanimously voting to maintain other asset purchases. The central bank said the economy is growing moderately, and inflation will continue to rise despite remaining below target. Recent data showed consumer prices rising just 0.8% in October from a year ago, following a 0.7% increase in September.
  • Do you believe? Tomorrow kicks off the well-known Santa Claus Rally, which refers to a rise in stock prices during the last five trading days of the year and the first two trading days of the following year. Sure enough, these seven days are up +1.35% on average and higher 77.6% of the time–making it hands down one of the most bullish times of the year. Today on the LPL Research blog we will take a closer look at this phenomenon.

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Click Here for our detailed Weekly Economic Calendar

Thursday

  • GDP (Q3)
  • Weekly Jobless Claims (Dec 16)
  • Personal Consumption (Q3)
  • Philadelphia Fed Business Outlook (Dec)
  • Chicago Fed Nat Activity Index (Nov)
  • Federal Housing Finance Industry House Price Index (Oct)
  • LEI (Nov)
  • France: Manufacturing Confidence (Dec)
  • Eurozone: Consumer Confidence (Dec)
  • UK: Lloyds Business Barometer (Dec)
  • Canada: CPI (Nov)
  • BOJ: Kuroda

Friday

  • Personal Income & Spending (Nov)
  • Durable Goods Orders (Nov)
  • Cap Goods Shipments & Orders (Nov)
  • Core PCE (Nov)
  • New Home Sales (Nov)
  • University of Mich. Sentiment (Dec)
  • Kansas City Fed Manufacturing Index (Dec)
  • UK: GDP (Q3)
  • Germany: Consumer Confidence (Jan)
  • France: PPI (Nov)
  • France: GDP (Q3)
  • Italy: Consumer Confidence (Dec)
  • UK: Current Account Balance (Q3)
  • Italy: Industrial Orders (Oct)

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.

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.

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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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