Market Update: Thursday, January 11, 2018

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Market Recap

  • Domestic equities ended down across the board. Marking first broad, albeit slight, decline of the new year. Dow -0.1%, S&P 500 Index -0.1%, Nasdaq -0.1%.
  • Financials were the standout performer; rate-sensitive utilities, telecommunications continue to lag.
  • Treasury yields held mostly steady; 10-yr. yield held at 2.55%.
  • NYSE breadth negative (1.6:1), volume above 30-day avg. (~108%).
  • Commodities: WTI crude oil strength persisted (+0.7% to $63.41/bbl.), COMEX gold +0.4% to $1318/oz., industrial metals mostly higher.
  • Fairly light economic calendar. EIA petroleum status report showed crude oil inventories posted 8th consecutive weekly drawdown (-4.9 million barrels).

Overnight & This Morning

  • U.S. equities opened slightly higher after China denies plan to sell Treasuries (details below).
  • European stocks slightly lower, gains in miners being offset by retailer weakness; European Central Bank minutes lifting euro. STOXX Europe 600 -0.1%, DAX -0.1%; CAC 40, FSTE 100 near flat.
  • Asian markets finished mixed. Hang Seng higher a record 13th straight day. Nikkei -0.3%, Shanghai Composite +0.1%, Hang Seng +0.2%.
  • Treasury yields still firm; 10-yr. yield little changed at 2.56%.
  • Commodities: Oil rise continuing (+0.4%) to ~$63.82/bbl., gold steady despite firm U.S. dollar (+0.1% to ~$1319/oz.), industrial metals mixed.
  • Economic releases: Jobless claims 261K vs. 245K consensus, 250K prior week. Producer price index (PPI) -0.1% month over month, +2.6% year over year (Dec), both below consensus (+0.2%, +3.0%, respectively) and below prior (+0.4%, +3.1%, respectively). Core PPI +2.3% year over year vs. +2.5% consensus and +2.4% prior.

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Macro Notes

  • China dismisses reports on Treasury purchases. Earlier this morning, officials in Beijing dismissed the report that the Peoples Bank of China was considering a reduction or even a halt in its U.S. Treasury purchases; instead suggesting that the largest holder of U.S. government debt is looking to diversify its $3.1 trillion of reserves. Treasuries stabilized overnight after yields spiked to 10-month highs following Wednesday’s initial report on concerns that significant changes to China’s Treasury holdings could trigger a sell-off in both bond and equity markets.
  • The Bank of Japan made a change to slightly slow purchases of long-term bonds in their securities purchase program (quantitative easing) over the past week, stoking rumors that a reduction in overall purchases may be on the horizon. This was at least one of the factors behind the recent rise in Treasury yields. However, the central bank maintained the size of its purchases in shorter-dated maturities in overnight buying, which helped mollify traders. Also, given the small magnitude of the change and the fact that Japan’s inflation readings are still well below their 2.0% target, we believe that this move was more of an operational adjustment, and we aren’t expecting any major moves from the Bank of Japan (BOJ) in the near term, especially before BOJ President Haruhiko Kuroda’s term expires in April (we expect he will be reappointed).
  • A good global earnings picture is getting better. Earnings growth is poised for double-digit increases in 2018, in both the U.S. as well as developed international and emerging markets, based on consensus estimates and improving global economic growth. In just the past month, an already good backdrop for overseas earnings has gotten even better, as S&P 500 and MSCI Emerging Markets Index earnings estimates for 2018 have risen by more than 2.0% over the past month, while MSCI EAFE earnings estimates have been revised 1.5% higher. The increase in U.S. estimates is not surprising given the new tax law, but the increases in overseas earnings expectations are a pleasant surprise.
  • U.S. earnings season effectively begins tomorrow (Friday) with reports from several big financial institutions on tap. Consensus is calling for a 12% year-over-year increase in S&P 500 earnings in the fourth quarter of 2017, suggesting that with historical average upside, a final tally in the mid-teens is achievable. We expect solid gains from the energy and technology sectors.
  • Should we expect a roller coaster ride in 2018? 2017 was one of the least volatile years for the S&P 500 Index ever, but what does it mean for 2018? Today on the LPL Research blog, we analyze years following periods of low volatility to see what might be in store for investors.

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Click Here for our detailed Weekly Economic Calendar

Thursday

Friday

  • CPI (Dec)
  • Core CPI (Dec)
  • Retail Sales (Dec)
  • Business Inventories (Nov)
  • Rosengren (Hawk)
  • France: CPI (Dec)
  • Italy: Industrial Production (Nov)

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