Market Update: Friday, March 2, 2018

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Market Recap

  • U.S. markets posted third straight decline amid worries that tariffs could ignite a trade war among nations, effectively creating a drag on global GDP growth. S&P 500 Index -1.3%, Nasdaq -1.3%, Dow -1.7%, Russell 2000 -0.3%.
  • All sectors closed lower. Utilities (-0.1%), energy (-0.5%) held up best. Industrials (-2.0%), stemming from tariff effects concerns, and financials (-2.1%) lagged.
  • Negative breadth on NYSE (1.5:1); trading volume slightly above average (~103% of 30-day avg.).
  • Treasuries strengthened in flight to safety; 10-yr. note yield -6 basis points (-0.06%) to 2.81%.
  • Commodities: WTI crude oil prices continued to cool due to inventory surplus (-0.4% to $61.40/bbl.); COMEX gold flat at $1317/oz.; industrial metals continue broad decline; U.S. dollar softened against major crosses.
  • Economic data: Domestic ISM Manufacturing Index results very strong (60.8 vs. 58.6), construction spending month over month below expectations (flat vs. +0.3%). The Fed’s balance sheet lightened by $18.3B for the week, driven by off-loading Treasuries and mortgage-backed securities.

Overnight & This Morning

  • Domestic equities opened lower; continuing negative momentum from previous day.
  • Europe tracking lower as leaders vow retaliation to tariffs, slightly counterbalanced by positive economic releases from United Kingdom, Italy. STOXX Europe 600 -1.4%, DAX -2.0%, CAC 40 -1.7%, FTSE 100 -0.7%.
  • Asia notched losses overnight. Potential retaliation from Thursday tariff announcement a key theme, Chinese reduction of U.S. Treasury purchases also a noted possibility, and/or increased regulation against U.S. firms. Nikkei -2.5%, Shanghai Composite -0.6%, Hang Seng -1.5%.
  • Treasuries retracing gains; 10-yr. note yield +1 basis points to 2.82%.
  • Commodities: Oil slide persists (-0.34% to $60.79/bbl.); gold rebounding on safe-haven buying (+1.4% to ~$1323/oz.); industrial metals down across the board.
  • Economic releases: Economic data light to close the week. Canadian GDP figures fell in line at 2.0%; Italian GDP met expectations at 0.3% quarter over quarter. U.K. PMI construction data beat consensus (51.4 vs. 50.4).

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Key Insights

  • Our take on the tariff announcement. President Trump’s announcement late yesterday afternoon that the United States will impose tariffs on steel (25%) and aluminum (10%) rocked an already wobbly stock market as worries over a potential trade war heated up. The primary beneficiaries are likely steel companies in the United States, which make up a small portion of overall equity market capitalization. The auto industry, however, likely stands to lose the most, as they are already facing slower sales and rising interest rates as headwinds. Approximately six million people work in steel dependent manufacturing fields in the United States, and legislators will fight to protect them, and their own re-election prospects, in the coming months. Overseas, China has already said it will take “necessary measures” against tariffs, and the European Union trade commissioner said the EU would consider imposing their own “safeguard” tariffs on imports of steel and aluminum.

Macro Notes

  • Powell moves to Senate for round two of testimony. Fed Chair Jerome Powell made his first appearance in front of the Senate Banking Committee yesterday where he reiterated much of his message from Tuesday’s meeting with members of the House Financial Services committee, if slightly more dovish. In his testimony, he told members that his outlook for the economy had strengthened since December, though there is no evidence it’s overheating; wage inflation has not reached a point of acceleration, nor does he see decisive evidence that a continued decline in the unemployment rate or a reduced slack in the labor market are the culprits behind the recent pickup in wage growth. Consequently, he expects the central bank to continue its rate-hike campaign into next year to avoid falling behind the curve. Market expectations, which match LPL Research’s outlook, are for three hikes this year; though four is more likely than two.
  • Another big down day. The S&P 500 fell 1.3% yesterday, on the heels of losing 1.3% and 1.1% the previous two days. This is the first time since the first week of January that the S&P 500 has lost at least 1% on three consecutive days. It was also the fifth consecutive day the S&P 500 changed either up or down 1%, for the first time since 6 in a row during the Brexit volatility in late June 2016.
  • Let’s celebrate equities this St. Patrick’s Day. Based on seasonal statistics over the past 20 years, the S&P 500 tends to move higher in March. Today on the LPL Research blog, we investigate which S&P 500 sectors and industry groups are likely to outperform broad equities during the month.

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Click Here for our detailed Weekly Economic Calendar

Friday

  • Univ. of Mich. Sentiment (Feb)
  • Eurozone: PPI (Jan)
  • Canada: GDP (Dec)

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