- U.S. markets rebound after White House tariff plan received pushback from Congressional leaders, upbeat economic data. S&P 500 Index 1.1%, Nasdaq +1.0%, Dow 1.4%, Russell 2000 +.8%.
- All sectors finished higher; utilities (+2.0%), financials (+1.4%) led advance; healthcare (+0.9%), technology (+0.9%) lagged.
- Positive breadth on NYSE (2.8:1); trading volume below average (~90% of 30-day avg.).
- Treasuries yields continued climb; 10-yr. note yield +2 basis points (0.02%) to 2.88%.
- Commodities: WTI crude oil regained some recent losses after foreign supply concerns (+2.22% to $62.61/bbl.); COMEX gold -0.3% to $1320/oz.; industrial metals broadly lower; U.S. dollar weakened vs. most major crosses.
- Economic data: Markit PMI services reading topped consensus (55.9 vs. 55.8), as did ISM Non-Manufacturing Index (59.5 vs. 58.8); Australian retail sales missed consensus (0.1% vs. 0.4% month over month). Market focus remains on White House’s tariff plan and potential for trade war.
Overnight & This Morning
- U.S. equities opened higher, continuing yesterday’s rebound. Trade talk still dominates the headlines.
- European stocks up midday as fallout from the Italian election was contained. STOXX Europe 600 +0.8%, DAX +0.9% despite sharp decline in PMI construction (52.7 vs. 59.8 prior), FTSE 100 +0.8%.
- Asian markets finished sharply higher as trade war concerns moderated, North Korea indicates openness denuclearization. Nikkei +1.8%, Shanghai Composite +1.0%, Hang Seng +2.1%.
- Treasury yields flat; 10-yr. yield unchanged at 2.89%.
- Commodities: Oil moving up (+0.9%) to ~$63.13/bbl., gold (+0.9% to ~$1331/oz.), industrial metals overall higher.
- Economic releases: January durable goods and factory orders came in below expectations (-1.4% vs. -1.3% month over month); core capital goods cited as main driver of weakness.
- The latest on tariffs. The European Commission (EC) is looking at retaliatory tariffs on imports of steel, apparel, and textile and footwear, according to Bloomberg. EC President Juncker is prepared to react with tariffs on Harley-Davidson, bourbon, and blue jeans according to the Wall Street Journal. Sources say the total worth of imports subject to the new tariffs would be $3.5 billion, which would be divided into thirds between steel, industrial goods, and agricultural. Yesterday, President Trump tweeted that he would consider lifting the proposed tariffs on Canada and Mexico if they conceded in the ongoing NAFTA demands. In addition, House Speaker Paul Ryan urged the White House not to go forward with the tariff plan yesterday, as his spokeswoman said he was “extremely concerned” about a trade war. Bloomberg cites sources familiar with the matter that White House economic advisor Gary Cohn is attempting a last second effort to halt the tariffs, leading many to think a major trade war could be avoided as he gathers executives at U.S. companies that depend on aluminum and steel to meet with the president. Last, as we noted in this week’s Weekly Economic Commentary, economic fundamentals remain strong and we believe trade concerns are unlikely to derail this bull market.
- North Korea willing to talk? Reports are surfacing this morning that North Korean leader Kim Jong Un met with South Korean officials for the first time since he took over power. Reports suggest that North Korea is looking for firmer ties with South Korea, an eventual reunification of the peninsula, and denuclearization in exchange for security guarantees. According to the New York Times, this would be the first time the North has shown a willingness to negotiate on these issues. Last, the two countries are holding a summit in April, the first in more than a decade.
- The rise in yields may very well stick. The meaningful rise in yields from recent lows in September represent a healthy repricing of economic fundamentals, in our view, meaning yields are unlikely to return to those depressed levels. Higher levels of growth and inflation (domestically and globally), in addition to a more aggressive Federal Reserve (Fed), are fundamental reasons why higher yields are warranted. In this week’s Bond Market Perspectives, due out later today, we discuss why we believe this rise in yields is likely to stick with us, and what investors can expect moving forward.
- Fundamentals for low-quality fixed income remain intact, despite recent weakness. Spreads have widened with equity weakness (mainly due to the threat of recent tariffs leading to a trade war), but fundamentals under the hood point to a well-behaved market. High-yield dispersion, the difference in yields between the lowest and highest-quality segments of the high-yield spectrum, can be viewed as a proxy for market stress or concern. In a very concerning situation, market participants sometimes liquidate their lowest-quality holdings first, as they believe those to be the most susceptible to further price declines. Thus, higher dispersion can potentially point to fundamental concerns by investors. This dispersion is still well contained within the high-yield market at this time. Additionally, the Fed Senior Loan Officer Survey, which shows the net percentage of banks that are tightening or loosening lending standards to medium- and large-sized companies, showed further net loosening in the most recent data point, another sign of fundamental stability for high-yield and lower-quality fixed income overall.
- Could the tariffs lead to a trade war? Though even a marginally negative impact to the economy is meaningful to the impacted areas, the relatively small likelihood of the tariffs triggering a measurable hit to gross domestic product suggests that the markets’ main concern is the potential for an escalating trade war. Today, on the LPL Research blog, we look at the top global producers and exporters of steel to the United States for indications of which countries may be most likely to retaliate.
- Factory Orders (Jan)
- Durable Goods Orders (Jan)
- Australia: GDP (Q4)
- RBA: Interest Rate Decision
- China: Foreign Reserves (Feb)
- ADP Employment Report (Feb)
- Non-Farm Productivity (Q4)
- Unit Labor Costs (Q4)
- Trade Balance (Jan)
- Beige Book
- Eurozone: GDP (Q4)
- Bank of Canada: Interest Rate Decision
- Japan: Current Account Balance (Jan)
- China: Foreign Direct Investment (Feb)
- Japan: GDP (Q4)
- Japan: Economy Watchers Survey (Feb)
- China: Imports & Exports (Feb)
- Germany: Factory Orders (Jan)
- BOJ: 10-Yr Yield Target
- BOJ: Monetary Policy Statement
- BOJ: Policy Balance Rate
- ECB: Main Refinance Rate
- ECB: Marginal Lending Facility
- ECB: Deposit Facility Rate
- Japan: Money Supply (Feb)
- Japan: Labor Cash Earnings (Jan)
- China: CPI & PPI (Feb)
- Change in Nonfarm, Private & Mfg. Payrolls (Feb)
- Unemployment Rate (Feb)
- Average Hourly Earnings (Feb)
- Average Weekly Hours (Feb)
- Labor Force Participation & Underemployment Rates (Feb)
- Wholesale Inventories (Jan)
- Wholesale Trade Sales (Jan)
- Germany: Industrial Production (Jan)
- France: Industrial Production (Jan)
- Italy: PPI (Jan)
- UK: Industrial Production (Jan)
- UK: NIESR GDP Estimate (Feb)
- China: Money Supply (Feb)