Market Update: Thursday, March 8, 2018

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Market Recap

  • U.S. markets closed mixed, rallied from early morning lows deriving from overnight volatility following Cohn resignation announcement. S&P 500 Index -0.1%, Nasdaq +0.3%, Dow -0.3%, Russell 2000 +0.8%.
  • Technology (+0.6%) led day’s performance followed by REITs (+0.5%), healthcare (+0.5%). Consumer staples (-1.0%), due largely to grocers, and energy (-0.8%) lagged.
  • Positive breadth on NYSE (1.1:1); trading volume below average (~85% of 30-day avg.).
  • Treasuries yields remained flat; 10-yr. note yield closed again at 2.88%.
  • Commodities: WTI crude oil resumed price decline over supply increase concerns (-2.0% to $61.39/bbl.); COMEX gold -0.7% to $1326/oz.; industrial metals broadly rebounded; U.S. dollar weakened vs. most major crosses.
  • Economic data: EIA’s petroleum status report indicated a 2.4M weekly addition to crude oil inventories. Eurozone’s final gross domestic product (GDP) figures were reaffirmed at 0.6% quarter over quarter. ADP employment report came in well above consensus (235K vs. 205K). Focus remains on White House’s tariff announcement expected to be released sometime today.

Overnight & This Morning

  • U.S. equities opened higher, as talk of possible tariff exceptions dampens worries of a potential trade war.
  • European stocks mostly up midday but off earlier highs following hawkish guidance from European Central Bank (ECB) rate announcement, though no change in rates or asset purchase program (details below). STOXX Europe 600 +0.2%, DAX -0.4%, CAC 40 +0.2%, FTSE 100 +0.1%.
  • Asian markets broadly higher, driven by moderating trade war concerns, upward revision of Japanese Q4 GDP estimates. Nikkei +0.5%, Shanghai Composite +0.5%, Hang Seng +1.5%.
  • Treasury yields advance; 10-yr. yield +0.1% to 2.89%.
  • Commodities: Oil holding near flat at ~$62.2/bbl., gold -0.1% to ~$1326/oz., industrial metals lower across the board.
  • Economic releases: Japanese Q4 GDP estimates revised higher (from 1.5% to 2.0% year over year). China trade balance (+$33.7b) much higher than consensus (-$5.7b) as exports surged 44.5%. Domestic jobless claims +21k from prior week (+11k vs. consensus) to 231k.

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Macro Notes

  • ECB drops pledge to increase size of QE program. The ECB made no changes to interest rates or the size of its quantitative easing (QE) program, as expected. However, the central bank removed a line from previous statements: “…the Governing Council stands ready to increase the asset purchase program (APP) in terms of size and/or duration.” Markets certainly noticed the change, but in reality the expectation in recent years has been that the ECB would slow and eventually stop its QE program, and there was little expectation of any increase in the near future. For this reason, we believe the removal is not very meaningful (and maybe even a little past due). Look for more insights regarding the meeting and press conference (currently underway) later today on the LPL Research blog.
  • Small caps surge. Since talk of tariffs and a trade war started a week ago today, the Russell 2000 is up 3.6%, while the S&P 500 is up 0.5%. The last time small caps did this well relative to large caps was back in November 2016. Year to date, the Russell 2000 is actually up more than the S&P 500 after yesterday’s surge (2.5% versus 2.0%). Sparking much of the strength were concerns over tariffs and a trade war. Remember, small caps are more domestically focused, generating a smaller portion of revenue overseas. Additionally, as we laid out in our Outlook 2018, we expected small caps to be one of the best places to find alpha this year due to tax reform, higher yields, and an improving economy.
  • The latest on tariffs. Many believe President Trump could sign the trade proclamation (steel and aluminum tariffs) as soon as this afternoon. Of course, the situation could change quickly and White House officials have said it would be delayed. Reports are saying that Mexico and Canada would initially be exempt and would avoid the tariffs completely if they agree to NAFTA renegotiations. In addition, the declaration would be written in a way that would allow other countries to be excluded if they offer concessions. Relief that a major global trade war will likely be avoided has led to equity gains globally. Additionally, the New York Times has a story out today that downplayed the worries over a trade war, indicating that the Trump administration signaled “it will act within the rules of the global trade game.” The article focused on productive talks during the latest NAFTA negotiations and the fact that Mexico and Canada would be exempt.

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Click Here for our detailed Weekly Economic Calendar

Thursday

  • 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)

Friday

  • 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)

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The economic forecasts set forth in the presentation may not develop as predicted.

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