Market Update: Tuesday, May 29, 2018

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Daily Insights

  • Italian Political Turmoil Pushing Italian Yields Higher, But Not Signaling Broader Crisis. Italian yields have spiked in recent days, moving from 0.46% on Friday May 25, to 2.2% currently. Adding additional context, two weeks ago today on May 15, the yield on 2-year Italian debt was actually negative (-0.08%). This move in yields was triggered by the populist parties’ nominee of a euro-skeptic financial minister and appointing a caretaker prime minister. Populist parties did well in recent Italian elections, and this move has triggered fears that they may take an even higher proportion of seats if new elections are called, potentially moving Italy closer to an exit from the euro (though that is far from certain at this point). It is important to note however, that yields in Germany and France actually moved lower on this news. The fact that markets are using core European countries as a safe haven in this environment may indicate that they believe the issue is in Italy itself, and investors aren’t concerned about the potential for broader contagion in the Eurozone at this point.

  • Week ahead. Friday’s monthly nonfarm payrolls report headlines U.S. data releases, but personal consumption expenditures, consumer confidence, and a series of housing data that include pending home sales will also be notable. Overseas, employment figures are due out in the Eurozone, Germany, and Japan. Also, final Purchasing Managers’ Index (PMI), consumer and economic confidence indicators, and inflation in the Eurozone will be on traders’ radars; as well as manufacturing data for China and Japan 

  • Municipal Outperformance Has Led to Expensive Valuations. The Bloomberg Barclays Municipal Bond Index has outperformed the broader Bloomberg Barclays Aggregate Index year to date (-0.9% vs -2.2%) and since the beginning of 2017 (4.5% vs 1.2%). This outperformance has been notable, but has also led to valuations relative to Treasuries that are expensive relative to history. We discuss the municipal bond market in more detail in this week’s Bond Market Perspectives, due out later today.

  • Will small cap strength continue? Small caps are having a very strong year, with the Russell 2000 Index up nearly 6% year to date, versus about 2% for the S&P 500 Index. We came into this year expecting small cap outperformance, and after a slow start to the year, they have delivered in recent months. Many factors are aligned that could help the group sustain its recent strength. In this week’s Weekly Market Commentary, we highlight three keys to our small cap outlook and will preview one of our favorite indicators today on the LPL Research blog.

  • Markets reacted positively to Fed minutes; look ahead to June meeting. Some added context in the Federal Reserve (Fed) minutes from its May 1-2 meeting, released last Wednesday, led markets to lower expectations for a fourth rate hike in 2018. The Fed’s economic assessment remained upbeat, viewing first quarter slowing as likely temporary, while signaling to markets that inflation would be allowed to run a little hot if the Fed believed it would still settle near its 2% target. While the statement released right after the meeting had the same message, although in much more condensed form, markets waited for the greater detail in the minutes before lowering expectations. The upcoming June 12-13 meeting will be another test of whether the Fed can continue to reassure markets that the path of rate hikes will be gradual. A rate hike in June is all but priced in at this point, so the focus will be on a new set of economic projections and Fed Chair Jay Powell’s post-meeting press conference.

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Friday

  • Unemployment Rate (May)
  • Markit Mfg. PMI (May)
  • Italy: Markit ADACI Mfg. PMI (May)
  • France: Markit Mfg. PMI (May)
  • Germany: Markit Mfg. PMI (May)
  • UK: Markit Mfg. PMI (May)
  • Eurozone: Markit Mfg. PMI (May)
  • Italy: GDP (Q1)

 

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