Market Update: Tuesday, August 21, 2018

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Daily Insights

  • U.S. dollar takes a breather. The dollar has dropped for four straight days (vs. a basket of global currencies) from a 12-month high reached on August 15 as fears around Turkey’s currency crisis have calmed and (more) trade negotiations between the U.S. and China began. President Trump’s recent criticism of Federal Reserve Chair Jerome Powell’s approach to raising interest rates could further weigh on the dollar as his comments suggest a preference for a more dovish course of future monetary policy.

  • Treasury yield curve flattens back to decade lows. The spread between 10- and 2-year Treasury yields is now back below 25 basis points (0.25%). This bout of flattening is mainly being driven by a modest decline in longer-term yields over the past two weeks (as opposed to a rise in short-term yields). With market expectations pricing in a 90% chance of a September rate hike and a 55% chance of a subsequent December hike, upward pressure on the front end of the curve has not waned, despite risk-off sentiment leading to long-end bidding.

  • Treasury futures are at historic short levels. Short positions in Treasury futures were historically high just two months ago, and now they are 50% higher than that level. Many of these short positions were put on over the last six months while the 10-year Treasury yield has hovered in its current 2.8-3.0% range. Yield moves meaningfully below that level could squeeze short positions, pressuring shorts to buy Treasury futures to cover their positions, which could pressure rates downward further.

  • Continued market strength under the surface. The S&P 500 Index hasn’t made a new all-time high since January 26, 2018, but it is getting closer. In fact, yesterday it closed just 0.55% away from a new high. What has us encouraged though is the overall action we are seeing, with many stocks and sectors participating. For instance, the Value Line Arithmetic Index (an equal-weighted index of approximately 1,700 stocks) closed at a new all-time high yesterday. In other words, the average stock is actually at a new high. Not to be outdone, the NYSE Advance/Decline (A/D) line closed at a new high as well. Technical analysis looks at this like the soldiers (stocks) are leading and the generals (the S&P 500) will eventually follow.

  • Will emerging-market debt (EMD) recover from its Turkish twist? The problems in Turkey are still evident, leading investors to reassess risk levels in EMD allocations and pressuring the asset class broadly. While we currently don’t see any meaningful signs of contagion to other countries or asset classes, investors must remain vigilant to any mounting risks. On the LPL Research blog today (and in this week’s Bond Market Perspectives), we look at the Turkey situation through a fixed income lens, and interpret what the market is telling us about the ongoing issue.

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Wednesday

  • Existing Home Sales (Jul)
  • Fed: FOMC Meeting Minutes
  • Japan: All Industry Activity Index (Jun)
  • Japan: Nikkei Mfg PMI (Aug)

Thursday

  • Markit Mfg PMI (Aug)
  • New Home Sales (Jul)
  • France: Markit Mfg & Svcs PMI (Aug)
  • Germany: Markit Mfg & Svcs PMI (Aug)
  • Eurozone: Markit Mfg & Svcs PMI (Aug)
  • Eurozone: Consumer Confidence (Aug)
  • Japan: CPI (Jul)

Friday

 

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