Markets rally Thursday, look to end week on high note. One day after the Federal Reserve (Fed) doubled down on its “patient” approach to rate hikes, the technology sector’s 2.5% gain led the S&P 500 Index to its highest close this year. While we are encouraged by the continued grind higher, the market’s more than 18% gain in the last 60 days is the most since October 2009, so a more cautious stance may be warranted. While we maintain our fair value estimate of 3000 for the index, given the extreme run-up in prices over the past few months, a consolidation of these gains may be in the cards before we move back to all-time highs. On any pullback we would look for the 50- and 200-day moving averages to act as support near the 2740 level.
Disappointing PMIs heighten Euro growth concerns. European equities turned lower on the week after flash PMI data showed the 19-member eurozone economy continues to deteriorate. Composite eurozone data inched closer to contraction territory with activity in the manufacturing sector hitting a 71-month low, while services activity also slipped but remains more firmly in expansionary territory. Composite readings in Germany- the region’s largest economy-registered a 69-month low amid accelerated declines in output, new orders, and exports. Meanwhile, readings on both manufacturing and services in France fell back into contractionary territory as the country continues to grapple with fallout from yellow vest protests. With the eurozone economy still searching for a bottom, investors are bidding up safe-haven assets like German government bunds, which turned negative for the first time in more than two years (details below).
Negative bund yields. Disappointing manufacturing data were the last straw for long-term bund rates, which fell into negative territory today for the first time since October 2016. The 10-year German bund yield slid nearly 6 basis points (0.06%) to 0.01% this morning as Markit data showed German manufacturing health slid to its lowest point in at least three years. Negative yields on German sovereign debt could further boost the attractiveness of U.S. Treasuries to foreign investors. The global rotation to U.S. debt this year is already evident: the 10-year Treasury yield has dropped about 14 bps this year, and is hovering around a 12-month low.
Meanwhile, U.S. leading indicators turn positive. The U.S. Leading Economic Index registered a 0.2% month-over-month increase in February after January’s flat reading and a -0.1% dip in December. A rebound in stock prices, along with increased consumer optimism and a pickup in lending conditions spurred the continued rebound. Recent year-over-year readings point to a slower growth outlook, however, the index has risen year over year for 111 straight months, a sign to us that recessionary odds remain low.
- Markit US Manufacturing PMI (Preliminary Mar)
- Markit US Services PMI (Preliminary Mar)
- Markit US Composite PMI (Preliminary Mar)
- Exisiting Home Sales (MoM Feb)
- Markit/BME Germany Manufacturing PMI (Preliminary Mar)
- Markit Eurozone Manufacturing PMI (Preliminary Mar)
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