Market Update: Monday, May 21, 2018

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Daily Insights

  • Earnings estimates rose past week. Over the last week, forward-four-quarter estimates for the S&P 500 Index rose 0.6%, and have risen by an impressive 1.3% since April 1. With 464 S&P companies having reported, first quarter S&P 500 earnings are tracking to a 26.2% year-over-year increase, while 79% of companies have exceeded earnings targets. Another 22 index constituents report results this week. We recapped earnings season in last week’s Weekly Market Commentary.

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Weekly Update – Stocks Dip as Yields Move Higher

US: S&P 500 Index  -0.5%, Dow -0.5%, Nasdaq -0.7%
Europe: STOXX Europe 600 +0.6%, German DAX +0.6%, France CAC 40 +1.3%, U.K. FTSE 100 +0.7%
Asia: Japan Nikkei +0.8%, China Shanghai Composite +1.0%, Korea KOSPI  -0.7%
Rates/Commodities: 10-Year Treasury yield +9 basis points to 3.06%, WTI crude oil -0.2%, COMEX gold -2.0%

Global equities moved modestly lower on the week, as investors expressed renewed concern over rising interest rates. The yield on the 10-year Treasury jumped to multi-year highs on Tuesday, following the release of retail sales data for April which showed accelerating consumer demand. Energy stocks outperformed for the week, as oil continued to consolidate recent gains above $70/barrel. Continue reading

A Royal Union Comes Together As Another Union Breaks Apart

As Britain’s painfully complex break from the European Union (EU)—commonly referred to “Brexit”—continues to be worked out, a royal union is coming together over the weekend as Prince Harry and Meghan Markle will wed on Saturday, May 19, 2018 at Windsor Castle in England. The couple’s decision to wed on a Saturday goes against tradition, as royal weddings usually take place on a weekday. Continue reading

Market Update: Friday, May 18, 2018

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Daily Insights

  • One Royal Union comes together as another breaks apart. Prince Harry and Meghan Markle will wed on Saturday. Around 600 guests are expected to attend, a small crowd in comparison to the Duke and Duchess of Cambridge (William & Kate) who wed in front of 1,900 guests. In other British union news–though it may not getting quite as much media coverage–Brexit negotiations are ongoing as Britain works to separate itself from the European Union (EU). Talks have proven to be quite contentious with reports swirling in the media that perhaps British Prime Minister Theresa May will ask for an extension beyond 2020 to define the terms of a post-Brexit Britain. Big issues include disruption to company supply chains, the Ireland border, the EU rejecting a piecemeal approach, and the presence of the euro-skeptics who want a hard break. All of this has created tensions that cloud the economic outlook in Britain, which we discuss later today on the LPL Research blog.

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No Chinese Selling of Treasuries in March

Treasuries have been under pressure in recent months, with the 10-year yield hitting 3% for the first time since late 2013 (see this week’s Bond Market Perspectives) due to a combination of factors including expectations of higher economic growth and inflation, as well as additional supply due to near-term deficits. The threat of China liquidating Treasuries as a potential bargaining chip in trade negotiations has also been on the mind of investors in recent months. Continue reading

Market Update: Thursday, May 17, 2018

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Daily Insights

  • How much do interest rates matter for EM equity investors? Over short-term periods, like what we are experiencing now, rising interest rates tend to cause higher volatility for emerging market (EM) stocks. However, over intermediate and longer periods of time, EM stocks have tended to do well as rates rise and correlations between EM stocks and the 10-year yield have been positive over most of the past 30 years. Note that EM stocks performed relatively well during the most recent Federal Reserve (Fed) rate hike cycle in the mid-2000s (June 2004 to June 2006), outpacing the S&P 500 Index when the fed funds rate rose from 1% to 5%; EM also performed well from January 1999 through July 2000 when the fed funds rate rose from 4.3% to 6.9%. The EM crisis periods of the mid-1990s were an exception and comparable given EM economies’ much stronger financial positions today broadly.

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Eurozone Data Disappoints

As our LPL Chart of the Day shows, European economic data reached a noteworthy low on May 7, after Citi’s Economic Surprise Index for the Eurozone dipped beneath -100 for the first time since 2011. (Citi’s surprise indexes average economic surprises compared with consensus expectations over time, with above zero indicating the average surprise has been positive.) Continue reading

Market Update: Wednesday, May 16, 2018

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Daily Insights

  • Economic growth forecasts tracking above 3%. With half of the second quarter now in the rearview, consensus forecasts are tracking to 3.1% gross domestic product growth for this quarter, while forecasts from the Atlanta and New York Federal Reserve Bank’s show 4.1% and 3.1%, respectively. With economic surprises, on average, being to the upside, second quarter growth exceeding 3.0% would represent a very solid quarter and push full-year growth nearer to the 2.75-3.0% range we are expecting.

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Oil Bouncing, but Balanced

Oil has been on the rise since last June, when prices hit an interim low of about $42.50 before crossing $70 for the first time since 2014 on May 8. The next day, President Trump announced the U.S. would be withdrawing from the Iran nuclear deal. As discussed in our Weekly Economic Commentary, we view rising oil prices as largely a result of rebalancing supply and demand, and believe prices will stabilize as markets digest the recent news. Continue reading

Market Update: Tuesday, May 15, 2018

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Daily Insights

  • The impact of a 3% 10-year yield. The 10-year Treasury yield continues to hover near 3%, but we feel this level is more important psychologically than it is for the bottom line of investors or borrowers. A 3% yield on a high-quality 10-year Treasury (or a nearly 2.6% yield on a 2-year Treasury for that matter) is a move in the right direction for savers and may help suitable investors meet their income targets with less reliance on low-quality debt. However, yields remain low relative to history, and even though corporate debt levels have increased over the past few years, stronger earnings mean interest coverage ratios–measure of companies’ ability to pay the interest expense on their debt–remain strong in aggregate. We dive into more detail on what 3% yields mean for investors and corporate borrowers in this week’s Bond Market Perspectives, due out later today.

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