Yesterday’s Market Activity

• U.S. stocks mixed as Dow (-0.3%), S&P 500 Index (-0.1%) experienced small losses. Nasdaq Composite +0.8%, Russell 2000 -0.3%.
• Healthcare (+1.3%), technology (+0.7%) led S&P 500. Healthcare sector responding favorably to signals Trump Administration is softening stance on drug pricing. Energy -1.6% led market down; oil extended its losses (-2.0% to $42.50/bbl.)
• 10-year Treasury steady around 2.15%; COMEX gold ($1245/oz.) up slightly after five consecutive declines.

Overnight & This Morning

• Asian stocks pared gains as WTI crude oil fluctuated; stronger yen pressured Japanese exporters. Mainland China equities sold off late on loan quality concerns, decline in inflation, M2 growth estimates. Nikkei -0.1%, Shanghai Composite -0.3%.
• European stocks fell for third day as energy selloff continued. Gilts firmed, cushioning yesterday’s weakness on mixed messages from Bank of England.
• Most sovereigns strengthened, led by German bund, whose yield declined to 0.25%. Euro strengthened slightly to $1.11.
• Commodities – WTI crude ($42.50/bbl.) is holding steady as worries increase that a ~$40.00 price limits profitability potential for North American drilling and production.
• Tropical storm Cindy has curtailed natural gas production to six-week low.
• Copper, gold both firmed.
• U.S. stocks mixed in early trading.
• Investors anxiously anticipating release of Fed’s stress tests on U.S. banks after the close.
• Dollar has dropped as 2-year Treasury yield pulled back to 1.34%.

Key Insights

• The 10-year Treasury yield hovers around 2.15%. Bloomberg is reporting that hedge funds and other large speculators keep plowing money into yield curve flattening trades (pushing longer-term rates down and shorter-term rates up). So far, this has paid off, with the difference between five- and 30-year U.S. yields at the lowest since December 2007. The gap from 10 to 30 years has shrunk for 11 straight days. This has never happened in data dating back to 1992.
• Given the stance of global monetary policy these past several years, we’re not convinced the recent flattening of the yield curve bodes poorly for the U.S. economy. While some data has come in below expectations, we’re still tracking for Q2 real gross domestic product (GDP) of ~+2.5%, which is essentially double the pace from Q1. In addition, domestic and global Purchasing Manager Indexes and Leading Economic Indexes indicate expansion. Moreover, global profits (a good lead indicator for employment and investment) are trending up, suggesting positive trends for consumption and to some extent, trade.
• It is therefore conceivable that two issues are driving the curve flattening: 1) slowing U.S. data could limit the Federal Reserve’s (Fed) plans for higher rates, and 2) given low yields on most global sovereign bonds, global investors see the 10-year Treasury and its comparatively higher yield as a bargain on a relative valuation basis. Of course, we will continue to monitor.

Click Here for our detailed Weekly Economic Calendar

 Thursday

• LEI (May)
• Eurozone: Consumer Confidence (Jun)
• Japan: Nikkei Japan Mfg. PMI (Jun)

 Friday

• Markit Mfg. & Services PMI (Jun)
• New Home Sales (May)
• France: GDP (Q1)
• France: Markit France Mfg. & Services PMI (Jun)
• Germany: Markit Germany Mfg. Services PMI (Jun)
• Eurozone: Markit Eurozone Mfg. & Services PMI (Jun)
• Russia: GDP (Q1)
• Canada: CPI (May)

Past performance is no guarantee of future results.

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

 The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

 Stock investing involves risk including loss of principal.

 Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

 Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

 Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

 This research material has been prepared by LPL Financial LLC.

 To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

 Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

 Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

 Member FINRA/SIPC
Tracking # 1-619860

It has been a rough year so far for crude oil with yesterday’s close at a fresh nine-month low officially pushing the commodity into bear market territory. Sparking much of the continued weakness is the usual worry that rising supply from the U.S. and Libya will continue to offset production cuts from the Organization of Petroleum Exporting Countries (OPEC).

Per Ryan Detrick, Senior Market Strategist, “Crude oil moving into bear market territory has many concerned that this is a sign of a potential global economic slowdown. We don’t see it that way, as this pullback has been, and continues to be, supply-driven, as opposed to demand-driven. Also, crude oil in a bear market is not uncommon, as 35% of the time since 1985 it has traded at least 20% off its trailing 52-week high.”

The last time crude oil was officially in a bear market was in early August of last year. As the chart below shows, this was one of the longest streaks without crude oil having a bear market.

So, what does it mean? Crude is in a bear market; so what? Well, historically the future returns have been much better when crude was in a bear market than when it wasn’t. In fact, a year out, crude has been up 18.1% on average when it was in a bear market versus up only 1.1% if it wasn’t.

As we noted in our newly released Midyear Outlook 2017: A Shift In Market Control publication, one of our favorite plays in the energy group is via master limited partnerships (MLP). Overall, the Trump administration’s stance on energy deregulation is supportive and yields on MLPs remain very attractive, though further crude oil weakness and interest rate risk remain potential headwinds. For a more detailed look at MLPs, check out this recent Weekly Market Commentary.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

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

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments.

Investing in MLPs involves additional risks as compared with the risks of investing in common stock, including risks related to cash flow, dilution, and voting rights. MLPs may trade less frequently than larger companies due to their smaller capitalizations, which may result in erratic price movement or difficulty in buying or selling. MLPs are subject to significant regulation and may be adversely affected by changes in the regulatory environment, including the risk that an MLP could lose its tax status as a partnership.

Additional management fees and other expenses are associated with investing in MLP funds.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and make no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC

Tracking # 1-619451 (Exp. 6/18)

Yesterday’s Market Activity

• Stocks pulled back from record highs on falling oil prices, energy sector weakness (S&P 500 -0.7%). Media, retail weakness also contributed. Biggest single-day drop since  May 17 (-1.7%).
• WTI crude oil (-2.1%) under more pressure on reports of higher production in Libya, Nigeria; ongoing domestic inventory glut; strong U.S. production. Energy (-1.3%) the worst performing S&P sector. Biotech, pharmaceuticals, homebuilders were bright spots.
• Treasuries rallied with 10-year yield -4 basis points (0.04%) to 2.15%.
• Copper fell for sixth time in seven sessions as dollar rose. COMEX gold ($1243/oz.) down 8 of 10 sessions.
• More attention on Washington. House Speaker Paul Ryan promoted tax reform, though comments elicited little market reaction. Senate healthcare vote expected Thursday.

Overnight & This Morning

• Markets flat on weakness overseas. Despite earnings support, S&P 500 near flat this morning.
• European markets under pressure. Ongoing energy weakness, concerns about feasibility of proposed U.K. political alliance weighing on sentiment. France and German markets down 0.5% to 1% in midday trading overseas.
• Asian markets mixed. Shanghai Composite +0.5% on favorable MSCI announcement (details below). Nikkei -0.5%, Hang Seng -0.6%.
• Oil trying to regain footing. Slightly bigger-than-expected crude inventory draw from private data source providing little help for oil, little changed this morning near $43.65/bbl.
• Treasuries firm as 10-year yield up 2 basis points (0.02%) to 2.17%.
• Republicans won special elections, though more of a political story. Regardless, Republicans will try to achieve as much of their agenda (healthcare and tax reform) as possible before midterm election campaign season heats up in early 2018.
• Today’s light economic calendar includes existing home sales (10 a.m. ET), weekly crude inventories (10:30 a.m. ET).

Key Insights

• Don’t get too excited about MSCI China news. Only a very small portion of the Chinese A-share market is being added to the MSCI EM Index. Meaningful additions, should they occur, will take place over a very long period of time. Nonetheless, we continue to like emerging markets.
• Oil enters a bear market. Today, on the LPL Research blog we will take a closer look at what this bear market could mean for crude oil (details below).
• Happy first day of summer. Sell in May hasn’t worked so far, as the S&P 500 Index rose in May and is up June to date. That said, a pullback is probably overdue given almost a year has passed since the S&P 500 fell 5% or more.

Macro Notes

• MSCI approves Chinese A share inclusion in EM index. After three years of rejection, MSCI announced it will add 222 Chinese A-Share securities into the MSCI Emerging Markets (EM) Index in 2018, more than the initially anticipated (169) but still only a small fraction of the overall market. At its initial weight, these securities will represent just 0.7% of the index, which likely explains the relatively muted reaction in local Chinese equity markets-the Shanghai Composite gained +0.5% overnight. Long term, as governance and liquidity presumably improve, China’s EM Index weight-now Hong Kong listing dominated-could potentially rise well beyond the current 26%.

• Crude oil moves to a bear market. The weakness in crude oil continued yesterday, as the commodity moved to a fresh nine-month low and officially closed in a bear market of more than 20% beneath the 52-week high. The last time crude oil was in a bear market was early August 2016, which puts this as one of the longest streaks without a bear market in crude ever. Today on the LPL Research blog we will take a closer look at what this bear market could mean for crude oil.

Click Here for our detailed Weekly Economic Calendar

Wednesday

• Existing Home Sales (May)
• BOJ: Kuroda & Iwata
• Japan: All Industry Activity (Apr)
• Japan: Machine Tool Orders (May)

 Thursday

• LEI (May)
• Eurozone: Consumer Confidence (Jun)
• Japan: Nikkei Japan Mfg. PMI (Jun)

 Friday

• Markit Mfg. & Services PMI (Jun)
• New Home Sales (May)
• France: GDP (Q1)
• France: Markit France Mfg. & Services PMI (Jun)
• Germany: Markit Germany Mfg. Services PMI (Jun)
• Eurozone: Markit Eurozone Mfg. & Services PMI (Jun)
• Russia: GDP (Q1)
• Canada: CPI (May)

Past performance is no guarantee of future results.

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

 The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

 Stock investing involves risk including loss of principal.

 Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

 Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

 Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

 This research material has been prepared by LPL Financial LLC.

 To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

 Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

 Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

 Member FINRA/SIPC
Tracking # 1-619045