Market Update

Yesterday’s Market Activity

  • U.S. stocks up sharply after anticipated re-ignition of U.S.- North Korea tensions failed to materialize over the weekend and impact of Hurricane Irma was less than feared. Dow +1.2%, S&P 500 Index +1.1%, Nasdaq+1.1%.
  • Above-average volume on the NYSE with advancers handily outpacing decliners 3.7:1.
  • All sectors gained with financials again leading as the 10-year Treasury yield jumped 8 basis points (0.08%) to 2.13%; telecom stocks lagged.
  • Treasuries’ selloff continued as prices fell across the curve, pushing yields higher.
  • Commodities – WTI Crude Oil (+1.2%) bounced back amid choppy trading; COMEX gold -1.1% near $1331/oz. on dollar strength and general risk-on sentiment; industrial metals mixed.

Overnight & This Morning

  • Asian markets higher overnight Nikkei +1.2%, Hang Seng (+1.0%), Shanghai Composite +0.1%.
  • Generally positive tone in European equitiesSTOXX Europe 600 Index +0.7%. U.K.’s FTSE 100 the exception, -0.2% after inflation data came in slightly higher than expected (details below).
  • Treasuries lower for second day, 10-year yield +3 basis points (+0.03%) to 2.15%.
  • Commodities – metals down sharply, copper -1.5%, gold -0.4%. WTI crude +0.3% to $48.21/bbl.
  • U.S. stocks at new record highs following Monday’s gains. S&P 500 +0.3% to 2494.

Macro View

Key Insights

  • It is always difficult to separate the human tragedy from major events such as Hurricane Irma. What was once a worst case scenario of an estimated ~$200 billion in damages has now dropped to ~$50 billion. Consequently, the reinsurers that lost almost 2% in market cap last week gained almost all of that back yesterday. Thus far, it appears that economic growth this quarter, Q3, could see a hit of -0.5% to -1.0% to gross domestic product, bringing output growth down to ~2.0%. The rebuilding process, though, will last for some time, boosting output by a similar magnitude in ensuing quarters. Material, energy, and home improvement retailers are among those poised to potentially benefit.

Macro Notes

  • U.S. Treasury bond prices were higher last week. The U.S Treasury 10-year bond rallied back from a 2.16% yield on Monday, to a year-to-date low of 2.05% on Thursday. The 30-year bond finished the week at a 2.75% yield, lower by 0.02% from the beginning of the week’s 2.77%. The 2-year Treasury yield rose 0.03% on the week.
  • Inflation expectations rose slightly. Last week saw higher inflation expectations as measured by the 10-year breakeven inflation rate rising from a 1.79% to a 1.81%, according to Federal Reserve Economic Data. This is lower than the year-to-date average of 1.89%, but higher than the June 20, 2017 low of 1.67%.
  • The yield curve was steeper on the week. The 2’s to 10’s slope, a measure of the steepness of the yield curve, was wider by 0.01% to 82 basis points (0.82%). The 2’s to 30’s yield slope was wider on the week higher by 0.01% to 143 basis points (1.43%).
  • High-yield spreads near fair value. The yield spread that investors demand for high-yield bonds over similar maturity Treasuries reflects investor expectations for defaults, the amount of money investors expect to recover in the case of default (known as the recovery rate), and a liquidity premium given that high-yield bonds may be less liquid than higher-quality counterparts. High-yield spreads have been on the expensive side of fair value most of this year, but as spreads have widened and default expectations have fallen, spreads are now closer to fair value. We explore this concept more in this week’s Bond Market Perspectives, due out later today.
  • International bond prices were slightly higher in Germany. The German bund 10-year yields were lower on the week from 0.38% to 0.31%. This brings the spread between the U.S. 10-year Treasury and the comparable German bund to 179 basis points of spread (0.37% vs. 2.16%).
  • Bullish tone continued in Asia overnight. While there was little economic data released, all markets gained overnight after the UN Security Council stopped short of a North Korean oil embargo. Also helping sentiment were steps the Chinese government took to weaken the Chinese yuan after its recent unprecedented rally. The yuan had gained over 6% since mid-May, apparently too much for the Chinese authorities, who changed regulatory rules overnight to make it easier for traders to bet on a weakening yuan. The yuan has lost about 0.9% over the past three days as these rules have been put in place, and traders have decided not to test the Chinese government’s resolve on this issue.
  • The U.K. released inflation data, which generally came in slightly higher than expected. Core CPI was 2.7% compared to expectations of 2.5%, while producer input prices gained 7.6% against expectations of a 7.3% gain. Inflation has been a major concern for the U.K. as the pound has declined 11% against the dollar and 15% against the euro since the Brexit vote. The currency weakness creates the possibility of more severe inflationary pressures than we have seen thus far, and also puts some pressure on the U.K. to raise interest rates, though rate increases are not expected until at least the spring of 2018.
  • Big day to new highs. The S&P 500 gained 1.1% for its third largest gain this year and only the fourth time in 2017 it gained more than 1%. Only a period in the 1960s saw full calendar years (1963, 1964, and 1965) with fewer than four days with at least a 1% gain. The last time the S&P 500 gained at least 1% and closed at a new high was on March 1, 2017. New highs in September are rather rare, as since 1928[1], only 4.1% of days during the month of September have closed at a new high, second only to August at 3.6%. The most is November at 8.0%. Last, the S&P 500 has closed above its 200-day moving average for 304 days in a row (only the 15th time it ever made it more than 300 days) and marks the longest streak since 477 consecutive days that ended in October 2014.
    [1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.
  • Five consecutive monthly gains has bulls smiling. The S&P 500 has (rather quietly) gained for five consecutive months. Of course, it is up only 4.6% during this win streak, which is the weakest return ever for a five-month win streak. Nonetheless, history has been very kind to future returns after five-month win streaks. Today on the LPL Research blog we will take a closer look at this potentially bullish phenomena.

Monitoring the Week Ahead

Click Here for our detailed Weekly Economic Calendar

Tuesday

Wednesday

  • MBA Mortgage Applications (Sept 8)
  • PPI (Aug)
  • Monthly Budget Statement (Aug)
  • Germany: CPI (Aug)
  • UK: Jobless Claims (Aug)
  • UK: Unemployment Rate (July)
  • Eurozone: Industrial Production (July)
  • Eurozone: Employment (Q2)
  • Sweden: GDP (Q2)
  • Japan: Bloomberg Japan Economic Survey (Sept)
  • China: Retail Sales (Aug)
  • China: Industrial Production (Aug)

Thursday

  • France: CPI (Aug)
  • UK: Retail Sales (Aug)
  • Bank of England: Bank Rate
  • Bank of England: Asset Purchase Target (Sept)
  • Eurozone: Weidmann
  • BOJ: Outright Bond Purchase
  • Japan: Industrial Production and Capacity Utilization (July)
  • China: Foreign Direct Investment (Aug)

Friday

  • Empire State Manufacturing Index (Sept)
  • Retail Sales (Aug)
  • Industrial Production and Capacity Utilization (Aug)
  • of Mich. Sentiment (Sept)
  • Business Inventories (July)
  • Eurozone: Trade Balance (July)
  • Eurozone: Labor Costs (Q2)
  • ECB: Nuoy
  • Bank of Russia: Key Rate

Saturday

  • China: New Loan Growth and Money Supply (Aug)

 

Important Disclosures

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 #1-643270