Market Update

• Stocks’ slide continues, German bonds turn negative.U.S. markets are trading lower this morning after finishing Monday’s session at the day’s lows, led by weakness in the materials, technology, and industrials sectors. Today’s move is in-line with foreign markets, which are also sliding as traders flock to safe havens such as 10-year German bunds, which moved into negative territory for the first time on record, as angst continues ahead of next week’s Brexit vote. Stocks across Europe are once again awash in red, on pace to post a fifth consecutive day of losses, while Japan’s Nikkei Index led declines in Asia overnight, falling a further 1.0% to a nine-week low. Meanwhile, the yield on 10-year Treasuries is 1.6% this morning and WTI crude oil is under pressure, while COMEX gold is flat.

Macro View

• 10-year breaks below 1.7% resistance level. Treasury yields fell across the yield curve last week, with the 10-year falling below 1.7%, a level of resistance that has proven meaningful over recent years. The decline in longer maturity Treasuries was greater than shorter maturity, resulting in more flattening of the yield curve. The steepness of the curve, based on the differential between the 2- and 10-year Treasuries, fell to just over .90%, its lowest level since late 2007.

• Treasury yields pushed lower by strong auction demand. The trend of strong bidding from end investors at Treasury auctions continued last week. The 10-year Treasury auction on Wednesday witnessed the strongest indirect (foreign) bidder demand ever. Combined with domestic demand, investors took down a record allocation of the 10-year auction. Foreign demand for the 30-year auction on Thursday was very strong as well. The value of Treasuries relative to other developed government bond markets remains elevated. The 10-year German bund was yielding just 0.02% as of yesterday.

• Bond market flashing some warning signs, but messages are mixed. The decline in longer-dated Treasury yields generally indicates slower growth, as does a flatter yield curve. However, the market may simply be on the receiving end of strong overseas demand. Other factors, like the resiliency of corporate bond markets, cloud the message. Absent activity for the two trading days ending June 13, 2016, high-yield, investment-grade corporate, and emerging markets debt prices have been relatively stable. Rate hike expectations also did not change dramatically last week. Read more about bond market messages in this week’s Bond Market Perspectives,due out later today.

• High-yield spreads continue to decline with oil strength. High-yield’s performance remains tightly linked to oil, as an increase in the price of oil led to a tightening of high-yield’s spread to comparable Treasuries last week to 5.9%. The tightening was led by the high-yield energy sector, the spread of which fell over .50% last week, briefly falling below 8% for the first time since July 2015. As noted before, high-yield’s tight link to the price of oil has been a tailwind since mid-February, but the importance of that single driver remains a risk for the asset class.

• Municipals brush off tough seasonal pattern so far.Municipal bonds have thus far avoided the typical June headwind, as the impacts of elevated supply have been minimal due to strong investor demand for high-quality bonds. Municipals returned 0.5% last week, outperforming Treasuries, which returned 0.4%.¹ Municipal yields declined across the yield curve, similar to Treasuries, with the average 10-year AAA yield falling to within 0.02% of its all-time low level reached in December 2012.
  ^[1] As measured by the Barclays Municipal Bond Index and the Barclays U.S. Aggregate Government- Treasury Index.

• Solid May retail sales confirm solid Q2 consumer spending and solid Q2 GDP. Core retail sales (excluding auto dealers, gas stations, and building materials) rose 0.4% between April and May, exceeding expectations of a 0.3% gain. The April reading was revised up to show a 1.0% increase; it was initially reported as a 0.9% gain. Retail sales in the first two months of Q2 2016 (April and May) are running 6% ahead of their Q1 average, which puts a floor under Q2 personal consumption, and in turn, Q2 gross domestic product (GDP). Q2 GDP is now tracking to between 3% and 3.5%.

• Brexit vote approaches. European financial markets–stock, bond, and currency–are now all Brexit all the time. Overnight, the yield on the German 10-year bond fell below zero; while many factors are weighing on bond yields, the Brexit vote is presumably a major factor in recent trading. The British pound also is declining further against both the U.S. dollar and the euro. The U.K. released multiple inflation indicators early this morning, all suggesting that inflation remains very modest, with core inflation up 1.2% for the year, slightly below expectations.

• Down four straight? The S&P 500 fell again yesterday, losing 0.8%. It is currently sitting on its upward sloping 50-day moving average. This was the third straight loss, on the heels of down 0.2% and 0.9% the two prior days. The last time the S&P 500 was red in four straight days was a five-day losing streak into the February lows. In fact, the S&P 500 has had only two of these four-day losing streaks during all of 2016, versus 14 of them in 2015. Incredibly, 2014 is the only year without a single four-day losing streak.

• Is the VIX giving a warning sign? The CBOE Volatility Index (VIX) has soared in the past three days, indicating increased hedging activity among market participants over potential concern about upcoming higher volatility. In fact, over the past three days, the VIX has soared by more than 48%. What is very interesting about this surge in the VIX is that the S&P 500 hasn’t pulled back by much, down 1.9% over the past three days. Going back in history, this is the smallest S&P 500 pullback when the VIX jumped at least 40% in three days. Today on the blog we will take a closer look at this development and what it could mean.

Monitoring the Week Ahead

Tuesday

• Retail Sales (May)
• UK: CPI (May)

Wednesday

• Empire State Mfg. (Jun)
• FOMC Statement
• FOMC Economic and Dot Plot Forecasts
• Yellen Press Conference
• UK: Jobless Claims and Unemployment Rate (Apr)
• Russia: GDP (Q1)

Thursday

• Philadelphia Fed Index (Jun)
• CPI (May)
• NAHB Housing Market Index (Jun)
• UK: Retail Sales (May)
• Japan: Bank of Japan Meeting (No Change Expected)
• UK: Bank of England Meeting (No Change Expected)

Friday

• Housing Starts (May)
• Mario Draghi Speech in Munich
• China: Property Price Indexes (May)

Saturday

Click Here for our detailed Weekly Economic Calendar

 

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) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

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.

Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

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