Market Update

• Equities head higher, oil continues lower. Stocks are advancing this morning after yesterday’s muted session in which only two sectors registered moves greater than 0.1%. The energy sector was the largest decliner, dropping nearly 1% on a 3.4% plunge in crude, while utilities led to the upside with a modest 0.3% gain. This morning, U.S. markets are taking their cue from Europe, which is higher across the board on mixed EurozonePurchasing Managers’ Index (PMI) reports and hopes of further monetary stimulus. In Asia, the Nikkei Index lost 0.6% as Japanese PMI data showed a slight contraction in manufacturing; the Shanghai Composite gained 0.2%. Meanwhile, WTI crude oil is back down below $47/barrel, COMEX gold is flat at $1345/oz., and the yield on the 10-year Treasury has ticked down to 1.53%.

Macro View

• Will foreign demand remain a tailwind for Treasuries?Demand from indirect bidders (which include foreign purchasers) has been strong in recent Treasury auctions. Markets will be watching the results of this week’s 2-, 5-, and 7- year auctions to determine if strong foreign demand is starting to fade. Currency hedging costs have increased for overseas investors leading to concerns that the narrow range in Treasury yields over recent weeks is a result of fading foreign demand. Low and negative interest rate policies and ongoing bond purchases from major global central banks motivate global investors to consider Treasuries, which offer higher relative, and inflation-adjusted yields, among global developed bond markets. We discuss international investor demand in more detail in this week’s Bond Market Perspectives, due out later today.

• Hawkish comments overcome dovish minutes. The Federal Reserve Bank’s (Fed) latest Federal Open Market Committee (FOMC) minutes were released last Wednesday, but their dovish tilt was overshadowed by more hawkish comments from Fed Vice Chair Fischer, as well as several Fed presidents, including the normally dovish Dudley (New York), and more centrist Lockhart (Atlanta) and Williams (San Francisco). Rate hike expectations moved higher for the week, with odds of a December hike increasing from 40% to 55%. However, with a long-term expected fed funds rate of just under 1.5%, the path of rate hikes envisioned by markets is still very benign relative to the Fed’s median forecast. Fed Chair Yellen is scheduled to speak on Friday at the annual Jackson Hole symposium, and her speech may offer additional insight into the Fed’s latest thinking on rate hikes.

• TED spread moves higher, but not on bank fears. TheTED spread, which is calculated by subtracting the three-month T-bill yield from three-month Libor, gained notoriety in the lead-up to the Great Recession as an indicator of stress in interbank lending markets. The TED spread has been increasing in recent weeks, though this time it has less to do with interbank lending fears and more to do with money market reform, as investors sell prime money market funds that are poised to move to a floating net asset value (NAV) in October 2016, and reposition into government money market accounts that will retain fixed NAVs. This movement is decreasing demand for commercial paper and CDs, leading to higher rates for short-term instruments that influence Libor rates.

• Spreads remain narrow across fixed income. We continue to believe bonds offer a diversification benefit but it is more difficult to find value in individual sectors given broadly elevated valuations. Spreads for many sectors of the fixed income market, including high-yield, emerging markets debt, investment-grade corporate, and high-yieldmunicipal bonds (based on the Barclays U.S. High Yield, JP Morgan EMBI Plus, Barclays US Corporate, Barclays AAA Municipal, and Barclays BBB Municipal Indexes) are all at or near their lows for the year. We continue to believe a mix of high-quality intermediate-term bonds, such as investment-grade corporates and mortgage-backed securities, combined with a small allocation to less interest rate sensitive sectors, such as high-yield bonds, may make sense for suitable investors.

• European stocks higher despite mixed European manufacturing data and another dip in oil. August Eurozone manufacturing PMI came in at 51.8, slightly below consensus (52.0) and the July reading (also 52.0), due to some weakness in France. But the services equivalent registered at 53.1, better than expected (52.8) and the prior month (52.9), despite a shortfall in the German services reading. These readings, which are consistent with the sluggish pace of growth in recent quarters, do help put concerns about a near-term economic disruption from Brexit to rest; but at the same time, they leave the door open for the European Central Bank (ECB) to potentially do more later this year. After yesterday’s 3% drop to break a seven-day winning streak, oil is down nearly 1% this morning to near $47.

• Low volatility stat of the day. It’s becoming repetitive but we continue to be struck by the low volatility in this stock market. The S&P 500 has not traded in a range of more than 0.75% for 14 straight days. Along with a similar streak that ended earlier this month, these are the two longest such streaks since 1980.

Monitoring the Week Ahead

Tuesday

• Markit Mfg. PMI (Aug)
• Eurozone: Markit Mfg. PMI (Aug)
• Japan: Bank of Japan’s Kuroda speaks in Tokyo

Thursday

• Durable Goods Orders and Shipments (Jul)
• Germany: Ifo (Aug)
• Japan: CPI (Jul)

Friday

• Goods Trade Balance (Jul)
• GDP (Q2 – Revised)
• Fed Chair Yellen speaks at Jackson Hole Policy Symposium

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) 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.

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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