Market Update: May 15, 2017

MarketUpdate_header

  • Overnight in Asia most indexes were up fractionally while Japan pulled back slightly. G-7 discussions focused on protectionist threats, which weighed on sentiment. North Korea also fired a new missile over the weekend, adding to tensions on the peninsula.
  • WTI crude oil prices are up ~3.0%, to $49.25/barrel, after energy ministers from Saudi Arabia and Russia agreed that extension to oil production cuts for an additional nine months, through March 2018, is needed.
  • European markets were mixed on either side of flat. Investors were positive on Christian Democrats state victory supporting Merkel’s hold on power, while oil move was also welcomed.
  • U.S. markets are moving higher, boosted by news on potential oil production cuts. Meanwhile, concerns over cyberattacks and Trump/Comey drama may dampen enthusiasm as trading progresses.

MacroView_header

Key Insights

  • The economy remains on track for Q2 gross domestic product (GDP) growth of 2.0% to 2.5% despite mixed inflation readings and retail sales below forecast.
  • The Consumer Price Index (CPI) rose +0.2% month over month and up from the drop of -0.3% in March, however both year over year CPI (+2.2%) and year over year core CPI (+1.9%) were below expectations, triggering the rally in safe havens last Friday.
  • Retail sales (+0.4%) were also below expectations, but up from the prior month. When considering the improvement in consumer sentiment, it is important to remember that this data point (retail sales) and the performance of retail stocks, should not be viewed as an indictment of the U.S. consumer. Rather than a changing consumer, it is a change in consumer buying habits, which is combining to alter not only retail sales figures, but also pricing measures. Consumers are spending: 1) more online, 2) on experiences over goods, and 3) comparison shopping using mobile technology. Consequently, it is very difficult for the department store model to continue charging premium, retail prices.
  • Considering the unemployment rate of 4.4%, wage growth of +2.5% year over year, riding confidence and delayed tax refunds, the near-term (Q2) and longer-term (2017) GDP trajectory appears favorable. Clarity on tax reform could take these numbers even higher.

Macro Notes

  • Excellent earnings season but bar will soon be raised. First quarter earnings season has been excellent by almost any measure. Results beat expectations by more than usual, the overall growth rate is very strong, and guidance has provided above-average support for analysts’ estimates for the balance of 2017. But at the risk of raining on the earnings parade, we would note that comparisons will get tougher as we anniversary the earnings recession trough of 2016, while the risk that the corporate tax reform timetable gets pushed into 2018 has increased. Market participants generally expect fiscal policy to begin to provide an earnings boost by year end, an expectation that has become increasingly tenuous.

 

5-15-17-earnings-dashboard

  • Chinese industrial production growth weaker than expected. Chinese industrial production growth came in at 6.5% vs. expectations of 7% and down from period month of 7.6%. On an absolute basis, the economy is still on track to meet its growth goals, though it looks like growth may have peaked for the year at the end of the first quarter. The government continues to crack down on excess leverage in the financial system; today’s numbers are unlikely to move them off that path.
  • Japan domestic demand, and prices, rise in April. We normally think of Japan as an export oriented economy, but domestic demand increased over 4% on a year-over-year basis, with the impact felt most strongly in demand for raw materials. Producer prices rose modestly last month against declining expectations and are running at 2.1% annually.
  • Bank of Japan. Just like the Federal Reserve (Fed) and the European Central Bank (ECB), the Bank of Japan (BOJ) is under some public pressure to outline how it intends to unwind both its zero-interest rate policy and the massive expansion of its balance sheet to 93% of the country’s GDP. Recent statements from BOJ Governor Kuroda suggests such policy announcements may be coming. The more good news that comes out of the Japanese economy, the more pressure the BOJ is under.
  • Win streak snapped, but lack of volatility remains. The S&P 500 snapped its 3-week win streak last week, with a modest 0.3% drop. One thing continued though and that was the incredibly small daily ranges and lack of overall volatility. On the week, the S&P 500 traded in less than a one-percent range (from high to low) for the second consecutive week ( only the third time since 1995). Additionally, the intraday range on Friday was 0.22% – the smallest daily range on a full day of trading in nearly three years.
  • Checking in on small caps. The lack of volatility isn’t just in the blue chips, as the Russell 2000 has traded in a range of only 6.8% over the past 20 weeks. That is the tightest 20-week range since at least 1990. After a big jump in the fourth-quarter, small caps have lagged large caps this year, as they continue to consolidate the late 2016 gains.

MonitoringWeek_header

Tuesday

  • Italy: GDP (Q1)
  • UK: CPI & PPI (Apr)
  • Eurozone: GDP (Q1)

Wednesday

  • Russia: GDP (Q1)
  • Japan: GDP (Q1)

Thursday

  • LEI (Apr)
  • ECB: Draghi

 

 

 

 

 

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.

More Evidence Russia’s Economy is Running on Empty

Russian car sales are getting absolutely obliterated at the moment.

Sales of light vehicles plunged by an astonishing 42.7% in the year to November, underlining the country’s economic turmoil.

That data comes from the Association of European Businesses.

Some major brands which sold more than 10,000 models in November 2014 saw their sales collapse even further — Toyota and Nissan’s each fell by 53%, while Chevrolet purchases crumbled, dropping by 71% in just 12 months.

In total, there were 131,572 sales in November this year, in comparison to 229,432 in the same month during 2015. For the first 11 months of the year, Russian consumers have bought 765,000 fewer light vehicles than they did in the first 11 months of 2014.

Other sectors of the economy aren’t doing quite so badly, but the stunning collapse of the ruble means that imported goods are now prohibitively expensive for Russians. Even cars actually produced in Russia will require parts and materials from elsewhere in the world, and they’ve shot up in price.

Here you can see the dollar surging in value against the ruble:

USDRUB
Provided by Business Insider
The AEB notes that in November last year, the ruble’s plunge had begun, and people were rushing to make purchases of foreign goods, making the decline in the last 12 months particularly sharp.
Russia’s GDP has slumped with global oil prices, and though it’s likely to come out of recession next year, the country’s currency has dropped in value by more than half against the dollar over the last two years.
President Vladimir Putin’s former finance minister even thinks the pressure on Russia means that it will exhaust its currency reserves soon.
Written by Mike Bird of Business Insider
(Source: MSN)

Oil Falls on Greece Vote, China Stock Market Turmoil

© REUTERS/Lucy Nicholson/Files A pump jack is seen at sunrise near Bakersfield
© REUTERS/Lucy Nicholson/Files A pump jack is seen at sunrise near Bakersfield
© REUTERS/Lucy Nicholson/Files

Oil prices fell sharply on Monday after Greece rejected debt bailout terms and as China rolled out emergency measures to prevent a full-blown stock market crash, adding to worries about poor demand growth at a time of global oversupply.

The result of Greece’s referendum has put in doubt its membership in the euro, pulling down the single currency (EUR=) against the dollar.

A strong dollar tends to pressure commodities as it makes fuel more expensive for holders of other currencies.

Commodities were also sucked into market turmoil that has seen Chinese shares (.CSI300) fall as much as 30 percent since June due in part to an economy that is growing at its slowest pace in a generation.

Chinese brokerages and fund managers have agreed to buy massive amounts of stocks to support markets, helped by China’s state-backed margin finance company, which in turn would be aided by a direct line of liquidity from the central bank.

“Uncertainty over Greece is bearish for oil. It adds an extra negative factor on top of the turmoil in Chinese financial markets, the recent rise in U.S. drilling rigs, and a potential increase in Iranian oil supply,” said Olivier Jakob, senior energy analyst at Petromatrix in Zug, Switzerland.

“The main implication is for euro/dollar and I think it will put additional pressure on the euro,” he added.

Benchmark Brent crude oil (LCOc1) fell $1.42 a barrel to a low of $58.90 before recovering a little to around $59.00 by 0925 GMT. U.S. light crude (CLc1) fell as low as $54.34, down $2.59 from its close on July 2. July 3 was a U.S. holiday.

The falls left both crude benchmarks at their lowest since mid-April.

With markets already nervous due to the turmoil in Europe and China, fundamentals were also bearish.

U.S. drilling increased for the first time after 29 weeks of declines, the strongest sign yet that higher crude prices are coaxing producers back to the well pad.

Production in Russia and the Organization of the Petroleum Exporting Countries is also at or near records.

“Demand is good, but supply is better,” said Bjarne Schieldrop, chief commodities analyst at SEB in Oslo.

Putting further pressure on oil markets is a possible nuclear deal between global powers and Iran, which could add more oil to oversupplied markets if sanctions are eased.

“Reports increasingly suggest a deal is likely before July 9,” Morgan Stanley analysts said in a report.

Written by Christopher Johnson of Reuters

(Source: MSN)