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After Lackluster Post-Game Monday, GM Earnings, Europe Set Positive Tone

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February 7, 2017

(Tuesday Market Open) Did overtime in the big game make investors sleepy on Monday?

It might seem that way, considering the rather lackluster trade we saw, with low volumes. All of Wall Street looked tired and disoriented. Maybe Tuesday’s overseas trade could give the U.S. markets a jolt. Asian stocks were mixed, but European markets are solidly higher, and U.S. stocks look primed for a positive open. Any sort of rally could put the market on pace for another test of all-time highs.

It’s another big day for earnings, and General Motors (GM) started the engines by easily beating Wall Street analysts’ top- and bottom-line estimates. The automaker earned an adjusted $1.28 per share in the fourth quarter on revenue of $43.91 billion. Wall Street estimates had called for $1.17 per share on revenue of $41.53 billion. Though Q4 earnings were down from a year earlier, the company said it sold a record number of cars last year. However, after an initial move higher in pre-market trade, GM shares fell slightly.

Another traditional U.S. behemoth, Walt Disney (DIS), is scheduled to report after the closing bell, and we’ll see if the company is “wishing on a star.” Investors could focus on ESPN’s numbers, which have been falling as consumers continue to cut the cords of their cable providers in search of cheaper alternatives. Theme parks and CEO succession plans also loom large.

On the economic front, after the International Trade Report at 8:30 a.m. ET, we head to the JOLTS report, which again is a number the Fed is said to look at closely in terms of employment health.

The crude oil market has been mostly quiet so far this year, and is also a bit softer this morning. The energy sector fell more than 1% Monday as crude oil prices sank 1.5%, hurt in part by the addition of 17 more U.S. oil rigs reported last week by Baker Hughes. That’s up 158 from a year ago, and paints a picture of continued growth in U.S. oil production. U.S. output is approaching 9  million barrels a day, a level it last reached almost a year ago.

As oil sank, gold had its best day in a while on Monday, rising to 11-week highs well over the benchmark $1,200 level before sinking a little early Tuesday. While some analysts said political concerns put a charge into the metal, others noted that the U.S. dollar has been under pressure for a while and that could be giving gold a boost.

However, the dollar is stronger today based in part on comments made out of the Philly Fed yesterday about a rate hike still being on the table in March, although currently Fed Funds are not bearing that out. The futures market puts odds of a March hike at just 9%. And 10-year Treasury bond yields have fallen back to around 2.41% after reaching nearly 2.5% last week.

VIX, arguably the most popular measure of fear in the market, was down early Tuesday and remains near recent lows. Some market participants have expressed surprise that VIX has stayed so muted lately, especially considering the political turbulence over the last few weeks, according to Barron’s. And volatility on 10-year U.S. Treasury Note futures prices also remains pretty calm, according to CBOE futures.

S&P 500

FIGURE 1: SMOOTH WATERS?

The S&P 500 Index (SPX), plotted here through Monday on the TD Ameritrade thinkorswim® platform, has entered a more choppy pattern over the last week, but VIX (purple line) seems to indicate relatively smooth waters ahead. Some say this could be due to continued optimism around the new administration’s economic plans and their potential effect on stocks.Source: TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Grading the Curve: It’s been a while since we mentioned the yield curve, but the gap between 5-year and 30-year Treasury bond yields weighed in at around 120 points on Monday, the highest level since mid-December. Remember, a steepening curve points to greater expectations for economic growth and can often be a positive sign for certain sectors, particularly the financial sector. It also can indicate the possibility of higher inflation down the road, which would typically lead to rising interest rates. Why is the curve strengthening now? Perhaps because some investors see the possibility of longer-term inflation if economic growth continues, which would conceivably have more impact on long-term rates. It could also mean some investors might be scaling back their recent hawkish feelings about Fed policy in the near term.

Get Some Credit: Though it sometimes gets overlooked, this afternoon’s consumer credit report deserves closer attention. The December data are expected to show consumer credit rising by $19.4 billion after an increase of $24.5 billion in November, according to a consensus of analysts by Briefing.com. The November figure had marked a strong seasonally-adjusted annual 8% pace of increase, driven primarily by a rise in revolving credit, which includes credit cards. But non-revolving credit, which includes car and consumer loans, also gained ground. Expansion of credit sometimes points to the possibility of increased economic activity. Lower consumer credit growth expectations for December could reflect sentiment that rising interest rates may have sapped some consumer demand.

What’s the Dividend Yield Telling Us? At this point, the S&P 500’s indicated yield stands at 1.8%, down from a recent high of 2.4%. In the past, falling dividend yields sometimes posed a warning of an overheated stock market. But dividend yields are less of a signal now than they were in previous decades, research firm CFRA said in a report Monday, in part because many companies now plow earnings back into themselves rather than paying investors. And with Treasury bond yields still relatively low, there’s less competition for payout from companies, so some investors may be reluctant to shift to fixed income. While past isn’t prologue, history shows that equities tended to rise over the following year when the S&P 500’s (SPX) dividend yield was below the yield on 10-year Treasury notes, but by less than one percentage point, CFRA said. The 10-year Treasury yield at the moment is around 2.45%.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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