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Great Expectations for Week End With A Whimper as Market Impact Muted

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June 9, 2017

(Friday Market Open) The week began with great expectations, but Thursday’s major events ended up hardly registering in the markets. U.S. stock futures pointed toward a slightly higher open after yesterday’s new record highs, while European and Asian markets mostly climbed.

Former FBI Director James Comey’s testimony captured attention for a good chunk of the day Thursday, but nothing came out of it that seemed really meaningful from a financial perspective. As many media reports noted, there was no “smoking gun,” with most of the information at the hearing simply repeating headlines Americans had already seen over the last two months. The Dow Jones Industrial Average ($DJI) and Nasdaq (COMP) both recorded fresh all-time highs Thursday, though none of the indices really took off.

The British election turned into something of a thriller and ended with the parliament becoming split, which might add some volatility in the longer term. The election results certainly hit the British pound, which fell to nearly a two-month low before bouncing back a bit. Friday began with Prime Minister Theresa May saying she would form a government. Political drama there could be interesting to watch, but so far it hasn’t had much impact on U.S. markets.

Additionally, the European Central Bank’s (ECB) decision to leave rates unchanged wasn’t really surprising, so that didn’t move the market much either way. However, the euro did slip a little vs. the dollar. In fact, the dollar is showing strength against other currencies as well as the euro and pound, though it remains well below its highs of earlier this year. ECB President Mario Draghi said Thursday that EU inflation remains subdued and the economy still needs monetary accommodation, though he acknowledged a pickup in economic activity. So the takeaway is pretty much more of the same.

As U.S. stocks touched new record highs Thursday, financials led the charge. The sector, which rose more than 1%, is up 2.5% year-to-date. That’s still behind the overall S&P 500’s (SPX) nearly 9% year-to-date climb.

The financial sector’s gains came as 10-year bond yields bounced from nine-month lows near 2.14% recorded earlier in the week, and as odds of a Fed rate hike this month climbed above 98%, according to Fed funds futures. Also, the House of Representatives passed a bill that would effectively gut the Dodd-Frank banking regulations, something the industry has long clamored for. There’s skepticism, however, about whether the legislation can gain traction in the Senate.

Additional sectors posting solid gains Thursday included industrials and info tech, but most other sectors finished with losses. Crude oil lost ground, as well, falling to new one-month lows. Oil prices made fractional gains early Friday but remained below $46 a barrel.

Defensive investments, including Treasuries and gold, both fell after the Comey testimony and into Friday, and VIX slid back below 10. Volatility remains subdued despite the week’s roster of big events, and now we’ll see where it goes heading into the Fed meeting next Tuesday and Wednesday. With a rate hike pretty much baked in and the Comey testimony over and done, there’s nothing pointing toward a major change in the volatility picture.

Financial Sector

FIGURE 2: FINANCIAL RECOVERY.

The financial sector, plotted through Thursday on the thinkorswim® platform from TD Ameritrade, is starting to shake off the lethargy it recently showed, and that could be a good sign for the broader market. However, the S&P 500 Index (SPX, represented by the purple line) has still outpaced financials over the last month. Data Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Turning Up the Volume: Was anyone on Wall Street was watching the Comey testimony Thursday morning? Volume on the NYSE doesn’t seem to show it. Starting at 10 a.m. ET Thursday, when Comey began his testimony, and going through noon, NYSE total volume reached 197 million shares traded. That was actually up a bit from Wednesday, when about 190 million shares traded during the 10 a.m. to noon timeframe. For the full day Thursday, volume reached 3.7 billion, up from 3.55 billion the previous day.

Valuation Evaluation: With the markets remaining near record highs, it might be a good idea to keep valuations in mind. The price-to-earnings (P/E) ratio on operating earnings per share for S&P 500 stocks recently stood at 20, about 15% above the near-30-year median P/E, according to research firm CFRA. Though valuations aren’t necessarily the biggest driver, it’s important to monitor them, but generally the market’s path of least resistance appears to remain upward. 

It’s Not Just U.S. Bonds: There’s been a lot of talk lately about how U.S. Treasury bonds have rallied even as the stock market rose to record levels and a Fed rate hike seemed to loom. The rise in bonds, accompanied by a drop in 10-year U.S. bond yields to lows not seen since late last year, could reflect lower inflation seen in some recent data. It’s also possibly a reflection of climbing bond prices overseas. Check the German 10-year Bund, a benchmark for the bond market in Europe. It’s fallen from a high yield of nearly 0.5% early in March to just over 0.25% on Thursday after the European Central Bank once again held interest rates steady at current low levels. Investors who can’t get much of a yield on their European bonds might be driving up bond prices in the U.S., causing yields to fall, though a 2.2% yield in the U.S. certainly seems to deliver more bang for the buck than 0.25% in Germany. This pattern might play out more and more as the Fed tightens policy and the ECB stays more accommodative.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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