Daily Market Commentary

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Weekly Relative Value

Published at the top of each week by Balance Sheet Solutions, Weekly Relative Value tracks market and economic trends, analyzes key releases and watches ongoing political developments.  

Commentary prepared by Balance Sheet Solutions, LLC, a wholly owned CUSO of Alloya Corporate Federal Credit Union. Balance Sheet Solutions is a leading broker/dealer, investment advisor and ALM risk management consultant to credit unions.

Thursday, August 16, 2018 at 8:00 a.m. CST
Commentary prepared by Tom Slefinger, SVP, Director of Institutional Fixed Income Sales, Registered Representative of ISI*, Balance Sheet Solutions

Market Indications

Historic Curves

Other Market Indicators

2s/5s Tsy Spread 0.12 0.00
2s/10s Tsy Spread 0.25 -0.01
2s/30s Tsy Spread 0.41 -0.01

DJIA-30   25162.41 -137.51
NASDAQ 7774.12 -96.78
S&P-500 2818.37 -21.59

Dollar Idx 96.61 -0.08
CRB Idx 187.93 +1.00

Today's Market Commentary

Recap – While Turkey has seen a good 36 hours, the rest of global markets seem to be suffering from a delayed contagion reaction yesterday. Yesterday, risk sentiment was further depressed by poor earnings from Chinese internet giant Tencent. Revenue and profit both fell short of expectations. Exuberance around the tech sector accordingly cooled somewhat, as investor concerns about valuations and growth deceleration resurfaced. The Nasdaq lagged behind other major indices in the U.S., falling -1.23%. The NYSE FANG Index of the biggest tech companies shed -1.62%.

The S&P 500 closed -0.76% lower. In the retail sector, Macy’s stock traded -16.0% lower, impacted by investors’ concerns on higher-than-expected cost growth and discounting of goods. Elsewhere, Sears (-13.1%) and JCPenney (-8.7%) also dropped in sympathy. This morning, JCPenney shares are down over 20% in the pre-market, trading below $2 for the first time in its almost 40-year history after posting a wider-than-expected quarterly loss and disappointing sales. On the positive side, Walmart stock is soaring 8% in the pre-market, pushing Dow futures even higher (Walmart has a 2.4% weighting in the Dow Jones Industrial Average) after reporting earnings that smashed expectations and boosted guidance.

Developments in foreign exchange markets also weighed on equity markets yesterday. The Chinese yuan broke above the closely watched 6.90 level yesterday, and the weakening continued throughout the U.S. trading session to touch an intraday level of over 6.95. This is the yuan’s weakest level versus the dollar since last January. So far, the weaker yuan has not reflected capital outflow pressures like it did in 2015-2016, but it could signal underlying weakness in the Chinese economy.

The U.S. dollar, despite trading flat yesterday, remains within a few basis points of its highest level in over a year. In fixed income, Treasuries rallied as the 10-year Treasury yield closed at 2.86% and near the bottom of its recent range. The two-year/10-year curve flattened back to 25 basis points, one basis points off from its recent low reached in mid-July. Commodities also dropped yesterday, with LME copper futures falling 4.02% to their lowest level in over a year, while zinc and lead also tumbled -6.28% and -7.09%, respectively.

In terms of Thursday trading, global stocks were set for another downbeat session when China’s Ministry of Commerce broke news broke that – at the invitation of the U.S. – China would send its Vice Commerce Minister to the U.S. for low-level trade talks in late August. This would be the first official exchanges since earlier negotiations broke down two months ago. The news, which the market immediately interpreted as an opportunity for an end to the trade war between the U.S. and China, sparked a furious risk-on rally, which sent U.S. futures and other risk assets surging. Meanwhile, however, the dollar and Treasuries slumped. This begs the question why the U.S. would invite China, especially if Trump is winning, if only for the time being.

In early trade, Treasuries are modestly lower with the key 10-year Treasury benchmark yielding 2.86%. The long bond is priced at 3.03%. Further in on the curve, twos and fivers are trading at 2.61% and 2.74%, respectively. In pre-market, U.S. equity futures are pointing to a higher open while the dollar is a smidge lower. Speaking of bond markets, many pundits are wondering why the 10-year Treasury note yield can’t seem to break above 3%, but then again, it can’t seem to break below 2.8% either.

Looking ahead to today, the August Philadelphia Fed Purchasing Managers’ Index along with July building permits and housing starts data will be released.


Economic Calendar

August 13 - 17, 2018: The Week Ahead

Economic Calendar


Future Fed Expectations
Sources: Bloomberg

Future Fed Expectations

Expected Fed Funds Path

Select Probabilities based on the Futures

Probability of Fed Funds rate increase on September 26, 2018 90%
Probability of Fed Funds rate increase on November 8, 2018 90%

**All quoted rates are indications and are subject to change without notice.
* ISI is a member of the FINRA/SIPC.

The information contained herein is prepared by ISI Registered Representatives for general circulation and is distributed for general information only. This information does not consider the specific investment objectives, financial situations or particular needs of any specific individual or organization that may receive this report. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. All opinions, prices, and yields contained herein are subject to change without notice. Investors should understand that statements regarding future prospects might not be realized. Please contact Balance Sheet Solutions to discuss your specific situation and objectives.