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Daily Market Commentary

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.

Tuesday, November 20, 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 Treasury Curves Graph

Other Market Indicators

Market Indicators  
2s/5s Tsy Spread0.07-0.01
2s/10s Tsy Spread0.25-0.02
2s/30s Tsy Spread 0.52-0.02
DJIA-30 25017.44-395.78
NASDAQ 7028.48-219.40
S&P-500 2690.73-45.54
Dollar Idx 96.36+0.17
CRB Idx 187.67-1.08

Today's Market Commentary

Recap – So much for the midterm election rally. For the first time this cycle, 2018 has taught us that buying the dips no longer works. Selling strength has emerged as the new normal. It should also be noted that typically stocks rally into the U.S. Thanksgiving holiday. This year they are tanking, and it’s still the names that have driven the market through the year that are under the most pressure: FAANG (Facebook, Apple, Amazon, Netflix and Google). The Nasdaq and NYFANG indexes slumped -3.03% and -4.28% yesterday, registering their fourth and third worst days of the year, respectively. Facebook and Apple fell -5.72% and -3.96%, respectively, as the sector remains pressured amid a slew of negative PR and the specter of stricter government regulation. Over the weekend, Apple CEO Tim Cook said in an interview that “the free market is not working” and that new regulation is “inevitable.” This negatively impacted highly-valued social media companies. Twitter and Snapchat traded -5.02% and -6.78%, respectively. The tech sector was further pressured after the Wall Street Journal reported that Apple had cut production orders for the new iPhones, chipmakers broadly traded lower and Philadelphia Semiconductor Sector Index shed -3.86%. The S&P 500 and Dow also slumped -1.66% and -1.56%, respectively. The sell-off was underpinned by the FAANG names selling off, an accounting scandal emerging at Nissan, oil swinging around and the U.S. housing market being spooked by weak data. Bond markets were relatively quiet, with Treasuries ending -0.4 basis points. Elsewhere, West Texas Intermediate oil tested breaking through $55 per barrel yesterday, after Russia stopped short of committing to supply cuts, before recovering to close +0.52% at $56.76.

Also, as for corporate credit, I see in today’s Bloomberg readings that high yield and investment grade notes are headed for losses this year for the first time since 2008. The bond market and the stock market are now very much in sync with repricing the outlook for growth and central bank policy. The investment grade market being at -3.7% for the year says a lot about the investment landscape. What the central banks can really do (in the context of a moderately higher inflation backdrop and, in the U.S. context, the tightest labor market since 1969) remains to be seen. U.S. high yield spreads widened six basis points to +424 basis points. As highlighted in this week’s Weekly Relative Value, the recent weakness in the high yield sector has become a talking point for broader markets (See: “Keep Your Eyes on Credit”). Continued weakness in this sector will negatively impact equities and benefit the higher quality fixed income sectors such as Treasuries and Agency debt.

Back to yesterday, weak U.S. homebuilder sentiment survey data played its part in the moves for markets. The November National Association of Home Builders (NAHB) Housing Market Index tumbled to 60 from 68 in October after expectations had been for just a one-point drop. That’s the lowest reading since August 2016 and the biggest one-month drop since February 2014. The details weren’t much better and fall into line with our long-term belief that housing has peaked. Today we’ve got more housing data, so it’s worth keeping an eye on, even if the October data for housing starts could be distorted by Hurricane Michael.

Stocks across the globe slid overnight, extending the latest wave of selling amid pressure on the technology sector. The Nikkei and Hang Sang closed -1.09% and -2.02%, respectively. Europe is solidly in the red as I type. U.S. futures are pointing to an ugly open once trade commences in New York. In fixed income, Treasuries are being bid modestly higher with the key 10-year Treasury yield back at 3.04%. Amazingly, since November 8, the yield has plunged 20 basis points from 3.24%. Meanwhile, the yield curve has reverted to its flattening bias with 2s/10s narrowing to 25 basis points. Of note, the 2s/5s spread has narrowed to seven basis points which is the narrowest the spread has been since 2007.

As far as the day ahead is concerned, there should be some interest in the just released October housing starts (+1.5% month-over-month) and building permits data (-0.6% month-over-month), especially following Fed Chair Jerome Powell’s recent comments acknowledging a slowdown in the housing market and yesterday’s homebuilder data.

Economic Calendar

November  19- 23, 2018: The Week Ahead

Economic Calendar Graph


Future Fed Expectations

Sources: Bloomberg

Fed Funds Graph

Expeced Fed Funds Path Graph


Select Probabilities based on the Futures 
Probability of Fed Funds rate increase on December 19, 2018 71%
Probability of Fed Funds rate increase on January 30, 201872%

**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.