The Market Today

Equity Markets Make the Most of Easing Trade Tensions


by Craig Dismuke, Dudley Carter

TODAY NEWS

Home Prices and Consumer Confidence Continue Higher: After a quiet start to the week yesterday, today’s economic calendar brings the January S&P CoreLogic Home Price index at 8:00 a.m. CT.  The index is expected to show prices rise 0.6% MoM, bringing the YoY rate down from +6.30% to +6.15%.  Higher and higher prices continue to be an underlying challenge for the housing market at a time when household formation is finally picking up but mortgage rates have risen.  At 9:00 a.m. CT, the March Conference Board report on consumer confidence is expected to show a new high for the cycle.  Confidence already sits at its highest level since 2000.

 

TRADING ACTIVITY

Yesterday – Trade War? What Trade War?: Stocks went on a tear Monday as the Dow jumped 669 points, or 2.84%, enough to cover Friday’s losses more than one and a half times. The S&P 500 rebounded 70 points, or 2.72%, but the Nasdaq led with an impressive 228 point, or 3.26%, surge. On a combined basis, the gain for the three indexes was the largest single-day points gain since October 2008 and most potent percentage rally since August 2015. The tech sector’s outperformance, as evidenced by the Nasdaq’s lead, was also on display in the S&P with tech companies gaining more than 4% to lead all others. But the strength was broad-based, as 10 of 11 sectors moved up more than 1% and 485 of 505 tickers improved. Monday’s moves also extends the theme of a return of market volatility in 2018. While trade tensions did show signs of easing over the weekend, the bounce may have also had a bit of technical flavor. Last Friday’s drop had pushed the indexes eerily close to their 200-day moving averages. As stocks bounced, yields moved higher and the 10-year yield, after recovering from a midday slip, finished near the highs of the day. After a full day of trading, the 10-year yield had added 3.8 bps to 2.85% while the 2-year yield had risen 1.7 bps to 2.27%.

 

Overnight – Stocks Rally but Yields Don’t Rise: Yesterday’s impressive recovery by U.S. equities spread globally overnight with the major indexes across Asia and Europe registering similarly sharp gains. U.S. shares rallied after officials from the U.S. and China showed a willingness to negotiate on trade instead of immediately taking the leap towards a tariffs battle. Overnight, stocks in Japan moved up more than 2.5% whiles shares comprising China’s CSI 300 rose 0.9%. In Europe, the major national indexes are more than 1% stronger and the Stoxx Europe 600 has add 1.4%. U.S. futures were up again with all three major indexes poised for another solid start. The stronger tones have not, however, completely cut off a bid for global sovereigns. Yields on European government bonds and U.S. Treasury yields erased an initial jump in overnight trading and are marginally lower ahead of the U.S. session (2-year -1.0 bps, 10-year -1.8 bps). The Dollar has recovered and easing of trade tensions were also directionally consistent with a stronger Chinese Yuan, which rose to its strongest level since the August 2015 devaluation. The Euro has weakened after mixed messaging in overnight commentary from a handful of ECB officials and misses in the latest economic confidence indicators which have softened now for three straight months.

 

NOTEWORTHY NEWS

Fed’s Mester See More Gradual Rate Hikes: Cleveland Fed President Loretta Mester (voter) said she expects further gradual rate hikes will be the appropriate way forward for monetary policy but acknowledged that the Fed wants to give inflation time to move back towards 2%, something she expects to occur over the next year or so. Mester, considered to be hawkish-leaning, said “Given the economy’s strength, we don’t want to get behind the curve, but we also don’t want to overreact to the positive outlook and potentially curtail the expansion.” Mester also said she had lowered her estimate for the longer-run unemployment rate (4.5%) which, on the margin, is a dovish adjustment indicating she expects the labor market can get tighter without creating inflation. On the recent trade tensions, she said the tariffs talk could add uncertainty but does not yet warrant a change in the outlook.

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