The Market Today
Investors Shrug Off Airstrikes, Turn Focus to Economic Data and Earnings Results
by Craig Dismuke, Dudley Carter
INVESTOR CONSIDERATIONS FOR AIRSTRIKES ON SYRIA
“Limited” Scope Military Operations Historically Yield Limited Market Reactions: The U.S., U.K., and France launched airstrikes on Syrian targets Friday evening after the markets were closed. There are four key points we take from the events.
- Limited scope – “one-time shot” as General Mattis referenced it
- Coalition Effort – the coalition included the U.S., U.K., and France with France’s Macron as the lead defender of the strikes
- Russia Warned in Advance – There were reportedly no casualties at the chemical facilities because Russia had been given the target list at least three days in advance
- Russia Did Not Try to Stop Strikes – Despite a lot of tough rhetoric over Syria, Russia does not appear to want to militarily confront the coalition
Given these takeaways, investors are highly unlikely to panic. Looking back at previous limited-scope military operations, one can see minimal market reaction. There are six previous engagements over the past 20 years which resemble this weekend’s event. Incidentally, most of these six experiences were also targeted at diminishing chemical weapons facilities. With the exception of Operation Infinite Reach in August 1998, Treasury yields were largely unchanged one month after each of the six recent engagements. August of 1998 saw Treasury yields drop because of a confluence of events not related to the one-day missile barrage launched by the U.S. in retaliation for the bombings of embassies in Kenya and Tanzania. The Asian crisis was persisting, the Russian ruble collapsed, stocks fell 24% from July to August, and the U.S. Treasury supply was contracting on the elimination of the budget deficit (obviously a different environment than today).
Overnight Trading – Investors Shrug Off Airstrikes, Turn Focus to Economic Data and Earnings Results: U.S. equity futures are up solidly ahead of this morning’s important U.S. retail sales report and despite mixed results across Asia and mostly weaker trends in the major European indexes. Before this morning’s retail sales results were released, futures on the three major equity indices were up just under 0.6%. The limited joint strikes carried out Friday night by the U.S., the U.K., and France against Syria appeared to have little lasting market impact as they resulted in no military escalation or retaliation by Syria or its supporters. Demand for traditional safe haven assets such as developed nation sovereign debt, gold, and the Yen was softer and oil prices, which tend to rise amid tensions in the Middle East, had pulled back. Global yields were almost exclusively higher, with the 2-year Treasury yield up 2.5 bps at 2.38%, a new high for the cycle, and the 10-year yield up 3.1 bps at 2.86%, the highest since March 21. Yields dipped slightly after core retail sales matched expectations.
March Retail Sales – The Consumer’s Back: In the most important economic report of the week, March’s retail sales data does show a consumer renaissance after a three-month hiatus. Headline sales rose 0.6% MoM, beating expectations by 0.2%. The headline figure was distorted by a stellar month for auto sales, up 2.0% MoM in the strongest month for auto sales since the cycle peaked in December 2016 (excluding the September 2017 data which was distorted by the hurricanes). Gasoline sales fell 0.3% MoM, freeing up more disposable income for other items. Building material sales were notably weak, down 0.6% MoM. Some of this weakness is likely the result of the weather patterns (warmer February and blizzards in March distorting the seasonal adjustment. And at the core level, retail sales rose an as-expected 0.4% MoM on strength in furniture sales, health and personal care sales, and on-line sales. This report affirms the Fed’s and private economists’ expectations that the soft 1Q data will turn stronger.
The New York Fed’s regional manufacturing index fell from 22.5 to 15.8, slightly weaker than expected. At 9:00 a.m. CT, homebuilder confidence is expected to remain at sky-high levels.
ICYMI – April 13, 2018 Weekly Market Recap: Stocks improved last week as trade concerns appeared to ease, geopolitical tensions seemed to be put on pause, and investors geared up for what’s expected to be a solid quarterly earnings season for U.S. corporations. China’s president discussed “opening up” the country for easier trade and financial market access for foreigners and leaders in the U.S. continued to show a willingness to negotiate on trade. In two separate tweets, President Trump warned Russia of a missile strike on Syria (Wednesday) but then later showed less certainty about the timing (Thursday). Despite the optimism for strong earnings this quarter, Friday’s disappointing price response to better-than-expected earnings from several large U.S. banks showed how high the earnings bar may be. As equities rose, shorter yields led the overall Treasury curve higher. The 2-year yield rose more than 9 bps to 2.36%, a new cycle-high, while the 10-year yield added around 5 bps to 2.83%. The spread between the two fell to 46.6, a new cycle-low. On the economic front, producer prices rose at the fastest pace since 2011, core inflation moved up to 2.1% YoY on base effects, both business and consumer confidence measures moderated, and the Fed’s March Minutes reflected a generally more confident group of central bankers. Click here to view the full recap.