The Market Today

Markets Shake Off Geopolitical Fears; Important ISM Report Ahead

by Craig Dismuke, Dudley Carter

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Trade Deficit Continues to Shrink on Slowing Global Trade: The November trade balance report, as foreshadowed by last week’s goods trade report, showed another $3.8 billion drop in the monthly trade deficit. Imports continued to broadly fall at a faster pace than exports. In November, imports dropped 1.0% while exports actually ticked 0.7% higher.  This trend of slowing global trade is negative for global growth, the U.S. GDP figures will continue to receive a boost in the short term.  After two months of data, the decline in the trade deficit is on pace to add over 0.5% to 4Q GDP.

Important ISM Non-Manufacturing Index: The most important report of the morning will be the 9:00 a.m. CT release of the ISM Non-Manufacturing index.  The index covering service sector activity in December is expected to improve.  However, the trendline dating back to late-2018 has been convincingly lower.  Following last week’s disappointing manufacturing index, this morning’s report is particularly important.

Factory and Capital Goods Orders: Also released at 9:00 a.m., the November factory orders data are expected to show a fairly-sharp pullback in orders.  Along with that data, the final revisions will be released for capital goods orders and shipments.


U.S. Stocks Diverged Higher from Global Downtrend: While gold finished the day at a six-and-a-half-year high, most other signs of the risk-off shift related to elevated tensions in the Middle East faded during U.S. trading. U.S. equities steadily recovered from an opening drop to break with the daily declines that had piled up elsewhere around the globe. The MSCI Asia Pacific Index had declined 1% prior to the open of the U.S. exchanges and Europe’s Stoxx 600 later closed down 0.4%. Although the S&P 500 dropped 0.6% on its opening tick amid the global weakness, the index slowly climbed back to finish up 0.4% and near its high mark of the session.

Treasury Yields Moved Higher As Geopolitical-Risk Effects Ebbed in the U.S. Session: Treasury yields, which had proved resilient overnight in the face of more equity weakness, remained higher for the duration of the day. The 2-year yield finished 2.0 bps higher at 1.55% while the 10-year yield added 2.1 bps to close at 1.81%. The perceptible geopolitical pressures in other markets also ebbed. The safe haven Japanese yen weakened and oil prices gave up another 3% daily gain to close down 0.3%. While gold closed at a more-than-six-year high, the precious metal finished well off its daily high.


Market Anxieties Continue to Ease: Market fears continued to wane Tuesday in the absence of further escalation of Middle East tensions spurred by last week’s U.S. strike that killed a top Iranian military commander. Market worries flared up last Friday but began to calm during U.S. trading on Monday. While the market tone is likely to remain cautious amid the war of words between the U.S. and Iran, discernible stresses on global assets further abated overnight. Gold prices leveled off near a six-year record, oil prices edged lower after rocketing higher last week, and foreign equities firmed up. A broad index tracking Asian equities rose nearly 1% and European equities had gained 0.4% at Tuesday’s midway point.

U.S. Assets Remain Steady After Yesterday’s Recovery: U.S. equity futures were roughly flat around 7 a.m. CT with tech continuing its outperformance from Monday. While European yields were mixed, Treasury yields had given back a portion of yesterday’s increase. Ahead of the open of U.S. trading, the 2-year (lower) and 10-year (higher) yields were mixed but hovering around unchanged. Looking ahead to later in the day, the potential for market volatility picks up around 9 a.m. CT with the release of December’s ISM Non-manufacturing PMI and revisions to business equipment investment figures for November.


(Reuters) Fed focuses on repo market exit strategy after avoiding year-end crunch:  “Wall Street’s worst fears of a year-end funding squeeze never materialized thanks in large part to the quarter-trillion dollars the Federal Reserve stuffed into the market to ensure nothing became gummed up. … The question now, though, is what it will take for the U.S. central bank to withdraw from its daily liquidity operations in the $2.2 trillion market for repurchase agreements, or repos – after it became a dominant player in a short three months. … Its ability to exit from the repo market after that time will depend on how long it takes the central bank to make the balance sheet large enough so there are adequate reserves in the banking system – and the repo operations are no longer needed.”

(WSJ) A Borrower Will Be 114 When Bonds Backed by Her Student Loans Mature – Billions in bonds wouldn’t be paid off in time, so issuers extended maturities by decades to avoid downgrades

(Bloomberg) S&P Takes Most Bearish Stance on U.S. Corporate Debt Since 2009: “S&P Global Ratings was the most bearish on U.S. corporate debt in 2019 than at any other point in the last decade. Last year saw the most credit ratings downgrades for U.S. companies relative to upgrades since 2009, according to S&P data compiled by Bloomberg. … Most of those cuts, 580 in total, were applied to the high-yield corner of the market compared to just 194 upgrades.”

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