The Market Today
Turkey’s Currency Plunges Again; China Sets Yuan at Weakest Level Since May 2017
by Craig Dismuke, Dudley Carter
This morning’s economic calendar will bring the July Leading Index at 9:00 a.m. CT (formerly the Leading Economic Index), which is expected to rise 0.4% MoM. Of the ten contributing indicators to the aggregate index, only the credit conditions index and the shape of the yield curve (the 2y10y spread, specifically) are remotely close to flashing red. We discussed these trends associated with a flattening yield curve in detail in The Implications of a Flattening Yield Curve. Also at 9:00 a.m., the University of Michigan’s Consumer Confidence report is expected to show a slight uptick in its preliminary August reading.
Yesterday – Stocks Posted Big Gains on Trade Developments and Walmart Beat: The Dow rose 1.6% on Thursday, its best day since April, on reports the U.S. and China would resume trade talks and after a big earnings reports from Walmart. Shares of Walmart surged more than 11% intraday Thursday, its biggest intraday charge higher since 2008, after reporting a big beat for sales, stronger grocery activity, and increased online activity. In addition, they raised guidance for the remainder of the year. While the sharp gains for the retail giant pushed consumer staples to the front of the pack, industrials got a lift from the plans for Chinese officials to travel to Washington to discuss trade. Boeing rallied more than 4% as a ratings upgrade added to the trade optimism and shares of Caterpillar posted a 3.2% gain. The S&P 500 added 0.8% as all 11 sectors improved; five sectors added more than 1%. Even with all the excitement in the equity space, however, Treasury yields ended little changed. After an up and down day that began during the overnight session on the trade news, the 2-year yield rose 0.8 bps and the 10-year yield climbed a sluggish 0.4 bps. The spread between the two flattened for a seventh consecutive session and ended at 24.7 bps, less than 1 bp above its cycle low.
Overnight – Market Angst Resumes Friday as Turkey Comes Back in Focus: Global equities were mixed overnight, a disappointing result considering the tailwind that could have been given by a strong U.S. equity performance in the previous session. Most Asian markets were firmer except for in China, where the CSI 300 fell 1.4% to a new 23-month low. The index is now down nearly 27% from its January peak as concerns about a slowdown in the world’s second largest economy have been compounded by the ongoing trade dispute with the U.S. On Thursday, the PBOC had pegged the Chinese yuan at its weakest level since May 2017. In Europe, all the major indexes have dropped into negative territory and financials have led the Stoxx Europe 600 0.4% lower. European banks have been beat up by concerns about the group’s exposure to the ongoing economic turmoil in Turkey. The Stoxx 600’s bank sector fell to its lowest level since 2016, is down over 7% in August, and has dropped more than 20% from its January peak. After recovering more than 18% over the last three sessions, the Turkish Lira reversed nearly 6% lower overnight after U.S. officials indicated on Thursday that more sanctions could be in store if Turkey didn’t release the U.S. pastor. Treasury yields have moved lower with other core sovereigns as a result of the renewed concerns. The 2-year yield lost 0.8 bps to 2.61% and the 10-year yield 1.3 bps lower to 2.85%. The spread between the two had reached a new cycle low of 23.4 bps. U.S. equity futures were 0.3% negative near the lows of the day.