The Market Today
Yields Move Lower on Less Hawkish ECB, Escalation of Mueller Probe
by Craig Dismuke, Dudley Carter
Today’s Calendar – Markets Digest News; Await Next Week’s Barrage of Data, Including FOMC Decision: There are no economic reports on the calendar this morning. The markets are likely to focus on the fallout from yesterday’s mildly dovish ECB events (more below), the uncertainty created by an apparent escalation of Mueller’s investigation (more below), and next week’s FOMC meeting.
Overnight Activity – Yields Lower with Stocks as the Dollar Continues to Drift: Global equities have weakened Friday after a mixed performance by shares of U.S. companies in yesterday’s session. Following a weak start in Asian markets, the Stoxx Europe 600 is down 0.4% although most national exchanges have fallen further. Sovereign yields are modestly lower with the German 2-year yield down 0.6 bps to -0.66% and the 10-year yield 2.1 bps lower at 0.50%. Treasury yields have traded similarly, with the 2-year yield 0.8 bps lower at 1.34% and the 10-year yield down 1.6 bps in yield to 2.24%. The recent rally in Treasurys has undone more than half of the sell-off that began in late June on comments from the ECB, the BoE, and the BoC. The Dollar continued to drift, touching its lowest level since Brexit, as U.S. political uncertainty remains elevated. Oil prices declined sharply within the last several hours on a report that OPEC’s July supply figures could be the highest of the year.
Yesterday’s Trading Activity – Nasdaq Hits New Record High, as Dollar Sinks to 11-Month Low: The Nasdaq edged 0.1% higher Thursday (third straight record close) as the Dow dropped 0.1% and the S&P barely changed. The Nasdaq’s 10th consecutive daily gain marked the longest streak since February 2015. Stocks recovered from a 9:30 a.m. CT tumble on a report that Special Counsel Mueller would review activities of Trump businesses as part of the investigation into Russia’s interference in the U.S. election. Treasury yields fell but were off of the intraday lows by the close. The low marks (1.34% on 2s, 2.24% on 10s) were reached on the back of the ECB’s latest decision and after the report about the Special Counsel’s investigation. The 2-year yield finished down 0.4 bps at 1.35% while the 10-year fell 1.1 bps to 2.26%. In currencies, the Dollar closed at an 11-month low as the Euro surged to its strongest level against the greenback in 30 months (January 2015) and the report on the Special Counsel heightened the political uncertainty. Comments from Draghi that recent strength in the common currency had received “some attention” by ECB officials and that the group would discuss potential QE changes in the autumn appeared to be the catalyst for the Euro’s gains. Oil prices fell after briefly touching their highest levels in six weeks.
Mohamed El-Erian on the Dangers of a Liquidity-Driven Market (Bloomberg Op-Ed): “Over the past few months, government bond yields have fallen, the dollar has weakened and financials have underperformed, yet the major stock indexes are at or very near record highs, as persistently supportive liquidity conditions have more than compensated for policy and growth disappointments. By boosting returns and repressing volatility, ample liquidity is a gift for investors.” He continues, saying that despite the disappointment in economic data and fiscal policy developments, “the most reassuring factor for traders and investors remains very loose financial conditions. … Liquidity, especially when ample and predictable, can fuel markets and condition investor behavior in a supportive manner for quite a while. … So far, equity investors have experienced an unusually long and fulfilling journey — one that, absent a major accident, could last a little longer. What remains more elusive, however, is confidence that this will end up at an enjoyable destination.”