Market Update | June 21, 2018

Macro View

Daily Insights

  • Trade policy update. After being hit to the tune of ~$240 million by U.S. tariffs, India ratcheted up tensions overnight when it retaliated with tariffs of its own on a wide range of U.S. imports, while European automaker Daimler blamed protectionist trade policies for its profit warning. Meanwhile, China is digging in with strong rhetoric and internal stimulus preparations to support its economy to mitigate any potential impact to small businesses. The tensions will likely go up another notch or two because the Trump administration expects to win this battle, but that means market volatility around trade uncertainty will likely persist. Nonetheless, we believe overall strong economic and corporate fundamentals will win out in the end.
  • First piece of bank stress test results coming today.Part one of the Federal Reserve’s annual report card for the nation’s biggest banks, including U.S. subsidiaries of some of the biggest foreign banks, is due out today, with the second phase coming next week. The tests remain very tough, but increased flexibility under new bank regulatory leadership, coupled with the generally strong economic and profit backdrop, likely means favorable results followed by dividend increases and share repurchases after the June 28 announcement. We continue to expect the sector to benefit from an eventual easing of yield curve pressures, though this year has been a struggle so far with the financials sector off roughly 1.2%.
  • OPEC may ramp up production. OPEC and Russia meet Friday in Vienna amid speculation that Saudi Arabia will get its 600K barrel/day output increase. Though likely, disagreement among several key members and the inability of secondary players to reach production targets introduce uncertainty. We see countervailing forces keeping oil prices largely range-bound near current levels, but strong global demand, geopolitics, and U.S. infrastructure bottlenecks offer the potential for a reversal of recent weakness. WTI crude oil is down this morning near two-month lows at ~$65/barrel.
  • Bank of England stands pat as expected. Three members of the committee did call for an immediate rate hike in a 6-3 vote, which pushed the British pound higher. The rate stayed at 0.5%, but the vote opens the door for an August hike despite Brexit uncertainty. In a hawkish twist, the Bank also lowered the target interest rate for pulling back quantitative easing and reducing its balance sheet, from 2% to 1.5%. Looking more broadly, gradual global central bank tightening continues.
  • Foreign stocks getting cheaper. Recent underperformance by international stocks (as measured by the MSCI EAFE Index and the MSCI Emerging Markets Indexrelative to the S&P 500 Index) has helped those stocks get cheaper. On a forward price-to-earnings basis, the price-to-earnings multiple on the MSCI EAFE (developed international benchmark) has dropped from 15 to 13.7 this year, while the MSCI Emerging Markets Index has fallen from 13 to 11.5. However, stronger earnings in the U.S. have led to a bigger drop in U.S. stock valuations, from 18.2 to 16.5.
  • Welcome to summer. Today is the longest day of the year and that means it is also the first day of summer. The good news is the S&P 500 Index is up 3.5% year-to-date heading into the official start of summer and wouldn’t you know that historically this is a good thing? That’s right, going back to 1950, we found that the S&P 500 is higher for the full year 35 out of 35 times when it is up 3% or more heading into summer. We will take a closer look at this phenomenon today on the LPL Research blog.
  • Jobless claims lower than expected. New applications for unemployment benefits fell again last week, coming in at 218,000 vs. expectations of 220,000. Jobless claims have now declined for four consecutive weeks pushing the less volatile four-week moving average of claims down to 221,000. The labor market is considered to be close to full employment and the data further affirms our view of a strong and gradually tightening labor market.

Monitoring the Week Ahead

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  • Markit Mfg. PMI (Jun)
  • France: GDP (Q1)
  • France: Markit Mfg. PMI (Jun)
  • Germany: Markit Mfg. PMI (Jun)
  • Eurozone: Markit Mfg. PMI (Jun)



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The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Morgan Stanley Capital International Europe, Australia, Far East (MSCI EAFE) Index is a capitalization-weighted index that tracks the total return of common stocks in 21 developed-market countries within Europe, Australia and the Far East.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

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