Equity Market Insights: January 11, 2018

Thursday, January 11, 2017, 11:00 AM, EST

• NASDAQ Composite +0.26% Dow +0.40% S&P 500 +0.28% Russell 2000 +0.78% S&P MID 400 +0.69%
• NASDAQ Advancers: 1025 Decliners: 1146
• Today's Volume (100 day avg) +15%

Equties in the US appear to be back on track this morning, after closing out yesterday's session in the red for the first time in 2018. Small and Mid-Cap stocks are widely outpace the other major indices, suggesting a shift into tax reform benefactors. Crude Oil is making a move to $64/barrel and pushing the energy sector (+1.2%) to the top of the sector leader board. The US Dollar Index has taken a sharp turn lower, dropping by its largest margin in over a week.

• Thirty minutes into yesterday's trading session, the Dow was off by more than 100pts, dragged lower by a report that China might be scaling back its purchases of US government debt. Separate reports that Canadian officials believe that President Trump will seek to exit NAFTA weakened stocks in the afternoon. Investors shook off this early bearish sentiment after both comments were walked back somewhat, helping stocks recover to almost unchanged by the close. The strong start to the year will hit its first major test starting tomorrow, as four leading financial companies will release quarterly results ( JPMorgan, PNC, Wells Fargo and BlackRock ). Traders are anticipating another quarter of strong corporate results, with the economy is in the midst of its strongest growth in over 10 years according to Goldman Sachs.
• Tax reform benefits are trickling through businesses with many passing on saving to employees while also raising wages. Walmart (WMT), which employs 2.3 million globally and is the largest private employer in the United States, will boost its minimum hourly wage and issue one-time employee bonuses noting tax reform as the catalyst. Other corporations raising guidance, passing through savings to employees or seeing analyst raising guidance due to tax reform include Delta Air Lines (DAL), Walgreens (Nasdaq:WBA) and Fidelity D&D Bancorp (Nasdaq:FDBC). Expect to see tax reform cited as a catalyst to propel earnings in multiple sectors moving forward.
• Unemployment numbers released by the U.S. Department of Labor continue to show demand in the U.S. Reported Initial Jobless Claims were slightly higher 261,000 vs polled expectations of 245,000, which is 11,000 more claims that the previous week (250,000 claims). Reported Continuing Claims were better than expected at 1.867 million claims vs estimates of 1.920 million.

Technical Take: Bund Yields are Heating Up

US and many global treasury yields spiked higher over the last two trading sessions apparently related to two "seemingly" big stories out of Asia. First the bank of Japan made a relatively minor decrease to its asset purchase program which some interpreted as a shift in monetary policy. Then yesterday there was speculation that China was preparing to reduce, or even halt, its purchase of US treasuries. However, both reports appear to have been overblown or simply flat out wrong. The BoJ's reduction in purchases looks more like a minor adjustment in order to manage its yield curve, and today China's State Administration of FX said reports of slowing or halting purchases of US treasuries were either based on a "wrong source" or simply "fake news". There is in fact noteworthy "central bank" news but it is coming from the other direction out of Europe. The minutes of the ECB's December 14 th policy meeting were released earlier today which show a "widely shared" view amongst the Governing Council to adjust their monetary policy guidance in early 2018 to better align with the strengthening economy and outlook for growth and inflation. In other words a reduction in the current EQE program. The euro immediately spiked higher along with local government yields. Most noteworthy was the move in the 10-Year German Bund Yield which over the last two sessions has gone from 41bps to 59bps. This is nearly DOUBLE the 30bps level it was at just four weeks ago at its policy meeting on December 14 th . Even more striking is the long term technical setup the of long bund yield which is currently testing a cluster of major resistance at ~0.62% which not only represents a two-year high, but more importantly lines up with the declining trendline going back to 2008. In addition long term momentum appears to be coiling with the monthly RSI pushing up against the 56 level which has acted as a clearly defined resistance line going back to early 2011. A breakout above these long term resistance levels, for both price and momentum, could trigger strong long term momentum and potentially a sharp rise in yields. While rising rates are generally a welcome sign reflecting improving economic activity, the pace at which yields rise is important. Gradual increases in rates are ideal, however sharp violent increases are highly problematic partially because it makes it difficult for institutions to hedge. The latter scenario would be a big concern for equities particularly in the current environment. Many global equity markets are in the midst of record moves since their lows in early 2016, particularly here in the US where the major equity indices have not seen a 3% correction since 2016. Combine that with momentum levels already well into "overbought" territory and bullish investor sentiment at high levels, and you could have a recipe for a "healthy" correction.

Nasdaq's Market Intelligence Desk (MID) Team includes:

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.

Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Annie O'Callaghan is Director on the Market Intelligence Desk (MID) at Nasdaq. Annie has worked for NASDAQ in a variety of roles including support of Nasdaq C-level management in client retention and customer service. Annie also served as a Sales Director in Nasdaq's Transactions Services business. Prior to joining Nasdaq, Annie worked at AX Trading, managing accounts for its Alternative Trading System and served on Credit Suisse's trading desk as an Electronic & Algorithmic Sales Trading Analyst.

Brian Joyce, CMT is a Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq's Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.