Daily Market Color

Stocks Continue to Rise While Bonds Hold Steady as FOMC Meeting Begins

Jeff Davenport

US Stock Indices Reach New Highs Ahead of Fed Decision  All three major stock indices closed at record levels yet again today, as expectations of fiscal stimulus in 2017 for the US continue to drive growth forecasts, while the Federal Reserve begins to unwind its QE monetary policy.  Driven largely by gains in Intel and Apple, the Dow Jones Industrial Average rose over 100 points on the day, coming within 100 points of the psychologically-significant milestone of 20,000.  The S&P 500 (+0.63%) and Nasdaq (+0.9%) similarly benefitted from gains in energy and information tech stocks on their way to all-time highs.  With the FOMC meeting results scheduled to be released tomorrow, markets will look for any indications from the Fed as to the timing of future rate hikes. The markets generally expect that the committee will take a neutral stance on future moves until policies from the Trump administration become more clear.  At the moment, futures point towards a 2/3 chance of the next rate increase (after tomorrow’s) coming at the June 2017 meeting.  Bond prices have held within a tight range for the second consecutive day, with the yield on the 10-year Treasury remaining just below 2.5%.  In the commodity space, crude oil initially traded to its highest level in 17 months, before trading back to finish just above even on the day.  Crude prices fluctuated today after a report released by the International Energy Agency projected a supply deficit in the first half of 2017, but did not address the impact of a potential boost in US production. 

Italian Banks Under Pressure in Low Growth Environment
With interest rates remaining in negative territory throughout the eurozone, financial institutions have struggled with diminishing profits and non-performing loans, especially in Italy.  Today Italy’s largest bank, UniCredit SpA, announced its intention to raise 13 billion euros through a rights offering in an attempt to support reserves and capital.  The overall plan also includes a significant cost-cutting measure that would shed 14,000 jobs throughout Europe and 1,000 bank branches in Italy.  UniCredit’s chief executive, Jean Pierre Mustier, explained that the plan would ultimately provide the bank with 55 billion euros that could be put towards new lending to business and retail customers.  Investors welcomed the news, driving the share price up 13% on the day, and viewed it as a way for the bank to distinguish itself from other struggling banks in the region, such as Banca Monte dei Paschi di Siena (MPS).  MPS made headlines yesterday after announcing that the bank would attempt to raise 5 billion euros before the end of year via a debt-to-equity swap along with a share sale.  The move stands as a last-ditch effort to raise funds from private investors and avoid government intervention/recapitalization.       

Jeff Davenport

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