Daily Market Color

Treasurys Rally as Global Political Concerns Temper Reflation Trade

The risk-on trading that characterized the first three days of the week reversed course heading into the long weekend, as investors responded to political concerns both in the US and Europe.  Treasurys rallied at the onset of the session before paring the majority of gains throughout the day, with yields/swap rates currently 1-3 bps lower across the curve.  The yield on the 10-year note rose as high as 2.52% (+9 bps) during the course of this week, driven by robust inflation data and hawkish testimony from Janet Yellen, before pulling back to its current level of 2.42%.  After their streak of five consecutive days of posting record highs was broken yesterday, major US stock indices traded within a tight range throughout today’s session.  The DJIA (+0.02%), S&P 500 (+0.17%), and Nasdaq (+0.41%) all finished with marginal gains.  The US dollar also edged higher, trading up 0.2% against a basket of major currencies.  Both oil and gold weighed down commodity prices, as crude settled down 0.3%, and gold trimmed 0.2% to $1,239 per ounce.  With little meaningful US economic data reported today, investors look forward to next Wednesday’s release of the minutes from January’s FOMC meeting to gain further insight into the Fed’s views of balance sheet unwinding and potential rate hike timing.                 

U.K. Retail Sales Data Highlights Brexit Impact      
As per the Office for National Statistics, retail sales in the UK declined for the third consecutive month in January, down 0.3% where market expectations called for a 1% rise.  Additionally, December’s 1.9% drop in sales was revised further downward to -2.1%, representing the largest fall in more than five years.  Declines in retail sales were present across a broad range of sectors including household goods, online products, and food.  The worst quarterly performance since 2013 was attributed to rising inflation as a result of a jump in import prices, which had been spurred by a devaluation in the pound following Brexit.  UK inflation reached 1.8% last month and is forecasted to go as high as 3% by the end of 2017, foreshadowing an uphill struggle for the consumer dependent economy.  In a separate report by the Office for National Statistics, the number of EU nationals working in the UK decreased by 50,000 in the final quarter of 2016, the sharpest decline in five years as concerns over the potential for a skills shortage continue to mount.  Among the sectors worst hit since Brexit have been education and healthcare.  The pound finished down 0.4% against the US dollar after falling as much as 0.7% following today’s data.            

French Stocks, Bonds Fall After Heightened Election Concerns
Early this morning it was reported that left-wing presidential candidates Benoit Hamon and Jean-Luc Melenchon, along with Yannick Jadot of the Green Party, were considering joining forces for this year’s presidential election in France, with the intent of a unified bid that could advance to the final round of voting.  Overall, if put into action the move is seen as actually improving anti-euro Marine Le Pen’s odds of victory, given a united left front’s inability to steal a meaningful number of right votes from Le Pen.  It remains to be seen whether such a merger will be completed given parties involved, but markets did not react favorably to the news, as stocks fell and yields on French bonds rose.  The spread between 10-year French bonds and similar-term German bunds widened to more than 70 basis points during the session.

Have a great long weekend. US markets are closed Monday for President’s Day.

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