Northwestern Mutual

Financial Markets Commentary For the week of Oct. 03, 2016

With the Federal Reserve and its plans for a rate hike off the radar for the moment, investors had other issues to preoccupy them last week, such as the price of oil, the stability of banks and the debating chops of the two presidential contenders, all of which added up to another up-and-down stretch for stocks.

But the major indexes eked out gains for the week and closed a strong quarter during which they all set new highs. Over the past three months, the Dow Jones Industrial Average rose 2.8%; the Standard & Poor’s (S&P) 500 gained 3.8%, led by the tech sector (up 12%); and the Nasdaq soared 9.7%, its best quarter since 2013. Bond yields also fluctuated last week, though the 10-year Treasury ended pretty much where it began, at 1.605%, after having opened the third quarter at 1.446%.

OPEC and oil

The price of a barrel of oil, though well up from the February low of $26, has been unable to stay above the $50 mark, but last week both United States and Brent crude closed in on that threshold, finishing at $48.24 and $49.06, respectively. The surge came after the Organization of the Petroleum Exporting Countries (OPEC) members, at an informal session in Algiers, announced that they would institute a modest production cut at their next meeting in Vienna on Nov. 30. OPEC members have been unable to agree on a cut, mainly because of antagonism between Iran and Saudi Arabia, but seem to have finessed a deal in which not every country would have to lower production equally. And even though the cut is a mere 700,000 barrels a day from the current output of 33 million barrels (that is, less than 1%), it at least represents the possibility of future consensus.

Banks here and abroad

Financial stocks were buffeted last week by unwinding news stories about two of the world’s largest banks, Wells Fargo and Deutsche Bank. Wells Fargo continued to suffer from the fallout over employees having created phony credit card accounts for existing customers. After losing some business with the State of California, Chief Executive Officer John Stumpf met with a withering reception at the hands of the Senate Finance Committee where senators from both sides of the aisle took aim, branding him a “thief” and referring to the bank as a “criminal enterprise.” Deutsche Bank, meanwhile, has been at the center of a rumor mill over whether it has enough capital in hand to cover some of its less conventional investments, whether or not Germany will come to its rescue if it stumbles, the size of the fine it must pay the U.S government for its mortgage practices prior to the financial meltdown of 2008 and the fact that the German government apparently rebuffed a request to intervene with the U.S. government on the bank’s behalf. So far this year, Deutsche Bank’s stock has tumbled more than 50%. It headed south for most of last week, taking the shares of other banks with it, before rebounding on Friday after a report that it would pay the U.S. government only $5.4 billion rather than $14 billion. The stocks of pharmaceutical companies also had a rocky week, starting with a report that Pfizer would not split into two companies and closing with the news that a group of senators petitioned the Justice Department to open an investigation into Mylan and the pricing of its EpiPen.

Welcoming the yuan

On Saturday, China’s yuan joined the dollar, euro, pound and yen in the basket of currencies that the International Monetary Fund (IMF) lends in emergencies. China has long sought to have its currency legitimized, but the IMF’s Chief Christine Lagarde also articulated her organization’s expectations, saying, “It’s an irreversible path towards opening up, integrating into the global economy and playing the economic game by the rules.”

Around the eurozone: A Brexit timetable and more austerity for Greeks

On Sunday, Britain’s Prime Minister Theresa May announced that her nation would begin formal talks on leaving the European Union “before the end of March” 2017, which means that the Brexit would most likely be completed by spring 2019. Across the English Channel, amid protests, Greece’s parliament narrowly passed yet another unpopular package of austerity measures that included reduced pensions and the transfer of state assets to a new privatized fund overseen by Greece’s creditors. The steps were taken to clear the way for €2.8 billion from those creditors which Greece hopes to secure at a meeting on Oct. 10. Greece, as well as the IMF, is looking for debt relief for the beleaguered nation.

Q2 GDP is upped again

In its latest revision, the government raised the pace of gross domestic product (GDP) growth in the second quarter to 1.4% from 1.1% (and the initial estimate of 0.8%), mainly because nonresidential fixed investment increased in the latest estimate; in the previous estimate it had declined. In other news, the Personal Consumption Deflator Index, the Fed’s preferred inflation metric, was up less than 0.1% in August from July, the smallest gain since March, and rose just 1% over the last year. Core prices, excluding food and energy, gained 0.2% and increased 1.7% from a year earlier. In the housing sector, new home sales unexpectedly fell 7.6% in August from the month before to a seasonally adjusted annual rate of 609,000, though sales were up 20.6% from August 2015. The S&P CoreLogic Case-Shiller U.S. Composite Index for 20 major metro areas climbed 5% in June from a year earlier. And pending home sales declined 2.4% in August from July, but were up 4% from August 2015. The Conference Board’s Consumer Confidence Index hit a nine-year high of 104.1 in August, and the University of Michigan’s Consumer Sentiment Index for September came in at 91.2, up from August’s 89.8. Lastly, first-time jobless claims for the week ending Sept. 24 rose 3,000 to 254,000; the four-week moving average for the week ending Sept. 17 fell 2,250 to 256,000.

A look ahead

This week’s releases will include the latest on construction spending; the ISM’s Manufacturing and Non-Manufacturing Indexes; the trade balance; factory, capital and durable goods orders; and, on Friday, the unemployment rate for September, expected to stay at 4.9%.