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The Launch Pad: Markets ease into U.S. Memorial day weekend | Don’t expect Yellen to rock the boat

The Launch Pad: Markets ease into U.S. Memorial day weekend | Don’t expect Yellen to rock the boat via @connectedWealth

Friday, May 27th, 2016

TODAY

We’d expect markets to be a little more relaxed today as the U.S. heads into its Memorial Day long weekend. A Friday before the ‘unofficial’ kickoff to summer tends to do that. Scanning our screens, (all four of them) we note that this lackadaisical attitude is noticeable around the globe as well. Currency moves are rather muted, bond yields are flat from yesterdays close and even commodities are trading within close to yesterday’s levels.

This morning we saw revised Q1 GDP data come out of the U.S., it ticked higher slightly bumping up to 0.8% from 0.5%. The direction of the revision plays into the Q2 comeback story.

Janet Yellen will be speaking at Harvard today at 1:15 p.m. EST. Whenever she speaks the markets listen, especially when they are overly concerned with the upcoming rate announcement in June. We’d expect her to maintain the rather hawkish tone coming from the Fed recently, but don’t expect any bombshells to surprise the market. The probability of a June hike has waned slightly to 28%, but a July move is better than a 50/50 bet.

Clearly with the 2.45% gain in the S&P 500 over the past five trading session investors are warming to the idea of a near term rate hike. Remember, the ‘don’t fret the Fed’ mentality is the new mantra of the moment.

At 10am, we’ll get an updated look into how the U.S. consumer is faring. The University of Michigan’s final consumer sentiment index is expected to fall slightly to 95.4 from 95.8 in April. The consumer remains one of the key drivers for the U.S. economy, so this data point has serious merit.

Fund Flows
According to BOAML, the latest round of fund flows reflect “unambitious risk-off” sentiment. Investors sold equity funds for the 7th week in a row and moved into government and IG bonds. Equities have staged a massive rally since the Feb11’16 low. As a result, and combined with improving US economic data, investors are positioning for another Fed rate hike in June or July. This sentiment is also evident in high yield and money markets, which saw $2.1 billion outflows and $12.2 billion inflows, respectively. More from Reuters here.

Diversion: Didn’t know this was a motorsport, but Stadium Super Truck races look like a lot of fun.

COMPANY NEWS

Blackstone is selling $1.1bb of exposure to European hotels. The operation is currently being run by Hilton Worldwide under their lower end Double Tree brand. The opportunity to sell is lucrative as lodging accommodation bookings rose nearly 80% in Europe last year. Gilead is being subpoenaed by a federal investigation surrounding anti-kickback legislation. They are being accused of sponsoring charitable organizations to subsidize part of their drug that the patient pays so Medicare will cover the rest. Thermo Fisher is purchasing FEI for a total of $4.2bb a 14% premium to yesterday’s close.

COMMODITIES

Oil prices are off this morning after breaching $50 a barrel mid-day yesterday. The Midwest and Rocky Mountains have seen a reduction in supply as flow from the oil sands is not making its way to the region. This is causing severing companies to lower the tariff on imported oil from Canada. Nigeria supply disruptions has been the other aide to prices that helped lift prices to the new recent highs. It will likely take another catalyst to bring prices to the mid-50s as oil companies begin bringing back on production and selling futures to take advantage of the near-term rally. Despite the pullback in gold prices, large players are still piling into the space as shown by the latest 10k fillings of several large cap gold companies. George Soros recently bought nearly 80 million share of Barrick according to their latest quarterly filing.

FIXED INCOME AND ECONOMICS

US bond markets close early today ahead of the Memorial day holiday, and this usually results in a low volume trading day. However, month end rebalancing for US Treasury markets plus the upcoming June 1 and June 2 coupon payment and maturity dates in the Canadian market should see an active trading session, with the potential for more new issues to absorb the cash flow. For Canada specifically, we note that T+3 settlement for trades in Canada today is June 1, the day that will see $20.2 billion in Canada bond maturities, and $10.6 billion of government bonds roll out of the index as their maturity is less than a year. These flows, combined with sizeable coupon payments from Canada guarantees and many provincial issues on June 1 and June 2 should see both passive and active managers looking to deploy this cash.

In terms of events, although we will have the second reading of first quarter GDP numbers in the US, it is not expected to be a market mover. Rather, focus will be on the outlook for US interest rates ahead of the June 15 FOMC meeting. Federal Reserve Chair Janet Yellen is speaking at 1:15 today, with a question and answer period to end by 2:00 PM, just as markets close. The release of minutes to the last the FOMC meeting showed that Fed officials were much more hawkish than expected, and we expect Yellen will reiterate that view, keeping the potential for a hike as early as this month. However, the market is currently only pricing in a 1 in 3 chance of a move, as there is some concern over the upcoming UK referendum on leaving the European Union on June 23. The potential volatility surrounding that event, combined with the fact the June FOMC meeting is a short one, suggests a move in July should be more likely – and the market is pricing in just over a 1 in 2 chance we get a quarter point hike on July 27th. From there, the next meeting is not until September 21, and with the US election becoming a focus at that point, the FOMC may want to stay on the sidelines for that meeting, and again November 2. That means if they don’t go in July, the next opportunity might not be until December.

CHART OF THE DAY