Day Traders Diary

9/7/17

 The equity market has managed to keep near its unchanged mark so far on Thursday despite another poor performance from the heavily-weighted financial sector (-1.8%) and a strong risk-off tone within other financial markets. The major averages are currently trading mostly lower with the S&P 500 (-0.1%) and the Dow (-0.2%) showing modest losses. The Nasdaq trades flat.

Seven of the eleven sectors are currently trading in the red, but none showing a greater loss than the financial sector, which has dropped below its 200 day simple moving average (397.68). Many of the catalysts that fueled the sector's Tuesday slide are still in play today, including Hurricane Irma, which has property and casualty insurers worried as it moves towards the populous state of Florida.

A flattening of the yield curve has also worked against the financial sector today, eating into the profitability prospects of lenders. The yield on the 2-yr note has fallen four basis points to 1.27% while the yield on the 10-yr note has dropped six basis points to 2.05%, lowering the 2yr-10yr spread to just 78 basis points versus 122 basis points at the start of the year.

The Treasury market rally follows the ECB's decision to leave interest rates unchanged and comments from ECB President Mario Draghi, who said that the central bank will make a decision on its quantitative easing program later this year and risks to the outlook remain balanced. Mr. Draghi also noted that the ECB is not targeting an exchange rate, but the level will factor into policy decisions.

Within the currency market, the U.S. dollar has taken a beating, dropping 0.7% against the euro to 1.2001 following Mr. Draghi's remarks. The greenback has also moved lower against the yen, dropping 0.8% to 108.30, which is seen as a risk-off move considering the yen's status as a safe-haven asset.

Meanwhile, gold, another safe-haven asset, has climbed 1.0% to $1,351.70/ozt--marking its highest level of the year--and the CBOE Volatility Index (VIX 12.03, +0.40) has jumped 3.4%. Given the risk-off tone in other financial markets, it would not be surprising to see the equity market extend its loss this afternoon.

However, the influential health care sector, which has done its part in mitigating the financial sector's bearish influence, continues going strong, sporting a gain of 1.1%. The top-weighted technology sector is also helping keep the broader market afloat with a gain of 0.3%.

In corporate news, Walt Disney (DIS 97.65, -3.85) has dropped 3.8% after CEO Bob Iger announced that the company's earnings per share for fiscal year 2017 will be roughly in line with the 2016 figure. In addition, the company said that its Marvel and Star Wars titles will go exclusively to its planned streaming service.

Similarly, General Electric (GE 24.13, -0.79) is also trading solidly lower, down 3.2%, after JP Morgan reaffirmed its underweight rating on GE shares. However, on a positive note, Restoration Hardware (RH 70.50, +21.08) has surged 42.5% after beating both top and bottom line estimates and issuing upbeat guidance.

On the political front, House Speaker Paul Ryan (R-WI) voiced his support for President Trump's Wednesday agreement with Democratic lawmakers, which packages Hurricane Harvey relief funding with a three-month extension of both government funding and the debt ceiling. Before Mr. Trump made the deal, Mr. Ryan called the idea "unworkable."

Reviewing Thursday's economic data, which included the weekly Initial Claims Report and revised readings for second quarter Productivity and Unit Labor Costs:

The latest weekly initial jobless claims count totaled 298,000 while the Briefing.com consensus expected a reading of 239,000. Today's tally was above the unrevised prior week count of 236,000. As for continuing claims, they declined to 1.940 million from the revised count of 1.945 million (from 1.942 million).

The key takeaway from the report is that the spike in initial claims was impacted by Hurricane Harvey, which is to say it is an aberrant reading in relation to an otherwise encouraging trend for initial claims.

Second quarter unit labor costs were revised downward to +0.2% (Briefing.com consensus +0.3%) from +0.6% in the preliminary reading. Meanwhile, second quarter productivity was revised upward to +1.5% (Briefing.com consensus +1.2%) from +0.9% in the preliminary reading.

The key takeaway from the report is that the subdued growth in unit labor costs will contribute to the market's thinking that the Fed has scope to hold off on another rate hike this year.