Rudd’s MarketView for Monday, June 12, 2017

Summary

Apple shares added to last week’s drop on Monday to lead a market downturn as tech, still the best performing S&P 500 sector this year, succumbed under its own weight.

Mizuho Securities cut its rating on Apple to “neutral” from “buy” on Monday, saying the stock had outperformed this year and that the “upcoming product cycle is fully captured at current levels.” Apple shares, down 2.4 percent on Monday, are up about 26 percent so far in 2017.

The S&P technology sector fell 0.8 percent after dropping 2.7 percent Friday for its largest two-day decline in nearly a year. The tech-heavy Nasdaq Composite underperformed the S&P 500 as the ongoing rout in the sector sparked a search for value elsewhere.

Energy sector, the worst performing sector year-to-date, was among the sectors trying to stop the bleeding on the S&P 500.

General Electric was the S&P’s best performer with a 3.6 percent advance to $28.94. Jeff Immelt will retire as chief executive and would be replaced by John Flannery, the head of GE healthcare, who said he will conduct a swift review of the business portfolio.

The largest percentage gainer on the S&P 500 was Under Armor, which rose 5.8 percent, while the largest decliner was Netflix, down 4.2 percent.

Coherus BioSciences fell 23.8 percent to $15.73 after the FDA denied the approval of its biosimilar for Amgen’s Neulasta. Amgen edged up 0.5 percent to $164.88.

Approximately 7.89 billion shares changed hands on the major domestic equity exchanges, a number that was far above the 6.81 billion daily average over the last 20 sessions.

Treasury Suggests Easing Rules

The Treasury Department suggested major revisions to key Wall Street regulations that were put in place after the 2008 financial crisis in a lengthy report on Monday suggesting over 100 possible changes.

Most of the recommendations laid out in the Treasury’s 150-page report can be accomplished by regulators appointed by President Donald Trump without any legislative changes from Congress, Treasury Secretary Steven Mnuchin told lawmakers Monday.

The report relies heavily on those regulators, as the Trump administration cannot count on legislation from Congress. Democrats are resisting major changes to the 2010 Dodd-Frank Wall Street reform law that came out of the financial crisis and was a signature achievement for former President Barack Obama.

Among other things, the Treasury would expand the authority of the Financial Stability Oversight Council, ease up on the Volcker rule, which restricts banks’ ability to place speculative market bets, and reduce the authority of the Consumer Financial Protection Bureau.

It would also provide relief for smaller banks by raising a $50 billion asset threshold that now requires tougher regulatory scrutiny.

Recession Remote for 12-Months

Chances are remote the economy will fall into a recession during the next 12 months despite a recent flattening of the U.S. yield curve suggesting growing recession risk, Deutsche Bank’s economists indicated on Monday.

Based on other bond market indicators, they estimated the probability of a U.S. recession from now to June 2018 at less than 10 percent. This as compared to the yield curve, or the gap between long-dated and short-dated yields, which currently implies roughly a 33 percent chance of a recession.

“Despite this development, we do not see U.S. recession risk as particularly elevated; indeed, we think it is quite low for the next year,” Deutsche Bank economists wrote in a research note.

Historically, a sharp flattening of the yield curve has preceded a recession as traders pile into longer-dated Treasuries in anticipation of an economic contraction.

On Monday, the two-year to 10-year portion of the Treasury yield curve flattened to 83.80 basis points, its tightest since early October. It reached nearly 137 basis points in December, which was its steepest level in a year, Tradeweb data showed.

Analysts and traders have attributed the curve flattening to doubts about any forthcoming fiscal stimulus from Washington and recent economic data that fell short of expectations.

Still, some aspects of the economy, such as the labor market and housing, continue to perform well without signs they will overheat in the next 12 months, Deutsche Bank economists said.

However, a further tightening of the labor market in the next 18 months might force the Federal Reserve to accelerate its pace of rate increases, raising the chances of a recession by 2010, according to the bank’s economists.

“The more hawkish scenario would clearly move the Fed’s policy stance to a level that would make a recession likely by late-2019 or 2010,” they wrote.

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