OREANDA-NEWS. April 06, 2016. Stocks resumed their winning ways after a one week hiatus. Last week’s gain makes it six of the past seven in which stocks have moved higher, rising 11 percent and leaving the S&P 500 positive on the year by 1.4 percent. Stocks got a boost on Tuesday after Fed Chair Yellen had a more dovish tone in remarks to the Economics Club of New York. The dollar immediately weakened and treasury yields fell.

Emerging market equities rose strongly in dollar terms on the week, while in the Eurozone stocks managed a modest gain as the euro rose to 113.91 versus the dollar from 111.67 the prior week. Japanese equities, in contrast, were lower measured either in yen or dollars. Overall, the DXY dollar index fell sharply on the week, from 96.27 to 94.62.The futures based probability of a rate hike in June fell from 38 before Yellen’s remarks to 24 percent by the end of the week, while the odds of an April rate hike fell to zero.

Also contributing to the better tone in stocks was some decidedly positive economic data. The economy added another 215,000 jobs. The unemployment rate rose for the first time since last May, to 5.0 percent, as the labor force participation rate also rose to its highest level in two years. That news was followed on Friday by a strong report from the ISM on the health of the manufacturing sector, which grew for the first time in seven months. The new orders component of the report was especially strong. Other favorable reports last week included consumer spending and pending home sales.

The Oversupply of oil Continues to Affect the Energy Sector

Leading stocks higher were the consumer and technology sectors. Only energy fell, as the price of oil dropped 7 percent to \\$36.79 a barrel. Worries that the global market remains oversupplied, combined with reports that Saudi Arabia will not agree to a production freeze at the upcoming meeting in Doha unless all agree, impacted the drop. Iran, which is ramping up production since international sanctions were lifted, has said it has no intention of agreeing. Russia, which will be a party to the production talks, reported record oil output in March.

The diverging price action between oil and equities last week stands in sharp contrast to the lockstep correlation on the way down to start the year. There is no doubt that oil prices have been influenced by the talk of a freeze, but how much further prices might retreat should the talks prove to be unproductive remains unclear. And whether stocks would once again begin to track oil more closely in that case also remains unclear.

How’s oil Impacting Bonds?

One relationship with the price of oil that has not diverged is with high yield bonds. The yield-to-maturity and the spread over governments for the Bank of America Merrill Lynch High Yield Master II index both rose last week, and have risen ever since oil peaked two weeks ago. During that time the yield has climbed 20 basis points to 8.59 percent, after having fallen from 10.17 percent in February when oil bottomed. The spread over governments widened by 40 basis points, as the yield on the ten-year note moved in the opposite direction, falling 13 basis points to 1.77 percent last week. The yield has dropped a total of 17 basis points since oil peaked in March.

For the year thus far, the Barclays U.S. Aggregate Bond index has delivered a total return of 2.9 percent, with the longest maturities and the lowest quality performing the best of this investment grade index. The total return of the ten years plus component is 7.3 percent. The same pattern is true in the below-investment grade universe. The Barclays High Yield index is up 3.3 percent, with the long maturity component up 8.1 percent. But, the CA-D index, the lowest rated category, is higher by 4.9 percent, with its long maturity component up 15.7 percent. However some of these gains might be eroded further should oil remain under pressure.

Last week the weaker dollar and the stronger economic data trumped the falling price of oil to support risk assets. Whether that divergence can persist will likely depend on the degree of strength in the data going forward, and just how much further oil might fall. The Fed seems willing to do its part by staying on the sidelines, at least for now.


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The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
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The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.
The ISM manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.
The Bank of America Merrill Lynch High-Yield Bond Master II Index is an unmanaged index that tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
Barclays Capital U.S. Aggregate Bond Index: Is an unmanaged index composed of securities from the Barclays Capital Government/Corporate
Bond Index, Mortgage-Backed Securities Index and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indices are rebalanced monthly by market capitalization.
The Barclays High Yield Index covers the universe of fixed rate, non-investment