The Market Today

Market Volatility Continues; Government Shuts Down for a Night; Winter Olympics Begin


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Investor’s Glued to Screens; Winter Olympics:  In the absence of any interesting economic news (only the December Wholesale Inventories report at 9:00 a.m. CT), investors will remain glued to the screens today to see if this week’s wild ride for stocks continues (much more below).  Today also brings the Opening Ceremonies of the PyeongChang Olympic Winter Games (replayed at 8:00 p.m. CT on NBC).

 

Government Shutdown Begins and Ends While Most People Slept:  The government shutdown last night at midnight but reopened just a few hours later.  Senator Rand Paul delayed a roll call vote, a procedural move to gum up the legislative process, in protest of the spending bill’s impact on the long-term debt.  Paul eventually relented, after a flurry of name-calling from Republicans who in 2011 were equally opposed to deficit spending, allowing for easy passage of the bill shortly after midnight.  The House then took up the bill with House Minority Leader Pelosi initially protesting the bill she helped write on the principle that it did not include immigration reform.  She eventually relented and the bill passed the House and the president signed the bill at 7:40 a.m. CT.  As we reported yesterday, “the two-year deal that raises spending levels $300 billion above the caps implemented in both the 2011 Budget Control Act and the Bipartisan Budget Act of 2015. Defense spending will now increase $165B ($80B in 2018, $85B in 2019) and an additional $131B will go to nondefense spending ($63B in 2018, and $68B in 2019).” It also contains spending authority through March 23 when Congress is expected to have appropriated the newfound money and pass another spending resolution.

 

TRADING ACTIVITY

Yesterday – Breakneck Volatility Whipped Stocks Again: Investors continued to search for a balance between higher interest rates and appropriate stock valuations as a jump in longer yields once again battered U.S. equities. Treasury yields began to climb after the Bank of England said it expects more hikes even sooner, reigniting the fears that initially sparked the equity turmoil one week ago. With rates up at the open, stocks moved lower and sold off steadily until lunch. After some early-afternoon consolidation, the equity sellers re-emerged and the negative momentum sent the major indices into the close at their daily lows. The Dow ultimately sank 4.15%, lost more than 1,000 points for a second time this week, and officially entered a correction. The S&P tumbled 3.75%, also into correction territory, and the Nasdaq dropped 3.90%. All three closed through their 50- and 100-day moving averages and at their lowest levels since late November (Dow, S&P) and early December (Nasdaq). The ramped up negativity seemed to drive an afternoon bid for Treasurys, although technical factors likely played a part as well; the 10-year yield had earlier matched its Monday’s four-year intraday high of 2.88%. After a subsequent bounce, Treasury yields pulled back to finish near their lows of the day. The 2-year yield dropped 2.0 bps to 2.10% with the 10-year yield 0.4 bps higher at 2.82%.

 

Overnight – Yesterday’s U.S. Swings Hit Global Equities For More Losses: The sentiment that sank U.S. markets on Thursday clobbered Asian equities to close the week and has European markets more than 1% lower midway through Friday’s session. Japan’s Nikkei dropped 2.3%, Hong Kong’s Hang Seng shed 3.1%, and China’s CSI 300 led regional losses with a 4.3% slump. All three indices fell into correction territory, down more than 10% from their late-January peaks. In Europe, all regional indices are negative with the Stoxx Europe 600 down 1.5% and just 1.5% shy of dipping into a correction. After leading yields higher on Thursday in response to hawkish rate guidance from the Bank of England, U.K. Gilts have led a yield decline across Europe on Friday. The EU’s chief Brexit negotiator said there are substantial disagreements over a transition period and such a period is not a given if those disagreements persist. A soft Brexit is one of the conditions underlying the Bank of England’s expectations for quicker rate increases. The Pound also erased entirely its Thursday rally. Treasury yields have reversed a brief drop caused by the drag from European yields to move higher by more than 1 bps across the curve (2s +1.1, 5s +1.7, 10s +1.8). Looking to equities, Dow and S&P futures are mixed but little changed.

 

NOTEWORTHY NEWS

More Fed Chatter: San Francisco Fed President Williams (voter) agreed with his colleagues who said this week’s market volatility shouldn’t currently have an impact on the real economy. After previously voicing support for up to four 2018 hikes, he said he doesn’t feel strongly about whether the Fed should hike three or four times this year. Dallas’ Kaplan (nonvoter) again said the labor market is tightening and stated three 2018 hikes is the appropriate pace in order for the expansion to continue. Harker (nonvoter) from the Philadelphia Fed said inflation dynamics aren’t clear right now despite some signs of wage pressure and that he currently expects two hikes this year with a chance for a third. Like others at the Fed, he too sees no change to the economic outlook because of the market turmoil. Minneapolis Fed President Kashkari (nonvoter) continues to point to consistent wage growth as a necessity for higher rates and said bond-yield levels are signaling a lack of fear around an unexpected faster pace of price pressures. In a second round of weekly remarks, NY Fed President Dudley (voter) said rising interest rates have obviously affected stock valuations but the “small potatoes” sell-off shouldn’t affect the economy. He said four hikes this year is a possibility if the economic outlook improves further but that inflation running below 2% does all the Fed some room for patience. In other Fed-related news, Marvin Goodfriend (would-be voter) was approved by the Senate Banking Committee (13-12) to fill one of the four Fed governor vacancies.

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