The Market Today
Political (and Geo) Chaos Anguish Markets
by Craig Dismuke, Dudley Carter
Today’s Calendar – Digesting the Week’s Events; Consumer Confidence: The August UM Consumer Confidence report will be released at 9:00 a.m. CT and is expected to show a slight pullback in headline confidence. Confidence remains strong, and is still expected to remain strong, despite all of the political turmoil of the past few months. The drop in the unemployment rate to 4.3%, continued low gasoline prices, and record high stock markets have kept spirits high. While the report is important to the markets, they are likely to be focused on making sense of the week’s geopolitical events. Fears of instability at the White House have weighed on stocks and pushed bond yields lower this week, while the turmoil in Charlottesville and Barcelona have created their own type of uncertainty.
Overnight Activity – Thursday’s Fears Follow Through into Friday’s Session: Global markets have shown no inclination to diverge from yesterday’s distressed trading in the U.S. While the moves in sovereign yields have not been as sharp, the attitude towards equities has been equally as gloomy. The German 10-year yield fell only 1.1 bps overnight, compared with yesterday’s 3.1 bps decline for a comparable Treasury, and shifts in other European yields have been similarly modest. The moderation of the bid for safer sovereigns has Treasury yields essentially unchanged ahead of the U.S. session (2s +0.6 bps to 1.30%, 10s +0.2 bps to 2.19%). European stocks, however, remain notably lower at Friday’s halfway point. After a sickly start in Asia, the Stoxx Europe 600 tumbled nearly 1%. Looking at the major drivers of trading trends over the last 12 to 24 hours, the widespread sector losses reflect the broader concerns surrounding the turmoil in U.S. politics. European airlines and leisure stocks underperforming the broader market reflects the impact of yesterday’s deadly terrorist attack in Barcelona. U.S. equity futures are positive but the Dollar has continued to weaken.
Yesterday’s Trading Activity – Markets Continue to Agonize over Political Chaos: Treasurys rallied Thursday as U.S. stocks sold off sharply and steadily during the entire session. Investors’ flight out of riskier assets pushed the VIX – known as the equity fear index and which measures expected future volatility – up 32%. The Dollar was relatively stable but the Yen benefited from the heightened uncertainty. Rumors of Gary Cohn’s resignation and the terror attack in Barcelona – both under the cloud of Wednesday’s dissolution of two of President Trump’s advisory groups – drove the flight to quality. Rumors that Gary Cohn, Chief Economic Advisor to the President, intended to resign were quickly debunked but the damage was done. The ever-increasing tensions in Washington continue to call into question the viability of achieving any aspect of the Republican’s agenda. Shortly after the Cohn rumors, news broke of the terrorist attack in Barcelona that resulted in more than 10 dead and scores more wounded. The Dow dropped 1.2% as the S&P tumbled 1.5% and the Nasdaq sank nearly 2%; the second worst day for the Dow and S&P since last September. The weakness was broad-based with only 23 of the 505 companies comprising the S&P positive on the day. The 2-year yield fell 3.1 bps to 1.30%, the 5-year yield shed 3.1 bps to 1.75%, and the 10-year lost 3.7 bps to 2.18%; the lowest 10-year yield since June 26 and the 14th lowest mark since the week of the election.
Thursday’s Fedspeak Lands on the Patient Side of the Inflation Debate: It was more of the same from Kaplan on Thursday. He wants to be patient before raising the target rate range again, allowing time for evidence that inflation will return to the 2% target in the medium term. He also discussed the dynamics behind an aging and slower-growing workforce weighing on economic growth. He pointed to the 10-year yield as a sign that markets also have an unspectacular outlook for economic growth. Minneapolis Fed President Kashkari overlapped Kaplan’s comments and touched on the same topics with an even less sanguine tone. Kashkari said the math doesn’t work for fast GDP growth, that there’s no need to cool the economy, and that low rates are here to stay. While the expectation remains that the Fed will announce slowing of reinvestments in September, Kashkari said they will be keeping an eye on the debt ceiling debate as they consider the timing.