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While there were so many standout moves in markets, I recall watching S&P 500 futures trade 5.8% lower between 12:00pm AEDT to 3:5pm AEDT, with the ASX 200 trading in appreciation from 5318 to 5052, before both embarking on a monster reversal as soon as Trump gave his victory speech. One could even say that the rally in US equities hasn’t really looked back since. USD/JPY traded in a 469 point range on that day, which volatility enthused FX traders can only dream of now, with its average range over the past five days a meagre 72 points.
The irony of the situation is that the world was supposed to collapse with Trump at the helm of the world’s largest economy, but the opposite is true and we can see the Dow up 19%, the S&P 500 +15% and the Nasdaq +26% this year alone. S&P 500 30-day realised volatility now sits at 4.4%, with implied volatility (or the “VIX”) at 9.79% and we haven’t seen a daily fall in the S&P 500 of more than 0.5% for 46 trading sessions, which is the longest run without this level of drawdown since 1968. We also know that a 2% move in the S&P 500 is a four standard deviation event, which to everyone who assesses volatility to understand the potential stress in their portfolio would feel like the worlds has imploded.
Extraordinary low volatility, strong equity gains and clear signs of animal spirits in developed and certain emerging market economies, married with actual signs of sales growth and one can almost deduce that it has almost been a perfect year for markets.
On a side note, if you want volatility there is really only one place to look and that is Bitcoin. The overnight moves were incredible, with price rallying to $7882 on the news that the expected fork was not going ahead, before price collapsed 10.4%. A market for the bravest of souls it seems.
While we can characterise that the world is a happy place right now, the moves have very little to do with Trump directly. However, the fact that we haven’t actually seen anything passed through Congress that has been really stimulatory for the US economy has only spurred on investors and traders to sell volatility, which in turn has resulted in these funds to take on ever more risk. If we had genuinely seen a sizeable fiscal response, in the timetable Trump had originally intended, then the Fed would arguing about a 50bp hike in December and not 25bp and the market would be pricing in three hikes in 2018. This would have undoubtedly promoted a sharp move in ‘real’ interest rates and a rapid tightening of financial conditions. So Trump can be credited for the strong moves in risk, but not for the reasons he so believes.
Re-focusing on the here and now, and it seems fitting then that the debate in US trade has focused on tax reform, with headlines detailing that the Senate plan to release its tax bill on Thursday at 11:30am EST. This will garner some attention and it is expected to be released shortly after the House unveil their mark-up version of last week’s tax plan. There will no doubt be sizeable differences between the two plans, but it is messy, the news is noise for markets and there is still a very healthy skepticism that anything is passed soon anyhow. The debate on tax reform, however, isn’t seemingly influencing markets and we see US equity indices largely unchanged, while small selling has been seen across the US Treasury curve. The USD index is completely unchanged, although there have been buyers of AUD/USD and NZD/USD, although the moves are still not huge by any means.
NZD/USD has certainly been aided 40 pips or so, by this morning’s RBNZ meeting, with the central bank upgrading its outlook for where the Official Cash Rate (OCR) will in future quarters.
A number of the red flags I was focusing on yesterday haven’t really followed through, with the Russell 2000 unchanged on the day, while the EEM ETF (MSCI Emerging Market ETF) has gained +0.4%. We have seen some further widening of US high yield credit and this needs to be watched going forward, while there has also been some focus on the fact that breadth in US equities is looking somewhat concerning. For example, the percentage of S&P 500 companies trading above their 20-day average has fallen from 78% on 5 October to now sit at 54%, with a similar move seen if we look at the medium term 50-day average. So despite a 2.2% gain in the S&P 500 during this time, the number of stocks participating in the rally is falling and it seems a handful of mega-cap stocks are pushing up the index.
The overnight leads have given us a platform for the bulls to support the ASX 200 above 6000 with our call currently sitting at 6022. Perhaps the new development is that Aussie SPI futures traded to 6012 in the night session, just trading above the March 2015 high of 6011, although it would have been nice to see a convincing close through this prior high. Banks will need to find further support on open for the market to progress, after financials putting in 14 points into the index yesterday, but whether we see follow through buying, specifically in CBA will be key here. BHP looks set to open on a flat note, while we see Vale’s US-listing trading +0.2%, so the materials space looks directionless and leads are somewhat mixed with spot iron ore closing -0.6%, while Dalian iron ore, steel, and coking coal futures closed +1.7%, +2.1% and +4.2% respectively.
Copper is up 0.3%, while small selling has been seen in both Brent and US crude, with some focus on the weekly US Department of Energy oil inventory report, which showed a 2.23 million build in crude stocks. On a more positive note, gasoline and distillate stocks fell 3.31millnio and 3.35 million respectively.