U.S. equity markets are seemingly on a never-ending roller coaster ride. Yesterday’s major indices expressed this sentiment yet again. At the peak of the trading session, the Dow Jones Industrial Average spiked 1.8% while the S&P 500 index had been up 1.9%. The Nasdaq Composite Index jumped 2.3% at its session high. All 3 major indices ended well off those levels: The Dow closed with a gain of just 0.2%, while the S&P closed up 0.3% and the Nasdaq rose 0.5% for the day. Most of the gains were lost between 2:00 and 4:00 p.m. EST., as news surfaced from a report by the New York Times that the Federal Bureau of Investigation had raided the office of Michael Cohen, President Donald Trump’s personal lawyer.
After giving up almost all of yesterday’s gains intraday, however, equity futures began to surge as news from Bei Jeng cited positive rhetoric on the U.S.-China trade front. In his speech from the Boao Forum for Asia, President Xi said China would open up the Chinese economy to global trade by taking the initiative to expand imports this year and “work hard” to import products that are required by the population.
“China does not seek trade surplus. We have a genuine desire to increase imports and achieve greater balance of international payments under the current account,” Xi said, according to a translation of the speech.
Beyond that, President Xi described China as a country upon which other nations had imposed unfair trade penalties: “We hope developed countries will stop imposing restrictions on normal and reasonable trade of high-tech products and relax export controls on such trade with China,” he said.
Regardless of the potential tailwind brewing for equities on the heals of the latest trade rhetoric, U.S. markets will likely be focused on the continued headlines coming out of Washington, the White House and Facebook. Mark Zuckerberg, the CEO of Facebook, appears before a joint hearing of the Senate Judiciary and Commerce committees in Washington on data privacy, after Facebook allowed a political data firm to misuse information on some 87 million of its users. Ahead of the scheduled testimony, Congress has released Mark Zuckerberg’s prepared testimony ahead of a Wednesday hearing. Here’s Zuckerberg’s full testimony!
“I think every day could be a dicey day. I don’t see any reason that volatility is going to lighten up anytime soon,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “I think it’s a Washington day all week. The economic calendar is light with the exception of PPI and CPI.” Producer price inflation is reported at 8:30 a.m. ET Tuesday, and consumer inflation data is released Wednesday.”
Beyond Zuckerberg’s testimony today, markets will also contend with the potential response from the White House on the latest Syrian chemical attacks on its citizens. President Trump said the attack could be the work of the Syrian government, Iran, Russia or all three. Trump promised a “major response” within 24 to 48 hours and that time has come due today. From within the White House cabinet, Trump spoke to reporters about the pending response during a meeting with U.S. security and military officials.
It remains to be seen if U.S. equity market volatility will persist in light of some positive global trade news today. Between trade rhetoric, the ongoing and expanding Mueller investigation, Zuckerberg’s testimony and a Syrian response, U.S. equities are still set to surge this morning with global equities taking the lead. The macro factors are front and center this week again, it seems, with a light economic data calendar. Data releases are expected today in the form of producer price index (PPI) data at 8:30 a.m. ET, and wholesale trade at 10 a.m. ET. In data already released this morning, the index of small-business optimism from the National Federation of Independent Businesses fell to 104.7 in March.
The March reading missed expectations of an increase to 107.0, among the economists surveyed by Econoday. The gauges of sentiment about expected sales and expected business conditions both notched big declines in March, but NFIB pointed out that both “remain at historically high levels.”
Looking to the central banking space, Atlanta Fed President Raphael Bostic will be in Cambridge, Massachusetts, where he is expected to attend the Harvard University Joint Center for Housing Studies’ 18th Annual John T. Dunlop Lecture. The Fed and it’s tightening schedule will likely plague the equity market throughout 2018 as fears of a misstep remain. The Fed is raising rates while reducing its balance sheet at the same time, causing continued consternation among investors and analysts alike.
“Years of accumulated policy distortion, a lack of Fed maneuvering room and shock waves from policy are the S&P 500 risks we see, but not corporate earnings or economic growth,” said Barry Bannister, head of institutional equity strategy at Stifel. Bannister has been warning about Fed-related risks for a while, and he recently speculated that if the Fed mishandles the transition to a more normalized policy, that could spark an “unusually rapid” bear market, leading to a “lost decade for stocks,” or 10 years with no positive returns.
With further tightening by the Fed scheduled for the balance of the 2018 and 2019 presently, Federal Reserve Chairman Jerome Powell backed a “patient” approach to raising rates and one that is continued to be tied directly to the Fed’s core mandates on employment and inflation. Treasury yields have been rising in 2018 on the prospectus of more tightening from the Fed with the 10-year yielding nearly 2.80% presently, up from 2.41% in the beginning of the year.
“We believe the simple reason that risk assets are struggling in 2018 is the Fed. Investors have been forced to acknowledge a tightening cycle is well underway,” wrote Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “History shows that once the Fed starts to tighten financial conditions it requires a major ‘event’ to reverse course.”
Federal Reserve Bank of Dallas President Robert Kaplan said late Monday that he expects the Fed to raise interest rates twice more this year and then possibly slow the pace of rate increases if the moderating growth he expects materializes.
“In 2019 and 2020, “I think you’ll see growth moderating and so for me, the path of rate increases is likely a little bit flatter,” he said. Weaker labor force growth, sluggish productivity and high levels of government debt are among the factors that could hold back the economy in coming years, he said in the Bloomberg interview.”
Simple or not, equities are struggling to find their footing for a variety of reasons noted. With the VIX above 20 presently, investors and traders would be wise to accept and expect greater whipsawing in markets for 2018. While the fear gauge for equity investors has risen some 85% YOY, most analysts are still of the opinion the major indices will finish higher when compared to 2017. Earnings season is still ahead with certain of the financial sector companies set to report Thursday and Friday.
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