Wednesday March 8

Stocks fell for the third consecutive day of losses as rates continue to sell off. The S&P 500 fell 0.2% to 2,362 and the Dow Jones fell 0.3% to 20,855. The KBW Bank index rose marginally and the DJ Utility average lost 1.5% as interest rates rose. Economic data today showed that the ADP Employment report showed a 298,000 surge in private payrolls in February compared to the consensus of just 183,000. That paves the way for a very strong reading for Friday’s NFP report. The prior month was also revised upwards by 15k as well. Additionally economic data showed that productivity over the last quarter was unchanged from prior readings along with unit labor costs. Economic data also showed that crude oil inventories rose by a very significant 8.2mm barrels last week compared to a 1.5mm increase the prior week which sent oil prices lower. In light of the ADP report analysts are now pricing in a near certainty chance that the Fed will raise interest rates next week and a 46% chance that the Fed will act again in June. Such a quick movement could suggest that expectations are shifting that the FOMC is behind the curve. On that backdrop the two year Treasury yield rose 3bp to 1.36%. The ten year Treasury yield rose 4bp to 2.56%. Accordingly 2yr vs 10yr bear steepened to 1.21%. USD rose 0.4% against GBP to $1.2152. USD rose 0.2% against EUR to $1.0542. And USD rose 0.6% against JPY to Y114.61 as the dollar is appreciating ahead of any Fed decisions. WTI lost 5.5% to $50.20 and Brent fell 4.9% to $53.16.

The election in the Netherlands next week will kick off the series of contentious elections that are set to take place across the eurozone this year. Next week voters in the Netherlands will cast their votes and if Geert Wilders wins the election it will continue the trend of anti-establishment political parties and euro-skepticism. Wilders is the candidate for a political party known as PVV that is based on anti-EU ideas and anti-immigration policies. Wilders is a proponent to pulling the Netherlands out of the euro currency union. Some commentators have compared Wilders to Trump in the United States. Although the PVV party was ahead in the polls for the majority of last year but support has fallen and analysts now believe his victory is unlikely. Instead now the centrist party and the current prime minister are expected to win and in the event that Wilders does win he won’t have a majority in parliament. Other political parties in the Netherlands have already said they will not form a coalition government with Wilders which would render his spot as prime minister as ineffective. As a result of this markets have not had any significant reaction to the possibility of him winning. Spreads between Dutch and German government bonds are slightly elevated however haven’t moved much since December. That contrasts to France where investors seem to be concerned about Marine Le Pen’s election based on market responses. Netherlands stocks have outperformed as well. If Wilders wins then it could have broader implications in upcoming elections since it suggests that euro-skepticism is rising and that polls aren’t doing a good job of capturing true sentiment.

Retirees and savers have been plagued by low interest rates on checking and savings accounts, which haven’t budged over the last few months even as interest rates broadly have increased. As a result of that savers have had to put more of their income into savings in the current low-return environment. That means that they are able to spend less on consumer spending and other discretionary purchases. In the current environments savers put away between 11% and 15% of their income depending on their annual income. Historically that range has been just between 6.8% and 8.2%. To earn returns in the current environment savers have had to allocate more money towards stocks than they might have otherwise, which is a risky proposition. Even CDs which savers used to use significantly haven’t yielded higher than 1% for the last eight years with no sign of changes any time soon. That compares to before the financial crisis when one year CDs yielded upwards of 3%. This is a bigger issue taking into account demographic trends and rising medical costs for elderly households. They have been investing in stocks which could leave them exposed in the event of a selloff.

In spite of heightened political risk across markets in Europe and even the US given all the uncertainty measures of volatility have been very low. Some analysts point out that investors may refrain from making any big portfolio moves or changes before important political events which would reduce the amount by which prices move around. Based on the market responses to the Brexit, the U.S. election and the Italian referendum investors have taken the opportunity to buy after quick selloffs following surprise outcomes. In the case of Brexit it took markets a couple days, the U.S. election a couple hours and the Italian referendum even less time. For the most part asset managers avoid making directional bets on political outcomes since they are uncertain situations and politics isn’t an area of expertise. Some investors have even been selling volatility leading into this election cycle taking the view that whatever the outcome it won’t shock markets similar to the Italian referendum. Implied and realized volatility have both been very muted over the last few months. However in anticipation of potential market shocks they have been hoarding cash as cash levels have increased to 6% which is the highest level in 15 years towards the end of 2016.

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Wednesday March 8

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