When lack of volatility is a bad omen for stocks
Five major themes likely to drive the thinking of investors and traders this week
1. I need a VIX cause I’m going down
Market volatility has rarely, if ever, been lower as investors bet on plain sailing across all assets, all around the world in the coming months. Nowhere is this more obvious than the VIX, Wall Street’s ‘fear index’, which is at its lowest in over 20 years. And that’s despite the political shocks and rise of populism and protectionism that were supposed to throw markets off course. They haven’t. So what will? Boring old economic fundamentals. History shows that meaningful surges in volatility come when the economy rolls over. There’s little sign of that happening anytime soon, so investors will continue riding the risk-on wave. But the US expansion is already the third longest in history, the Fed is raising rates, and US economic surprises are mostly to the downside.
2. Day after day, alone on the hill
Donald Trump may be a divisive president, but everyone would agree that his term in office so far has proved that there’s never a quiet or dull moment in Washington. In the past week it was his shock firing of FBI chief James Comey that dominated the headlines. Political and policy turmoil has so far had minimal negative impact on markets but investors are growing increasingly nervous that shenanigans in Washington could jam the legislative process, and tax reform in particular. G7 finance officials are meeting in Italy, with Europe, Japan and Canada all hoping to come away with a clearer picture of Trump’s plans on key policies such as trade and regulation. It’s bound to be another interesting week on Capitol Hill.
Delay seen, again, on Trump growth agenda after Comey sacking
Viewsroom: Comey ouster bad for business
Trump attacks on fired FBI chief meet resistance; Russia probe proceeds
At G7, world finance chiefs are trying to gauge Trump’s plans
3. ECB balancing act
As the ECB’s June meeting approaches, it seems policymakers are doing their best to prevent markets running too far ahead on just how much the central bank will signal a step back from its ultra-loose monetary policy. ECB chief Mario Draghi warned this week it was “too early” to declare victory in the quest to boost inflation and vice president Vitor Constancio said maintaining the ultra-loose policy for longer is the safer way to avoid an economic relapse. But strong company earnings, generally upbeat economic data and fading political risks could make the case for the ECB’s doves harder. That will keep the spotlight on a deluge of ECB speakers, including Draghi, next week. Investors meanwhile may have made already made up their minds that “tapering” is on its way. German Bund yields rose this week to seven-week highs, while money markets price in roughly a 60% chance of an ECB rate hike in early 2018.
4. Oil slips up
It’s been a rollercoaster week for oil, with some of the ups and downs spilling over into world markets, especially affecting assets of emerging economies. A week ago, oil prices plumbed five-month lows on fears of oversupply. But then prices turned sharply thanks to a fall in US inventories that indicated stocks had been depleted earlier than usual and expectations that OPEC-led output cuts could be extended. This put crude prices on track for the biggest weekly gain in five weeks. Benchmark Brent is back just above the $50 a barrel threshold – a ballpark level acceptable to both importers and exporters of crude across emerging markets. Confounded investors awaiting the next OPEC meeting later in May will continue to seek direction in crude markets and commodities prices more widely, with a plethora of data from China due in the coming week.
5. As good as it gets?
Everyone loves European stocks. Inflows into European equity funds in the week after Emmanuel Macron won the French presidential election by a big margin were the highest on record, according to EPFR Global. $6.1 billion was pumped into fund focusing on the region as fading political risks and the strongest earnings season since 2010 draw investors back. But there are signs that caution is creeping in. Credit Suisse downgraded the best performing eurozone equity market – Spain – to “underperform” on Friday, citing risks that the strong earnings momentum is starting to fade. Valuations are no longer particularly cheap either. Eurozone stocks are now trading at 14.2 times forward earnings, still cheaper than the US and emerging markets, but against their own history, they are now at a 12% premium. That has raised the worry that while more inflows can support the market, for now, investors will want to see the 20% growth in earnings expected in the first quarter to translate to upgrades for Q2 and beyond.
(Reporting by Jamie McGeever, Dhara Ranasinghe, Karin Strohecker and Vikram Subhedar; Editing by Catherine Evans)