Market movers today
The key focus in markets will continue to be the recent market rout and how far it can go.
German factory orders should confirm the picture of robust manufacturing growth. The data is very volatile though, so one should looked at the smoothed trend rather than one month’s data.
US trade balance may come into focus as we get the December number and thus have the total for all of 2017. It may reveal that the trade deficit with China has reached a new high, triggering further ammunition for Trump to take protectionist measures against China.
In the afternoon, the Fed’s Bullard (non-voter, dovish) will speak on the US economy and monetary policy. Bullard has proven one of the most dovish members of the Fed and cautioned against too aggressive rate hikes. He will vote on policy next year.
In Scandi, we get releases for Swedish industrial orders as well as Danish house prices.
Selected market news
Yesterday, we experienced a major risk off day in the financial markets. S&P500 fell 4.1% (the biggest decline since August 2011) erasing the gains in January thus ending the ‘honeymoon phase’ in the stock markets where we have not seen a big market correction since Brexit. In Asia, it was also red across the board this morning. S&P500 futures have recovered slightly but are still down around 1%. US 10-year Treasury yields have continued to fall overnight and are now trading at 2.68% versus 2.88% at their peak yesterday. The equity volatility index VIX more than doubled from around 17 to 37, higher than during the US election, Brexit and the Chinese slowdown in early 2016 – we have to go back to the flash crash on 24 August 2015 to find a higher VIX. The higher VIX leads to a big fall in short VIX products. Brent oil is now trading slightly below 67 dollars per barrel (versus slightly above 70 at its peak).
The question is whether the big risk sell-off reflects an economic slowdown. We do not think so. Economic optimism is high and both European PMIs and the US non-manufacturing ISM are at very high levels, suggesting economic growth is still strong. However, an increasing concern is whether the time of low inflation is over, not least after the stronger-than-expected wage growth numbers from the US on Friday. It is not unnatural for markets to take a break after a long period of big increases (and especially the equity markets have had a very strong start to 2018), as investors take home some profits. Long equities have been a crowded trade for some time with markets looking stretched and overbought. Despite the big falls, the S&P500 is still marginal above its 100-day moving average and still close to 30% higher than before Trump won the election. While the correction may not be over yet, we think it is short-lived.
Yesterday, Jerome Powell was sworn in as Fed chair. In the short term, he is going to stick to the current monetary policy by raising the Fed funds target range three times this year (the first one in March) but look out for the increasing discussions about shifting to a price level target instead of the current inflation target, see Flash Comment US: Powell is “Yellen in disguise” amid discussions about price-level targeting, 24 January.