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Options

SPY 3D Volatility Surface


Using Interactive Analytics within his Trader Workstation, Interactive Brokers chief options strategist Steve Sosnick examines the current volatility surface of the SPDR S&P 500 ETF (Ticker: SPY). Looking back at surging volatility, Steve compares and contrasts current versus peak implied volatility and considers how the volatility surface has somewhat normalized.

 

The analysis in this article is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


16492




Macro

Early Look


Thursday, February 22, 2018

 

Stock futures are pointing to a mixed open a day after markets dropped late session on rising inflation and borrowing cost fears. Stocks did an about face on Wednesday, reversing earlier gains to close near its worst levels of the day as minutes from the Federal Reserve’s most recent policy-meeting sparked a fresh wave of volatility, while bond rates spiked higher (30-yr above 3.21% to highest since July 2015 and 10-yr to 2.95%, highest YTD) and the dollar strengthened, weighing on equities. Minutes from the January FOMC meeting showed that officials saw a stronger economy than at the end of 2017 and that more rate increases were coming. Given the reaction to the minutes, markets will most likely keep a close watch on comments from various Fed speakers throughout the day (including Dudley and Bostic), along with the weekly reading on jobless claims and oil inventory data. In Asian markets, The Nikkei Index declined -234 points to settle at 21,736, the Shanghai Index reopened, up 69 points to settle at 3,268 and the Hang Seng Index dropped -466 points to settle at 30,965. In Europe, the German DAX is down around -100 points at 10,360, while the FTSE 100 is down around -70 points holding above 7,200. The declines in Europe follow weakness in the U.S. yesterday

Market Closing Prices Yesterday

  • The S&P 500 Index dropped -14.93 points, or 0.55%, to 2,701.33
  • The Dow Jones Industrial Average fell -166.97 points, or 0.67%, to 24,797.78
  • The Nasdaq Composite slumped -16.08 points, or 0.22%, to 7,218.23
  • The Russell 2000 Index advanced 1.84 points, or 0.12% to 1,531.84

Events Calendar for Today

  • 8:30 AM EST       Weekly Jobless Claims…est. 230K
  • 8:30 AM EST       Continuing Claims…est. 1.935M
  • 9:45 AM EST       Bloomberg Consumer Comfort Index…prior 57.0
  • 10:00 AM EST     Leading Index for January…est. 0.7%
  • 10:30 AM EST     Weekly EIA Natural Gas Inventory Data
  • 11:00 AM EST     Weekly DOE Inventory Data
  • 11:00 AM EST     Kansas City Fed Manufacturing Activity for February…est. 18
  • 12:10 PM EST     Fed’s Bostic speaks on outlook for Economy

 

Earnings Calendar:

  • Earnings Before the Open: APA, CCOI, CHK, CNP, GOGO, HCN, HRL, LKQ, MITL, NEM, PPL, SCG, SRC, TPX, W, WIN
  • Earnings After the Close: APPN, GDDY, HLF, IMMR, INTU, LNT, NDSN, OLED, TTD

 

Other Key Events:

  • CAGNY Conference 2/19-2/23 in Boca Raton, FL
  • Citigroup Industrial Conference, 2/21-2/22, in Miami, FL
  • RBC Healthcare Conference 2/21-2/22, in New York
  • Minutes from the prior ECB Meeting released

World News

  • German business sentiment dropped in February from last month's record high, as the Ifo's business climate index fell to 115.4 points in February from 117.6 points in January, disappointing economists' expectations of 117.0 points.
  • The Office for National Statistics revised down U.K. growth in the final three months of 2017 to 0.4% from 0.5% previously. On an annualized basis, fourth-quarter growth was lowered to 1.6% from 2.0%

 

Sector News Breakdown

Consumer

  • Cheesecake Factory (CAKE) Q4 EPS 53c/$571.8M vs. est. 53c/$567.7M; 4Q restaurant comp sales -0.9% vs. estimate -0.7%
  • Jack in the Box (JACK) Q1 operating EPS $1.23/$294.46M vs. est. $1.06/$283.53M; system same-store sales decreased (-0.2%) for the quarter
  • Wendy's (WEN) Q4 adjusted EPS 11c/$309.2M vs. est. 11c/$313.49M; reports North America systemwide sales growth 2.4%, International sales growth 14.6%; sees year EPS 54c-56c vs. est. 61c; sees year comp sales up 2%-2.5%; Q1 comp sales rose 1.3% vs. est. 1.8%
  • Hormel Foods (HRL) Q1 EPS 44c/$2.33B vs. est. 45c/$2.42B; raises FY18 EPS view to $1.81-$1.95 from $1.62-$1.72 vs. est. $1.73 and backs FY18 revenue guidance of $9.7B-$10.1B
  • Bridgepoint Education (BPI) Q4 adjusted EPS loss (16c)/$105M vs. est. loss (13c)/$109.1M; says total student enrollment 40,730 vs. 45,087 a year ago
  • Ford Motor Co.’s (F) head of North American operations is leaving the automaker immediately following an investigation into reports of “inappropriate behavior.”
  • Masonite (DOOR) Q4 adjusted EPS 71c/$509M vs. est. 84c/$511.66M; sees FY18 adjusted EPS $3.70-$4.20 vs. est. $3.95; sees FY18 sales growth 6%-8% vs. est. $2.16B
  • SpartanNash (SPTN) Q4 adjusted EPS 41c/$1.92B vs. est. 41c/$1.94B; sees FY18 adjusted EPS $2.20-$2.32 vs. est. $2.35; sees FY18 CapEx $60M-$70M
  • Fresh Del Monte (FDP) announces $300M share repurchase program
  • Boston Beer (SAM) Q4 revs $206.3M vs. est. $208.0M; sees FY gross margin +52% to +54%; sees 2018 EPS $6.30-$7.30 vs. est. $7.54
  • Interface (TILE) Q4 adjusted EPS 32c/$266.2M vs. est. 30c/$256.28M; sees 2018 organic revenue growth 3%-5%; expects its strongest operating income growth in Q2 and Q3, with softer growth in Q1 and Q4

 

Energy

  • The American Petroleum Institute (API) showed a fall in U.S. oil inventories by around 900,000 barrels last week
  • Continental Resources (CLR) Q4 EPS 41c/$1.047B vs. est. 32c/$962.52M; Q4 net production totaled 26.4 million Boe, or 286,985 Boe per day, up 18% QoQ; increased production 37%, with oil production up 44%; Q1 production is estimated to be between 285K-290K Boe per day.
  • Energy Transfer Partners (ETP) Q4 Ebitda $1.94B vs. est. $1.76B; 4Q revenue $8.61B vs. est. $8.1B
  • Gulfport Energy (GPOR) Q4 adjusted EPS 45c/$338.7M vs. est. 39c/$339.27M; estimates total capital expenditures will be in the range of $770M-$835M, which will be funded within cash flow at current strip pricing; forecasts its 2018 average daily net production will be in the range of 1,250 MMcfe to 1,300 MMcfe per day, an increase of 15% to 19% over its 2017 average daily net production of 1,089.2 MMcfe per day
  • Matador (MTDR) Q4 adjusted EPS 25c vs. est. 23c; average daily oil production increased 5% sequentially from approximately 23,500 barrels per day in Q3 to approximately 24,700 barrels per day in Q4. Average daily natural gas production increased 3% sequentially from approximately 110.5M cubic feet per day in Q3 to approximately 114.3M cubic feet per day in Q4
  • Parsley Energy (PE) Q4 adjusted EPS 30c/$311.49M vs. est. 17c/$298.38M; reports Q4 Net production averaged 80.3 MBoe per day; Proved reserves of 416 MMBoe as of December 31, 2017 represent an 87% increase versus proved reserves as of December 31, 2016
  • SandRidge Energy (SD) Q4 adjusted EPS 34c vs. est. 26c; proved reserves at 2017-year end of 178 MMBoe, with 17% increase in proved oil reserves over year-end 2016; reports 2018 production of 14.9 MMBoe at high end of guidance for 2017
  • Repsol SA (REP) said it has reached an agreement to sell its 20% stake in Gas Natural SDG SA (GAS.MC) to CVC Capital Partners for EUR3.82 billion euros ($4.7 billion), or EUR19 a share. https://goo.gl/RBjcRF
  • TechnipFMC (FTI) Q4 adjusted EPS 20c/$3.68B vs. est. 43c/$3.84B; 4Q backlog $12.98 billion
  • Whiting Petroleum (WLL) Q4 EPS loss (17c) vs. est. loss (33c); sees FY capital expenditure $750.0M; sees FY production 46.5 to 47.2 MMBoe; 4Q production 128.05 mboe/d
  • WPX Energy (WPX) Q4 adjusted EPS loss (2c) vs. est. loss (7c); Delaware production averaged 58.7 Mboe/d in Q4, up 41% vs. the sequential quarter and 134% higher than the same period in 2016. Williston Basin production averaged 38.7 Mboe/d in Q4, up 8% vs. the sequential quarter

Financials

  • Athene Holding (ATH) Q4 operating EPS $1.69 vs. est. $1.29; generated deposits of $3.5B
  • CoStar Group (CSGP) Q4 adjusted EPS $1.25/$254M vs. est. $1.24/$252.75M; sees Q1 adjusted EPS $1.32-$1.40 on revs $269M-$272M vs. est. $1.66/$263.79M; sees FY18 revenue $1.17B-$1.19B vs. consensus $1.11B
  • Life Storage (LSI) Q4 adjusted FFO $1.34/$133.1M vs. est. $1.31/$132.9M; increased same store revenue by 1.3% and same store net operating income by 0.4% as compared to the fourth quarter of 2016
  • Diebold Nixdorf (DBD) announced that Gerrard Schmid will join the company as its president and CEO, effective immediately. He also will join the Diebold Nixdorf Board of Directors
  • ProAssurance (PRA) Q4 net premiums earned $183.0M and Q4 net premiums written $167.4M; Q4 EPS 55c vs. est. 62c

Healthcare

  • Globus Medical (GMED) Q4 EPS 38c/$176.0M vs. est. 35c/$166.5M; reaffirmed forecast
  • GW Pharmaceuticals (GWPH) said GWP42006 didn’t meet the primary endpoint of a Phase 2a proof of concept study for adult patients with focal seizures; remains committed to continued development of GWP42006 for autism spectrum disorders
  • PRA Health (PRAH) Q4 EPS $1.04/$655.9M vs. est. $1.03/$543.54M
  • Quidel (QDEL) Q4 EPS 56c/$114.9M vs. est. 53c/$114.7M; 4Q gross margin +51%
  • Ultragenyx (RARE) files automatic mixed securities shelf

Industrials & Materials

  • Avis Budget (CAR) Q4 adjusted EPS 45c/$2.02B vs. est. 22c/$2.0B;
  • Aerojet Rocketdyne (AJRD) Q4 adjusted EPS 16c/$528.2M vs. est. 27c/$544.4M
  • Kaiser Aluminum (KALU) Q4 EPS $1.22/$353M vs. est. $1.23/$348.8M; sees mid-single-digit growth in shipments and value-added revenue for the full year 2018; sees 2018 adjusted EBITDA margin in the mid-20 percent range
  • Trinity Industries (TRN) Q4 adjusted EPS 43c/$906.4M vs. est. 42c/$1.03B; sees FY18 adjusted EPS $1.15-$1.35 vs. est. $1.34; now anticipates 2018 railcar deliveries of 20,500, compared to deliveries of 18,395 railcars in 2017
  • Stericycle (SRCL) Q4 EPS $1.00/$887.8M vs. est. $1.14/$883.28M

 

Technology, Media & Telecom

  • Pandora (P) Q4 adjusted EPS loss (13c)/$395.3M vs. est. loss (7c)/$376.43M; said total listener hours were 5.03B for Q4, compared to 5.38B for the same period of the prior year; active listeners were 74.7M for Q4
  • Roku (ROKU) shares fell -20%; Q4 EPS 6c/$188.3M vs. est. $182.5M; sees 1Q revenue $120M-$130M vs. est. $132M; 4Q average rev. per user $13.78; sees year total net revs $660M-$690M vs. est. $661.6M; sees year net income loss $40M-$55M
  • Applied Optoelectronics (AAOI) shares fell -11%; Q4 EPS 89c/$79.9M vs. est. 83c/$85.52M; sees Q1 EPS 28c-34c on revs $67M-$71M, well below the consensus 74c/$87.21M
  • Synopsys (SNPS) shares rose 5%; Q1 EPS $1.10/$769.4M vs. est. $1.00/$751.19M; sees Q2 adjusted EPS $1.06 - $1.10 on revs $765M-$790M vs. est. 84c/$715.23M; sees FY18 adjusted EPS $3.67-$3.74 on revs $2.92B-$2.95B vs. est. $3.50/$2.9B
  • Convergys (CVG) Q4 adjusted EPS 47c/$689Mvs. est. 45c/$695.73M; sees FY18 adjusted EPS decrease of up to 10% and sees FY18 constant currency revenue decrease of up to 7%
  • Cotiviti Holdings (COTV) Q4 adjusted EPS 47c/$176.7M vs. est. 43c/$179.1M; Q4 non-GAAP adjusted EBITDA of $77.6M; Sees FY revenue $740M-$775M vs. est. $761.5M
  • Five9 (FIVN) Q4 EPS 7c/$55.4M vs. est. 4c/$52.3M; sees Q1 EPS 2c-4c on revs $54.5M-$55.5M vs. est. 1c/$54.9M; sees FY18 EPS 20c-25c on revs $231M-$234M vs. est. 13c/$231.4M
  • Mellanox (MLNX) announced that Jacob Shulman has accepted an executive position at a pre-IPO company and will step down as Chief Financial Officer of Mellanox on May 4, 2018; sees Q1 revenue $240M-$250M vs. est. $227M and Q1 Non-GAAP gross margins of 68.5% to 69.5%.
  • Mindbody (MB) Q4 EPS 3c/$49.7M vs. est. 1c/$48.96M
  • Stamps.com (STMP) Q4 EPS $4.68/$132.5M vs. est. $2.72/$120.26M; Q4 adjusted EBITDA was $64.1M, up 15% compared to $55.9M; Sees FY adjusted EPS $8.80-$9.80 on revs $530M-$560M vs. est. $8.21/$531M
  • Tyler Technologies (TYL) Q4 adjusted EPS $1.07/$218.1M vs. est. $1.04/$220.6M; sees FY18 EPS $4.73-$4.83 on revs $913M-$929M vs. est. $4.40/$933.6M
  • Sinclair (SBGI) is planning to sell New York's WPIX and Chicago's WGN TV stations to help secure FCC approval for its $3.9B takeover of Tribune Media (TRCO) but will still operate the properties, Bloomberg reports

The content of this post was created by the Hammerstone Group. The Hammerstone Institutional Forum, a chat-based platform for traders, provides subscribers with up-to-the-minute breaking news headlines and instant analysis that drive the market. For more information please visit www.thehammerstone.com. For more information on the stocks mentioned in the Hammerstone Recap, please contact Brian Ducey at brian@thehammerstone.com.

This article is from the Hammerstone Group and is being posted with the Hammerstone Group's permission. The views expressed in this article are solely those of the author and/or the Hammerstone Group and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

 


16490




Futures

Blue Line Morning Express


E-mini S&P (March)

Yesterday’s close: Settled at 2698.75

Fundamentals: The S&P settled nearly 2% from its session high, reversing course sharply after the release of the FOMC Minutes. Price action extended gains initially after the release to a high of 2747.75, matching Tuesday’s session high and our first key resistance level. However, a slightly more hawkish rhetoric than anticipated pushed the 10-year Treasury yield to a new high of 2.957. It is important to note that the 2-year, 5-year and 10-year prices all did not make new lows. While we have seen a marginal consolidation off yesterday’s low for each into this morning, this has brought support to the equity markets; the S&P traded to an overnight low of 2682 before regaining 2700. The Fed signaled staying the course on three gradual hikes this year, the concern for the equity markets is rising inflation equaling higher yields. The Fed upped their growth forecast citing tax-reform and consumer spending, most see inflation reaching their 2% target later this year. Markets across the globe plated catchup; the DAX has lost about .67% and the Nikkei is down 1%. The ECB this morning did not bring much, they said too early to change their communication. However, St. Louis Fed President Bullard made dovish comments earlier today cautioning against too many rate hikes. Weekly Jobless Claims are due at 7:30 am CT. NY Fed President Dudley speaks at 9:00, Atlanta Fed President Bostic speaks at 11:10, Dallas Fed President Kaplan speaks at 2:30. There is a 7-year note auction at noon CT.

Technicals: Price action failed right at first key resistance late yesterday and the sellers showed up. Intraday, second key support at 2688-2692.50 held and we will be watching part of this level on a closing basis... Please sign up for a Free Trial at Blue Line Futures to view our entire technical outlook and proprietary bias and levels.

Crude (April)

Yesterday’s close: Settled at 61.68

Fundamentals: Crude Oil sold off after yesterday’s settlement at 1:30 pm CT trading to an overnight low of 60.75. This came after the release of the FOMC Minutes and as the Dollar strengthened. Price action did see a short-lived bounce after the release of API data that showed Crude inventories at -907,000 when +1.3 mb was expected. Gasoline’s build of 1.468 was in line with expectations and Distillates saw a much larger draw at 3.563. This could be seen as giving a very slight edge to the bear camp on today’s EIA data. Ultimately though, the market remains in a very technically defined range. The official EIA read expects +1.795 mb Crude, -.282 mb Gasoline and -1.46 mb Distillates. Estimated production must be watched as the U.S continues to add rigs. The Dollar trade will also be key; strength will add pressure while weakness will add support.

Technicals: As we said above, the market remains in a very technically defined range. Yesterday’s price action struggled to stay above the pivot at ...  Please sign up for a Free Trial at Blue Line Futures to view our entire technical outlook and proprietary bias and levels.

Gold (April)

Yesterday’s close: Settled at 1332.1

Fundamentals: Gold took it on the chin late yesterday after the release of the FOMC Minutes. Though the content was not much of a surprise, the path of least resistance in the Dollar has been higher in the very immediate-term and this opened the door for further gains. While the Fed signaled they were still on their gradual path of three rate hikes, upbeat comments on growth due to tax-reform and consumer spending and their 2% inflation target being achieved later this year supported the Dollar Index to the 90 mark. We have a lot of Fed speak today to digest; first St. Louis Fed President Bullard warned of too many rate hikes slowing growth. Next up is New York Fed President Dudley at 9:00 am CT, Atlanta Fed President Bostic speaks at 11:10, Dallas Fed President Kaplan speaks at 2:30. Weekly Jobless Claims are due at 7:30 am CT.

Technicals: We remain long-term Bullish Gold though the market is going through a period of wide range consolidation. First key support at...  Please sign up for a Free Trial at Blue Line Futures to view our entire technical outlook and proprietary bias and levels.

Natural Gas (April)

Yesterday’s close: Settled at 2.681

Fundamentals: March option expiration is tomorrow and while the open interest has been in April, the volume has clearly moved too. Today’s storage report is 9:30 am CT and expectations sit at -120 bcf. This is predicted to be the last draw of over 100 bcf for the season and the recent warm front that brought temperatures above 70 degrees on the east cost has pared back expectations over the next two weeks. Still, price action has held well against a long-term value area. Shorts are likely taking profit at this area and ahead of today’s read and we maintain that a surprise weather scare is not priced in at all.

Technicals: The late January rally in the April contract never got out above the $3 mark, and this will be a clear line in the sand in the coming weeks...  Please sign up for a Free Trial at Blue Line Futures to view our entire technical outlook and proprietary bias and levels.

10-year (March)

Yesterday’s close: Settled at 120’065

Fundamentals: Yesterday’s FOMC Minutes sent the 10-year yield to a new high of 2.957% but the price did not make a new low against last Thursday’s 120’01. The technicals as well as a psychological barrier near the 3% are what is supporting price action. Fed speakers today include NY Fed President Dudley speaks at 9:00, Atlanta Fed President Bostic speaks at 11:10, Dallas Fed President Kaplan speaks at 2:30. Weekly Jobless Claims are at 7:30 am CT and there is a key 7-year note auction at noon CT.

Technicals: An overnight bounce in price action has remained contained below the 120-’15-120’18 area...  Please sign up for a Free Trial at Blue Line Futures to view our entire technical outlook and proprietary bias and levels.

 

Futures trading involves substantial risk of loss and may not be suitable for all investors. Trading advice is based on information taken from trade and statistical services and other sources Blue Line Futures, LLC believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder. Past performance is not necessarily indicative of future results.

Visit our website at www.bluelinefutures.com to open an account and stay up to date with our research.

Bill Baruch is President and founder of Blue Line Futures. Bill has more than a decade of trading experience. Working with clients he focuses on developing trading strategies that present a clear objective for both long and short-term trading approaches. He believes that in order to properly execute a trading strategy, there must be a well-balanced approach to risk and reward.

Prior to Blue Line, Bill was the Chief Market Strategist at iiTRADER which followed running a trade desk at Lind Waldock and MF Global.

Bill is a featured expert on CNBC, Bloomberg and the Wall Street Journal as well as other top tier publications. 

Blue Line Futures is a leading futures and commodities brokerage firm located at the Chicago Board of Trade. We work with clients that range from institutional to professional to novice and from self-directed to broker-assisted. No matter what type of trader you are, our mission is simple; to put the client first. This means bringing YOU strong customer service, consistent and reliable research and state of the art technology. 

This video is from Blue Line Futures and is being posted with iBlue Line Futures’ permission. The views expressed in this video are solely those of the author and/or Blue Line Futures and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


16488




Macro

Three market concerns move to the fore


Weekly Market Compass: Exploring the potential for populism, protectionism and pressure on debtors

Last week brought renewed focus to three areas of concern that I’ve been writing about for some time: populism, protectionism and pressure on debtors. It appears that we may be moving closer to certain outcomes that could be of concern to markets.

Populism

On March 4, Italian citizens will vote in the country’s parliamentary elections. With polls showing there are still many undecided voters, there is much uncertainty surrounding the election. It seems likely that the Five Star Movement — a relatively new party focused on environmental, anti-immigration and Euroskeptic issues — could garner the most votes of any party, although not enough to govern without a coalition. However, the Five Star Movement, which is seen as populist in nature, has in the past ruled out forming coalitions with other parties, which means that we might see the formation of a different governing coalition involving Silvio Berlusconi’s right-wing Forza Italia party and the very right wing, populist Lega Nord party. In other words, the most likely outcomes could result in an anti-European Union (EU), populist movement in Italy’s leadership — a significant departure from the past several years in which Italy was governed by a center-left coalition that was largely supportive of the EU. This situation is further complicated by the reported involvement of “bots” — automated social media accounts such as fake Twitter profiles — that are attempting to help populists win the Italian elections.1 This is particularly troubling given that the US Senate warned last month that Italy is a potential target for Russian election manipulation.

What’s so worrisome about a populist regime in power? While it’s unlikely that we will see an “Italexit,” it is likely that such leadership will make it more difficult for the EU to become more politically and fiscally aligned — which is part of French president Emmanuel Macron’s vision for reforming and improving the EU. In addition, populism could result in efforts to erect protectionist barriers. Which brings us to our next topic.

Protectionism

Last month, we saw the US impose tariffs on two imports from China — washing machines and solar panels. The move seemed small in scope, but at the time I worried that it could result in retaliatory actions on the part of trading partners, given that tariffs tend to beget more tariffs. But despite strong words, there was no retaliation, at least not yet. Then, last week, America’s protectionist stance gained momentum as the US Commerce Department recommended significant barriers on steel and aluminum imports to the US. This all started back in April, when an investigation was opened under Article 232 to determine whether these imports posed a threat to the country’s national security. The report released last week by the Commerce Department concluded that such imports are weakening the country’s internal economy, and therefore pose a threat to US national security.

The recommended solution was essentially a cafeteria list of different options, comprising quotas or tariffs or both, which could be waged against all countries or a select group of countries. In other words, President Donald Trump could determine that specific countries should be exempted from the proposed quota, or that only a few countries should have tariffs imposed on their goods. Those tariffs would be determined by the economic or security interests of the United States — a relatively amorphous standard. In making a determination on which countries would be subject to tariffs or quotas, Trump could consider the countries’ willingness to work with the US to address issues such as global excess capacity and other challenges facing its aluminum and steel industries. For its part, the Aluminum Association advocated focusing specifically on Chinese overcapacity while “avoiding unintended consequences for US production and jobs.”

Not surprisingly, after the release of the Commerce Department’s recommendation, China announced that it reserves the right to retaliate if tariffs and/or quotas are imposed. In addition, a number of groups have come out in opposition to such trade barriers, including beverage companies and auto manufacturers. Some Republican lawmakers have also voiced opposition to these protectionist proposals, saying they would jeopardize US manufacturing jobs. It seems likely that input costs would increase if the Commerce Department’s recommendations were enacted, which is why stocks of US auto makers fell after the news on Feb. 16.

President Trump has 90 days to review the findings and recommendations and make a decision; we will want to follow the situation closely. As I have mentioned, geopolitical risk rarely impacts capital markets in a material way over the longer term — but protectionism can and typically does. Keep in mind that higher inflation is often a result of protectionism, which means that protectionism might be one of many forces pushing prices higher. And that brings us to pressure.

Pressure

Last week, stocks made a dramatic recovery, retracing nearly half the loss made in the “flash correction” of the previous week. That correction was brought on by concerns about higher inflation, which could trigger higher interest rates — and indeed the 10-year Treasury yield did rise significantly over the past several weeks. However, while stocks have shrugged off concerns about higher rates — at least for now — we need to remain focused on them. That’s because inflationary pressures seem likely to be building, which could result in higher rates that place potential pressure on governments, companies and households.

The Federal Reserve Bank of New York just released data showing that household debt in the US is at an all-time high of $13.15 trillion after five consecutive years of growth.2 In Canada, household debt has risen to 101.15% of gross domestic product (GDP)3, while in Switzerland it is 127.5% of GDP.4 In South Korea, the ratio of household debt to GDP is 93.8%.4 Rising debt is problematic because it impacts economic growth; recent research has shown that a 1 percentage point increase in the household debt-to-GDP ratio is associated with growth that is 0.1 percentage point lower in the long run.5 Keep in mind that debt service is not just about the amount of debt; it’s also about the interest rate. Not only are we taking on more debt in many parts of the world, but interest rates are going up in certain regions as well (which can be especially problematic for countries in which mortgages are predominantly variable-rate as opposed to fixed-rate). That means more money needs to be spent servicing that debt — money that could be put toward more productive purposes such as capital investment. Even if rates go up gradually, they can place significant pressure on debtors — an important issue we will have to follow closely.

Key takeaways

For some time, I’ve written about the “three D’s” — disruption, divergence and demographics/debt — which are three macro themes that can impact markets and investors. Now, add to that the “three P’s” above. With so many global forces applying pressure to markets, investors are understandably concerned. But it’s important to remember the “ABC’s” of investing — allocating to a diverse range of investments, being disciplined and creating a long-term plan.

In particular, I would note:

  • We can’t ignore the specter of higher inflation. This means considering the potential benefits of inflation-hedging investments, including commodities, real estate investment trusts, gold and inflation-linked bonds.
  • While volatility has hit markets around the world, valuations are relatively lower in many markets outside the US.
  • Alternative investments may react differently than stocks and bonds to market moves.

 

1 Source: Bloomberg L.P., “Now bots are trying to help populists win Italy’s election,” Feb. 18, 2018

2 Source: Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, Q3 2017

3 Source: St. Louis Federal Reserve Bank Department of Economic Research, as of Sept. 30, 2017

4 Source: Bank for International Settlements, as of June 30, 2017

5 Source: Lombardi, Mohanty and Shim, “The real effects of household debt in the short and long run”, BIS Working Papers, no 607, January 2017

Subscribe to the Invesco US Blog and get Kristina Hooper’s Weekly Market Compass posts in your inbox. Simply choose “Market & Economic” when you sign up.

Also, explore our Market Compass investment guide, which provides a look at three macro issues —disruption, divergence and demographics — using clear, compelling charts.

Important information

All investing involves risk, including risk of loss.

Diversification does not guarantee a profit or eliminate the risk of loss.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Alternative products typically hold more nontraditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.

Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.

Investments in real-estate-related instruments may be affected by economic, legal or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small- and mid-cap companies, and their shares may be more volatile and less liquid.

The opinions referenced above are those of Kristina Hooper as of Feb. 20, 2018. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

 

Tags: Weekly Market Compass

Three market concerns move to the fore by Invesco US

 

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