Equity indexes closed in the red for the second consecutive week: the S&P500 Index (SPX) closed 2,328.95, down – 1.20%, the Dow Jones Industrial (INDU) closed 20,453.25, down -0.99%, and the Russell 2000 Index (RTY) closed 1,345.24, down -1.60%. For the time being it seems like the rally in equities has stalled. As it was a short trading week, option volumes were low for the week with a total of 62,988,702 options traded, averaging 16,335,269 daily volume. Thursday, the SPX traded 1,438,798 option contracts while the VIX traded 1,324,660 option contracts. The VIX closed slightly below the 16 handle, at 15.96, but was up +13.59% for the week.
Volatility has been rising for the past two weeks as geopolitical events are making investors and traders nervous. The fast approaching French election (May 7), where a highly contentious landscape now includes a communist, has been the focus of global financial markets given the possibility of political outsiders winning the presidency. As it stands, a likely showdown looms between the far right Le Pen and the communist Melanchon, both of which are considered outsiders in the French political arena long dominated by the center-right Republicans and center-left Socialists.
To add to investor concerns, over the weekend North Korea had another big military parade revealing what appeared to be an intercontinental ballistic missile (ICBM) although no one is sure if they have been able to build one. Immediately after the parade North Korea fired off a missile but it was a long range missile rather than an ICBM. While long range missiles can threaten the South Korea and Japan, our two most important allies in the region, an ICBM could potentially threaten Hawaii, Alaska, or the West Coast. The Trump administration has made quite the effort in getting Chinese help in reigning in the North Korean government, and even had Vice President Pence tour the region in order to reassure our regional allies.
In all the macro news and geopolitical events over the past few weeks, there remain concerns over the Turkish referendum. Turkish president Erdogan won 51.4% of the vote meaning that he will be able to increase the powers of his office. The Council of Europe, of which Turkey is a member, raised concerns that the changes would weaken the checks and balances system. Turkey is a key NATO member and U.S. ally in the Middle East region and any instability in its government can cause investor concerns.
Given the current political climate, investors demand for riskier assets seems to be waning. Treasuries extended gains this morning and gold continues to be bid. In part, the disappointing inflation data is casting doubts on the pace of the Fed rate hike. Gold moved higher as the U.S. dollar index traded lower. Pre NY-open, Gold for June delivery gained 0.16% to 1,290.50 as the dollar index fell 0.30% to 100.19. WTI oil futures have traded lower over the past two sessions but have gained nearly 8% over the past 30 days.
There seems to be renewed faith in the OPEC / Non-OPEC production cut deal and the IEA seems to agree. OPEC indicated on a report last week that U.S. shale production will increase as their own production output decreases. Indeed, investments in the U.S. shale seems to suggest that interest by private equity in oil production have amounted to nearly $20 billion in the first quarter. This time however, it is not the price increase that is driving investment in the space, but rather cost reductions that have been achieved in oil extraction and shale processing.
With all the attention granted to geopolitical events, it is easy to miss any good stories. For one, bank earnings came in positive with sharp Q1 profits. According to FactSet, with 6% of the SPX companies reporting for Q1, 76% have beaten the mean earnings estimate, and the current growth rate for the SPX is 9.2%. Further economic data in whole was positive last week, but you wouldn’t know it given an outsized attention given to political and geopolitical news, and especially to the forced removal of a United Airlines passenger. Some positive highlights include strength in Port Traffic, Foreclosures are below the recession levels, CPI and PPI registered lower, Weekly Jobless Claims fell to 234K, and Michigan Sentiment rose to 98.
This week the economic data is business as usual:
- Monday: Empire Manufacturing, NAHB Housing Market Index
- Tuesday: Housing Starts, Building Permits, Industrial Production, Capacity Utilization
- Wednesday: MBA Mortgage Apps, Fed Beige Book
- Thursday: Initial Claims, Philly Fed Business Outlook, Leading Index
- Friday: Markit PMI, Existing Home Sales, Chicago Fed Index, Dallas Fed Manufacturing Index