What’s Behind the Eerie Calm in the Markets?
Despite evidence of continued economic firming and reassurance from the central bank, Eurozone equities slumped for the third consecutive week, taking a little wind from the sails of what has been a strong relative performer in the wake of the French presidential election. Since climbing by 6.4 percent in the two weeks following the first round of elections in April, the EuroStoxx 50 index has given back 2.2 percent, leaving it ahead on the year by 8.8 percent. Overall, the MSCI EAFE index rose just 0.1 percent on the week, nevertheless leaving it still higher on the year by 11.8 percent in dollar terms.
These year-to-date gains have been helped by the 4.6 percent decline in the DXY dollar index since the start of the year, although the dollar was fractionally stronger last week. The MSCI Emerging Markets index climbed 2.1 percent last week in dollar terms, assisted by a strong rebound in Brazil following an 8 percent plunge the previous week. Year-to-date the index is higher by 18 percent.
Is the Economy Rebounding as Expected? We’ll Know More This Week
On Wednesday of last week, the Federal Reserve released the minutes of its May meeting, and the market reaction suggested a slightly more dovish reading of the Fed’s intentions. Following the release, the yield on the ten-year treasury note fell four basis points by week’s end to close at 2.25 percent. The two-year yield fell three basis points to 1.29 percent. Nevertheless, the Bloomberg world interest rate probability function continues to reflect the near certainty of another Fed rate hike on June 14. At the same time, there continues to be general skepticism that a third rate hike will happen this year. The minutes also included detail regarding the Fed’s intentions to begin shrinking its balance sheet.
This week’s economic calendar will provide further evidence of whether the economy is rebounding as expected in the second quarter. The May jobs report is scheduled for Friday, and the consensus forecast is calling for another solid report with the creation of 180,000 new non-farm jobs, with the unemployment rate remaining at 4.4 percent and only a fractional increase in average hourly wages. The April reports on personal income, spending, prices and pending home sales, along with May reports on manufacturing and services, and motor vehicle sales are also scheduled for this week.
The Atlanta Fed’s GDP Now forecast slipped lower over the past ten days from its previous forecast of 4.1 percent annualized growth in the second quarter, yet remains at a healthy 3.7 percent. In contrast, the New York Fed’s Nowcast forecast stands at just 2.2 percent. In the United Kingdom, this is the final full week of campaigning ahead of the general election on June 8.
Volatility Drops to Near Record Lows
Back home, the president has returned from his extended trip through Europe. During his absence, the VIX index of expected near-term volatility fell from 12.0 to 9.8, just fractionally above its low for the year on May 8, and not far above the record low of 9.3 in 1993. In early trading this week the VIX is already higher at 10.8. Congress is in recess this week, and will have a lot of work to do by the end of July when it is once again in recess through Labor Day. While investors may be most interested in tax reform, both healthcare and the fiscal 2018 budget will be the priority focus of legislators, leaving only a small window if tax reform is to get done this year.
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Indexes are unmanaged and are not available for direct investment.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely-used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
The MSCI Emerging Markets Index captures large and mid-cap representation across 23 Emerging Markets (EM) countries. With 837 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Morgan Stanley Capital International EAFE Index (MSCI EAFE), an unmanaged index, is compiled from a composite of securities markets of Europe, Australasia and the Far East.
The U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
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