Global equities rebound, VIX manipulation charges and four rate hikes in 2018? Find out more in this edition of “The Week in Review.”
Last Week Review
Global equities begin to rebound after two-week slide.
After dropping nearly 9% in the past two weeks,1 global equities bounced back with a weekly return of 4.2%.2 Emerging market equities saw the largest sell-off of the major regions with a 10% drop,3 but recovered last week with a 5.7% gain.4 U.S. equities and developed ex-U.S. equities also started to recover last week, with 4.4%5 and 3.9%6 gains, respectively. Year-to-date returns moved back into positive territory across all major regions with non-U.S. developed markets lagging at 0.6%7 and emerging markets leading at 4.2%.8 U.S. Treasury yields wavered throughout the week with the 10-year yield pushing above 2.9%,9 while the 2-year yield finished the week 12 basis points higher at 2.19%.10
Investors shrug off modest U.S. inflation uptick. The increase in wage gains earlier this month to 2.9% year-over-year (y/y)11 left some investors worried about overheating inflation and looking forward to upcoming data points. The U.S. headline consumer price index (CPI) reading of 2.1% y/y12 and the core CPI figure of 1.8%13 y/y surpassed expectations. However, we believe these increases did not inspire the same fear as the increase in wage gains since much of the rise came from the clothing and energy components of the CPI measurement. Outside the U.S., UK core CPI was 2.7% y/y14 and UK headline CPI was 3.0% y/y.15 Both metrics were slightly above prior levels, which may factor into the Bank of England’s thinking around future interest rate policy.
Regulators review possible VIX manipulation. In addition to inflation concerns, the recent market sell-off was thought by some investors to be driven by a pickup in selling among commodity trading advisor strategies, volatility targeting and risk parity strategies. The CBOE Volatility Index’s (VIX) climb in early February is being reviewed by the Financial Industry Regulatory Authority (FINRA) to determine whether traders were placing bets on certain S&P 500 options to manipulate prices for VIX futures.
4Q 2017 earnings picture remains bright. 399 S&P U.S.500 companies (80%) have reported earnings thus far, with 15.2% y/y earnings growth topping expectations by 4.8%.16 Though sector performance was relatively similar during the recent sell-off, the consumer discretionary sector continues to lead all sectors year-to-date at 6.3%17 followed by the technology sector at 5.8%18 and the financials sector at 3.8%.19 Defensive sectors such as utilities, consumer staples, and telecom continue to struggle year-to-date with returns of -4.8%,20 -3.1%,21 and -2.4%,22 respectively.
This Week Preview
Earnings season heads towards final stretch. Home Depot (HD), Wal-Mart (WMT), Duke Energy Corp (DUK) and Hewlett Packard (HPE) are among the companies reporting earnings this week. Looking ahead, a large portion of the companies that have yet to report earnings are in the consumer discretionary, energy, and utilities sectors.
Flash PMI data expected to remain relatively unchanged. We believe flash manufacturing Purchasing Managers’ Index (PMIs) data across major regions is expected to remain in expansionary territory (above 50) and reflective of a constructive global growth outlook. Germany, Europe, and the United States flash PMI figures are expected to be in-line with prior readings. Investors may be wary of a large move higher in the PMI readings, especially in the United States, as a rapidly accelerating growth environment could be a sign that inflation may pick up down the road.
Investors looking for clues on Fed outlook in January minutes. Investors will be looking for additional information on the future direction of interest rate policy when the Federal Reserve releases meeting minutes from its January meeting on Wednesday. We believe markets have fully priced in a rate hike in the March 21 Fed meeting, with close to two additional hikes also priced in throughout the rest of 2018. Some investors are expecting as many as four hikes, given the jump in inflation from last week and the idea that inflation could push higher given tax cuts and additional government spending.
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Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.
- 1. Bloomberg, MSCI World Index returns 05Feb2018 – 16Feb2018.
- 2. Bloomberg, MSCI World Index returns 12Feb2018 – 16Feb2018.
- 3. Bloomberg, MSCI Emerging Market Equities Index returns 05Feb2018 – 16Feb2018.
- 4. Bloomberg, MSCI Emerging Market Equities Index returns 12Feb2018 – 16Feb2018.
- 5. Bloomberg, MSCI U.S. Equities IMI Index returns 12Feb2018 – 16Feb2018.
- 6. Bloomberg, MSCI World ex-U.S. IMI Index returns 12Feb2018 – 16Feb2018.
- 7. Bloomberg, MSCI World ex-U.S. IMI Index returns 2Jan2018 – 16Feb2018.
- 8. Bloomberg, MSCI Emerging Market Equities Index returns 02Jan2018 – 16Feb2018.
- 9. Bloomberg, 10-Year Treasury Rate 16Feb2018.
- 10. Bloomberg, 2-Year Treasury Rate 16Feb2018.
- 11.Leubsdorf, B. S. Gained 200,000 Jobs in January as Wages Picked Up. Wall Street Journal. Retrieved Feb 18, 2018 from https://www.wsj.com/articles/u-s-gained-200-000-jobs-in-january-as-wages-picked-up-1517578320.
- 12. Bloomberg, 12-Month Percentage Change – Headline Inflation, 18Feb2018. Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods, as a way of determining how much inflation is occurring in the broad economy.
- 13. Bloomberg, 12-Month Percentage Change – Core Inflation, 18Feb2018. Core inflation excludes goods with high price volatility, such as food and energy within an inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. This measure of core inflation systematically excludes food and energy prices because, historically, they have been highly volatile and non-systemic.
- 14. Office for National Statistics. “Inflation and Price Indices.” Comparison Year Over Year Core Inflation. February 2017 – February 2018.
- 15. Office for National Statistics. “Inflation and Price Indices.” Comparison Year Over Year Headline Inflation. February 2017 – February 2018.
- 16. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved Feb 18, 2018 from http://lipperalpha.financial.thomsonreuters.com/2018/02/sp-500-17q1-earnings-dashboard/.
- 17. S&P 500® Consumer Discretionary Index performance 2Jan2018 – 16Feb2018. Comprising those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector. The Global Industry Classification Standard (GICS) is an industry taxonomy developed in 1999 by MSCI and Standard & Poor's (S&P) for use by the global financial community. The GICS structure consists of 11 sectors, 24 industry groups, 68 industries and 157 sub-industries into which S&P has categorized all major public companies. GICS is used as a basis for S&P and MSCI financial market indexes in which each company is assigned to a sub-industry, and to a corresponding industry, industry group and sector, according to the definition of its principal business activity.
- 18. S&P 500® Technology Index performance 2Jan2018 – 16Feb2018. Comprising those companies included in the S&P 500 that are classified as members of the GICS® technology sector.
- 19. S&P 500® Financials Index performance 2Jan2018 – 16Feb2018. Comprising those companies included in the S&P 500 that are classified as members of the GICS® financials sector.
- 20. S&P 500® Utilities Index performance 2Jan2018 – 16Feb2018. Comprising those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.
- 21. S&P 500® Consumer Staples Index performance 2Jan2018 – 16Feb2018. Comprising those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.
- 22. S&P 500® Telecom Index performance 2Jan2018 – 16Feb2018. Comprising those companies included in the S&P 500 that are classified as members of the GICS® telecom sector.