Implied volatility in US equities has dropped back overnight and we can currently see the US volatility index (or “VIX” index) sitting at 17.16, while front-month VIX futures (March) sits just above the cash at 17.30.
This move naturally reflects options pricing and how people feel about volatility in the S&P 500 over the coming 30-days and as a trader, this is a sweet spot for vols. Not too crazy, but still getting a good level intra-day range that we get price movement and opportunity in abundance. We can see this move a reflection of a positive flow into the S&P 500, which currently sits off session highs +0.7%, while the NASDAQ has been bid 1.0% and we can see small caps outperforming, with the Russell 2000 gaining 1.2%. Emerging markets are looking solid too, with the NYSE:EEM ETF putting on 1.6%, while European markets, on the whole, have found small buyers, with the German DAX the outlier, closing at 12,470 and the bulls are finding it hard graft to push this market higher.
On the data front, there was some focus on European manufacturing (printing 58.5 vs 59.2 eyed) and services (56.7 vs 57.6) PMI, with the composite PMI print coming in at 57.5 vs 58.4 expected, and while slightly weaker this is still a healthy level of expansion. This outcome in the data didn’t cause any real reaction in EUR/USD, in fact, the pair pushed higher into $1.2336, before trading down to $1.2300, with these two levels defining the range going into the FOMC minutes. We have also seen a slightly hotter-than-forecast Markit US manufacturing PMI print at 55.9, while existing home sales were a touch softer than expected, with a 3.2% decline in January, with the pullback predominantly attributed to a drop in single-family homes.
On the Fed chatter front, we heard from Fed member Harker (a non-voter), who is considered to hold a neutral (or centrist) stance on policy and interestingly he sees two hikes as appropriate in 2018. He also suggested he sees unemployment falling to 3.6% by mid-2019, with US GDP growth of 2.5% this year and 2% in 2019, while inflation should hit their target by end-2019. We also heard from Neal Kashkari, who hit back saying markets overact to every word the Fed say, while Robert Kaplan (again a non-voter) spoke in Dallas, but didn’t really give us any new colour here.
Another element the market was interested in was the $35 billion auction of five-year Treasury’s, notably after yesterday’s poor 2-year bond auction. Well, this was hardly any better with the bid-to-cover sitting at 2.44x, which is at the lower end of the past 12 auctions and really doesn’t play into the view from PIMCO (which also got a bit of attention), where we saw PIMCO’s CIO, Mark Kiesel (on Bloomberg), detailing that “bonds are getting exciting” to own for the first time in three years. The fact that the speculative funds hold such a massive net short position on Treasury futures, across the yield curve backs his view, although price action, at this stage, doesn’t.
Undeniably the highlight of the session was clearly the FOMC minutes and while we had seen some confidence to maintain market exposures into the release, the moves, specifically in equities on what we heard have been punchy. Risk assets initially pushed further higher taking inspiration that the Fed are more confident but despite this confidence happy to maintain a gradual pace of tightening and certainly not giving inspiration to those now calling for four hikes this year. The moves in FX are interesting, with the USD index falling from 89.50 to 89.22 before heading back into 89.44, while USD/JPY fell around 30 points before the buyers stepped back in.
US fixed income initially saw a touch of buying across the curve, but as I type we are seeing better selling, notably in the long end with the 10-year now +3bp at 2.92% and this us up for an assault on 3%.
So clearly the market has taken the minutes and the deep dive into the January FOMC meeting and the statement itself as quite nuanced, but on the whole, the bank are feeling more optimistic. On one hand, we can see a more intense focus on the USD weakness, but participants saw the impact of a weaker USD offsetting the effects of higher nominal bond yields. All very calm and collective, as was the commentary on the “gradual” pace of hikes, which is the results of a stronger outlook for economic growth.
Of course, these minutes pre-date the recent CPI print, so all eyes turn to Jay Powell’s hearing next week, but one suspects the prospect of the new Fed chair signalling for four hikes this year is less likely here.
Our calls for Asian equities are looking constructive for Thursday and in the backdrop of very little economic data to concern us, so the shift again turns to Aussie reporting season, with AX:AWC, BAL, AX:CWN, AX:FLT, AX:IRE, AX:OZL, AX:QAN, AX:QUB, AX:SXY and AX:WEB (among others) hitting the market this morning. It's certainly positive backdrop to report earnings, with our call for the ASX 200 sitting at 5981, where the bulls would ideally want to see a close through the figure although that seems a tall order. Japan and Hong Kong should also see positive equity flows on open and if they can see follow-through buying on the open underpin moves in the local market. After the wobbly in the markets over the last few weeks, the world, it seems, is a happy place again.