Equities regain poise as bond yields continue to rise

 

The S&P 500 suffered a 1% reversal in fortunes on Tuesday, then recovered its poise on Wednesday once again.  Despite the S&P 500 managing to hold onto the early gains of the year so far, the Vix index may be suggesting that some more volatility could lie ahead. The index has risen 20% this week and is now trading above 12.

 There has been nothing of note on the horizon from the fundamentals to suggest that the present calm should be disturbed. The earnings season is only just underway and even though, it been mainly the banks that have reported, in general, earnings reports have come in no worse than expected. Apple announced, that as a result of the changes to the tax structure, it will repatriate in the region of $250bn of capital back into the US and invest it into the economy. Not only will Apple invest in the economy it will also pay about $38bn in tax to the US government. On the macro front, China released its estimate for economic growth for 2017 and for the fourth quarter. China’s economy grew at 6.9% in the previous year and at 6.8% in the final three months against an expectation of 6.7%.

The rout in 10 year US Treasuries continues as the yield climbed above 2.6% after the labour department said that the number of Americans filing for unemployment benefits fell to the lowest level in 45 years. The stronger unemployment data follows on from the Federal Reserve’s announcement on Wednesday that US industrial production rose 0.9% in December versus expectations of 0.4%. The Federal Reserve’s Beige Book, a collection of anecdotal information compiled by each Federal Reserve bank on current economic conditions in its district, believes the U.S. economy and inflation are expanding. All this good news may suggest equity investors are getting slightly complacent over the path of interest rates.

One event that may be causing the spike in the Vix index is the possibility once again of a government shutdown if the Democrats and Republicans can’t agree to a pro tem measure to keep the government operating at least in the short term. However, there have been several points in history when the government has shut down have occurred, one example December 1995, during Clinton's reign. Other Presidents who have suffered include Gerald Ford, Jimmy Carter and George Bush. There has generally been some short-term reaction, but overall markets have shrugged these events away.

Posted on January 18, 2018 .