It was supposed to be a day perfectly suited for volatility-starved traders, with former FBI director James Comey testifying to the Senate Intelligence Committee about Russian meddling in the U.S. election, the U.K. holding a general election, and the European Central Bank announcing its decision on monetary policy. They even came up with a name for it: Super Thursday. What they got was more of the same, which is to say subdued markets with little volatility.
The Standard & Poor's 500 Index fluctuated in a range of 0.5 percent as the CBOE Volatility Index, also known as the “fear gauge,” held at historically low levels. JPMorgan's G-7 volatility index of currencies is trading at some of its lowest levels of the year. The U.S. bond market did move, but only around the little-changed mark. Investors and strategists are not quite sure what to make of the current low levels of volatility permeating most markets. Some say it reflects unwarranted complacency. Others say it's a byproduct of all the cash printed by central banks in recent years sloshing around the global financial system.
DRAGHI DISAPPOINTS EURO BULLS
To be honest, there were some fireworks -- firecrackers? -- in the euro Thursday after the ECB left interest rates and policies unchanged while trimming expectations for inflation through 2019. While that was largely expected, the shared currency fell as ECB President Mario Draghi said in his news conference that the euro area still isn’t generating enough inflation, overshadowing improved prospects for the economy that led officials to upgrade their growth assessment. The change in the assessment of risks for the economy sets the scene for the ECB to start a discussion about the timing for the removal of the stimulus, though the tone of Draghi’s appearance suggests officials aren’t yet ready for such a debate, according to Bloomberg News's Piotr Skolimowski and Maria Tadeo. Traders were expecting a more hawkish-sounding Draghi after amassing the biggest bullish wager on the euro in more than six years as measured by Commodity Futures Trading Commission data.
ITALY REWARDS THE PATIENT BULLS
There's been a lot of angst lately over Italy -- specifically, the deteriorating state of its banking system and its unstable political system. For one day, at least, those worries receded as both the stock and bond markets were among the biggest gainers in the world as the prospects of Italian elections leading to either a hung parliament or a win for the anti-establishment Five Star Movement, or both, were suddenly downsized. The euro region’s third-biggest economy unexpectedly moved away from a possible vote this fall after a multiparty agreement on a new election law failed to hold up in parliament, according to Bloomberg News's Lorenzo Totaro. The yield on the Italian 10-year bond fell 14 basis points to 2.16 percent, narrowing the yield spread with German bunds to 189 basis points at 4:20 p.m. local time. The FTSE MIB benchmark index of stocks was up 1.3 percent. Investors had said that the agreement on an electoral law was a negative, given that a nonmarket-friendly party could win.
THERE'S A SURPRISE IN THE ECONOMIC SURPRISE DATA
Indexes that measure the economic data that exceed forecasts relative to those that miss have been on the decline -- and that's not the worst of it. An even more disconcerting trend is the recent dip in the Bloomberg Economic Surprise Index when survey data is excluded, according to Bloomberg Intelligence chief economist Michael McDonough. This looks at economists’ expectations for hard data, such as industrial production and retail sales, versus the actual release data. Unlike the survey-based indicator, this index never experienced a surge following the U.S. election, and it has actually turned negative over the past several months. A steep increase in survey-based data has typically augured an eventual improvement in hard economic data, according to McDonough. But a lack of progress on Donald Trump’s fiscal agenda and only gradual improvements in the U.S. economy indicate that this will not be the case. Growth in the current quarter may be above 3 percent, due to payback from the first quarter's 1 percent reading, but the underlying trend appears to be holding steady at close to 2 percent, McDonough wrote in a research note.
NET WORTH IS RISING, BUT LIABILITIES ARE RISING FASTER
First, the good news. The net worth of U.S. households and nonprofit groups rose by $2.35 trillion, or 2.5 percent, to $94.84 trillion in the first quarter from the previous three-month period, the Federal Reserve said Thursday. Household wealth has grown, boosted mostly by a 5.5 percent gain in the Standard & Poor’s 500 Index last quarter and house price appreciation that matched the biggest year-over-year increase since 2014, according to Bloomberg News's Shobhana Chandra. Now, the bad news. Household debt increased at a faster rate, or 3.2 percent, as mortgage borrowing advanced at a 3 percent pace. Other forms of consumer credit, including auto and student loans, climbed at a 5 percent rate, the slowest since 2013. Although measures of consumer confidence have risen since the U.S. elections in November, that hasn't necessarily translated into spending, helping to temper economic growth.
In a few hours, the world will have a good idea of the U.K. election results. The first indications will come at 10 p.m. London time, when broadcasters release an exit poll for an election dominated by Brexit, austerity and, in the closing phases, security, according to Bloomberg News's Thomas Penny and Svenja O'Donnell. While such surveys have generally been accurate in the past, they are not precise and the final result will not be known until Friday morning. Prime Minister Theresa May seems to have done her best to squander a sure thing, and Labour leader Jeremy Corbyn has made an unlikely surge. With some polls showing May's Conservatives losing a comfortable lead, traders are now entertaining two potential shocks: a hung Parliament in which no party has enough seats for an overall majority without a coalition, and a victory by socialist Corbyn, whose spending agenda may offset pledges to soften Brexit. Bloomberg News's Cecile Gutscher reports that a hung Parliament would knock at least 5 percent off the value of the pound, according to Citigroup forecasts. A win by Labour would weaken the pound as much as 15 percent versus the dollar.
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Stop Waiting for 'All Clear' Signal From Markets: Ben Carlson
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