Market Update: Wednesday, April 19, 2017

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  • Markets edge higher as indecision continues. (10:34am ET) The major U.S. averages are just above their flat lines in early trading, and are looking to recapture slight losses from yesterday’s session as earnings reports continue to roll in. The S&P 500 slipped 0.3% on Tuesday, with momentum again dictated by the heavily-weighted financials sector which lost 0.8% as upbeat earnings from Bank of America contrasted with disappointing numbers from Goldman Sachs. Overnight, Asian markets were little changed with the exception of the Shanghai Composite (-0.8%), which followed U.S. markets lower. European equities are stable one day after Prime Minister Theresa May announced a surprise snap election in June; the STOXX Europe 600 is higher by 0.3% after yesterday’s 1.1% drop. Meanwhile, Treasuries are backing off gains from yesterday as the yield on the 10-year note is back up to 2.21%, COMEX gold ($1279/oz.) is off more than 1%, and WTI crude oil is unchanged at $52.48/barrel.

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  • European inflation moderates. Consumer inflation in Europe moderated to 1.5% on an annualized basis, and to 0.7% excluding the volatile food and energy categories. In the past few months as inflation was nearing the European Central Bank’s 2% target, there was some pressure on the bank to tighten monetary policy. This reduction reduces some of that pressure. The euro has been under some pressure during the past month, but has strengthened the past few days. European stocks and the euro will be closely watched this week given the first round of French presidential elections this Sunday, April 23. While markets have been very stable, the options markets suggest that traders are positioning for a wide range of outcomes and the potential for high volatility depending on the election outcome.
  • Is fear finally spiking? We touched on market sentiment in this week’s Weekly Market Commentary, but a few other interesting developments have recently taken place. First, the CBOE Volatility Index (VIX) was recently more than 25% above its 20-day moving average. This was the highest since before the U.S. election and historically has marked potential peaks in volatility. Also, the VIX was more than 50% above its three month lows, something that has happened only 6.0% of the time since 1990 – again suggesting volatility could be due for a pullback in the near-term. Last, the Bank of America Merrill Lynch Global Fund Manager Survey found that allocations to U.S. equities were at their lowest level since January 2008, with one concern being valuations. This could be a contrarian signal should the global economy hold up.

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