February 7, 2018, by Lorcan Roche Kelly
Overnight, the MSCI Asia Pacific Index took its lead from the late-session U.S. rally and rose sharply after the open. That initial lift faded, with the regional index only managing to hold a gain of 0.1 percent, while Japan’s Topix index closed 0.4 percent higher. In Europe, the Stoxx 600 Index rose 0.7 percent by 5:45 a.m. Eastern Time with most sectors posting gains. U.S. stocks may open lower, with both S&P and Dow futures slipping 0.8 percent. The violent moves over the past two days have investors asking if this is the end of the bull market, or a buying opportunity.
German Chancellor Angela Merkel’s bloc has reached a deal on a coalition government with the Social Democratic Party, ending months of political stalemate in Europe’s largest economy, according to people familiar with the talks. As part of the agreement, the SPD will get the crucial finance ministry. That should help the party’s leader, Martin Schulz, win the vote he said he would allow its 464,000 members before the SPD enters government as a junior coalition partner.
The House passed a bill yesterday to avoid a government shutdown this Friday in a 245-182 vote which will maintain federal funding until March 23. Senate leaders say they see little risk of a delay in the upper house. Ambitions are much higher though, as congressional leaders are attempting to wrap up a longer-term budget plan in the next two days that would include a lifting of the debt ceiling, agreement on defense spending and hurricane aid. Should an accord be reached, it would end the current cycle of shutdown debates and short-term extensions dominating Washington politics recently.
The long-dormant VIX Index exploded higher over the past couple of days, forcing some products linked to the index to shut. As the dust settles, analysts are looking at how the products behaved as volatility increased, and – due to the popularity of the short-volatility trade – are starting to conclude that markets may have seen a case of the tail wagging the dog. ETNs linked to the VIX typically buy VIX futures as they seek to maintain a constant degree of exposure to the underlying index, so large moves in the gauge will be reflected in larger moves in futures, which can lead to a feedback loop.
Yesterday Elon Musk’s SpaceX successfully completed the first test launch of its Falcon Heavy rocket, which included the spectacular simultaneous recovery of two spent boosters. The payload on the rocket was a Tesla roadster, which turned into a very effective product placement for Tesla Inc. ahead of today’s earnings update. Analysts will watch closely for any pushing back of production targets.