February 13, 2018, by Tracy Alloway
Markets still seeking stability
U.S. stocks may struggle to hold onto yesterday’s momentum, which saw the S&P 500 Index spend the entire session in positive territory for the first time since its last all-time closing high on Jan. 26. S&P 500 futures are declining and European stocks are fluctuating following a late downswing in Asia, with Japanese equities hit by a sudden rally in the yen. Traders are still scratching their heads about the gains in Japan’s currency, but some are blaming an unwinding of positions after yesterday’s public holiday. Authorities in Tokyo are also eyeing a leverage cap on some currency trades.
President Donald Trump unveiled a $4.4 trillion federal budget for fiscal 2019 — a plan Congress is expected to all but ignore — that would slash entitlements and other domestic programs in favor of higher spending on the military and immigration enforcement. The budget sees the deficit nearly doubling from projections last year, to $984 billion. The red ink would total $7.1 trillion over the next decade, with national debt rising to nearly $30 trillion. Evercore ISI warned that the rise in bond yields that contributed to last week’s market selloff is down to “U.S. fiscal overkill.”
A week after the VIX was thrust into an unflattering spotlight, a whistle-blower has told U.S. regulators of a scheme to manipulate the volatility index. In a letter, a Washington-based lawyer said his client found a flaw that allows traders to move the VIX up or down by posting quotes on S&P options that don’t have to be traded. On the plus side, the mystery buyer of VIX options known as ‘50 Cent’ is estimated to have made nearly $200 million out of last week’s turmoil. Meanwhile, volatility-sellers are returning to the market as evidenced by options tied to the VXX and record inflows into the SVXY, which lost more than 80 percent of its value on Feb. 6.
South African limbo
South Africans awoke to find their nation in limbo after President Jacob Zuma’s refusal to obey his ruling African National Congress’s request to resign voluntarily prompted its top leadership to order his removal from office. The ANC is seeking to install Cyril Ramaphosa as president a year before the 2019 elections, giving the newly-crowned party leader time to convince voters that he’s committed to meeting pledges to rebuild a battered economy and clamp down on graft. The rand gained as much as 0.2 percent against the U.S. dollar on Tuesday, adding to its 1.9 percent advance in the previous two sessions.
Shades of data
Investors looking for signs that Ray Dalio’s U.S. recession prediction is coming true will have a few things to digest today, including the NFIB Small Business Optimism survey, and a speech from Cleveland Fed President Loretta Mester at 8.00 a.m. ET. Meanwhile, the U.K.’s Office for National Statistics said that inflation held steady at 3 percent in January. Japan is scheduled to post its fourth-quarter GDP overnight. In commodities-land, the International Energy Agency said in its oil market report that OPEC and its allies have almost achieved their goal of clearing an oil glut, but that effort could be derailed by rising shale supplies.