By Robert Burgess
July 5, 2017, 3:30 PM CDT
North Korea fires another rocket, except this was its first intercontinental ballistic missile. Secretary of State Rex Tillerson says North Korea’s actions are a “new escalation of the threat” to the U.S. and its allies. The United Nations Security Council calls an . So, stocks sold off hard and fast, right? Not quite.
Equities did a whole lot of nothing Wednesday, reinforcing notions that investors have become way too complacent about any type of potential dangers and are keeping volatility subdued beyond what would be justified. After all, how else to explain the strong rally in stocks and other higher-risk assets this year amid the political turbulence in Washington, the geopolitical risks that keep cropping up around the world and rumblings by central banks that they are close to pulling away the easy money punch bowl? Could it be because ? As the CBOE Volatility Index continued to edge lower this year, investors increasingly paid up to protect against a rebound, sending the cost of calls versus puts to the highest level since October 2015, Bloomberg News' Cecile Vannucci reported.
According to Vannucci, VIX options volume has surged this year, with an average of almost 680,000 contracts changing hands on average each day. Almost 2.7 calls traded for each put, the most since 2007. At around 4-to-1, the call-to-put ratio is at its highest since September 2014.
Volatility may be relatively low in the bond market, too, but that doesn't mean investors are bullish. JPMorgan's weekly survey of fixed-income investors showed sentiment has fallen to its lowest level of the year. Despite the recent inflation data coming in lower than forecast, Federal Reserve officials in recent weeks have said they are confident consumer prices will soon accelerate as the economy operates at full employment, justifying even more interest-rate increases. Even if it doesn't, some central bank officials say current easy financial conditions and rising asset prices . That may help explain why the yield on the benchmark 10-year Treasury note has risen to 2.33 percent from as low as 2.12 percent on June 26. Fed Chair Janet Yellen said last month that asset valuations look “somewhat rich” using traditional metrics such as price-earnings ratios. Minutes of the central bank's last meeting in mid-June released Wednesday showed that financial conditions were debated at the gathering, with some participants arguing that “increased risk tolerance” among investors could be lifting asset prices and others expressing concern that “subdued market volatility” could lead to financial stability risks.
Europe's shared currency has had a great run, with the Bloomberg Euro Index jumping as much as 6.93 percent since mid-April as economic data show stronger growth. Although in the past week or so it seems as if the euro The euro weakened against the dollar Wednesday, even though IHS Markit said its Purchasing Managers’ Index for manufacturing and services came in at 56.3 for June, exceeding the estimate of 55.7 made on June 23. So, does this mark a top? According to the foreign-exchange strategists at Brown Brothers Harriman, the recent sideways action is consistent with the notion that the market has discounted a favorable news stream for Europe and may have gotten ahead of itself. Interest-rate differentials are no longer working in the euro's favor. The extra yield offered on two-year Treasury notes over similar maturity German bunds has increases about six basis points this week, while the U.S. 10-year note premium is about three basis points wider.
The latest weekly Fed data on commercial and industrial loans got hardly any attention, probably due to the fact that it came late Friday before what was an extra-long weekend for many due to the Independence Day holiday falling on a Tuesday this year. The important thing to know is that it looks like lending of a seven-month-long funk. The $14 billion jump in the latest week was the biggest since March 2016, and pushed the total to $2.113 trillion. Between the start of November and mid-June, the amount of commercial and industrial loans fluctuated between $2.03 trillion and $2.10 trillion. That slowdown was called alarming by the economists at Piper Jaffray, who pointed out that such loans are a key source of financing for business investments and are vital for boosting overall growth. They said in a June 19 report that the pullback didn't appear to be due to stricter lending standards, but rather was related to weaker demand, thus increasing the odds of a recession.
Wednesday brought more anecdotal evidence that investors may not be counting on broad tax reform and tax cuts in the U.S. anytime soon, despite comments last week by Gary Cohn, President Donald Trump’s chief economic adviser, that the administration is "100 percent committed" on getting something done prior to next year's tax season. The research firm Spectrem Group's monthly index of affluent investor confidence has fallen to its lowest level in a year. That's notable because tend to benefit the most affluent, who can afford to save more for retirement and who face higher income taxes. John Friedman, an associate professor of economics at Brown University, told Bloomberg News' Suzanne Woolley in May that the affluent are active savers and that active savers make up 15 percent to 20 percent of all savers. "Markets may not have written off the Trump administration’s economic plans, but the high hopes of early 2017 have yielded to more modest goals," John Spear, the chief investment officer at USAA, said in a market commentary. Spectrem's survey is based on 250 interviews with financial decision-makers who have more than $500,000 of investable assets.
The monthly deluge of U.S. jobs data begins Thursday when ADP Research Institute releases its payroll report for June. The median estimate of economists surveyed by Bloomberg is for the report, which doesn't track government hiring, to show that jobs growth slowed to 180,000 from 253,000 in May. But that's only half the story. There is a tendency for the ADP estimate to miss consistently in one direction or the other for months at a time. The estimate was too high in eight of 12 months last year. This year the trend is the opposite, with the estimate coming in below the actual number every month except April, when the two were basically the same.