The Weekly Update

Last week saw a sharp sell-off in equity indices across the board with both The Dow Jones Industrial Average and S&P 500 down over -5%, further to the -4% drop in the prior week. Resultantly, after the worst 2-week fall in over two years, both are down -2% year-to-date. The FTSE 100 fared much worse and was down -7.7% YTD touching 14-month lows. Contrastingly, the US Treasuries curve on Friday was back to where it was the previous week with the largest shift being a 7 basis point rise in 30-year yields. 10-years closed the week at 2.85% and the 30-years at 3.16%. Towards the end of the week emerging market and high yield bond indices dipped, typically around -1.5% to -2%, while investment grade corporates on average exhibited a more limited downside.

With these large swings in the market the major news story last week was the rocketing volatility: specifically the VIX which topped 50 at one point intraday after having averaged ~11 for the past 12 months. The Dow saw intraday swings exceeding 500 points every day last week with the moves exceeding 1000 points on three of those days. It seems a lot of retail investors got taken for a ride as many of the inverse-volatility products that have been returning ~8% a month for the past couple of years suddenly lost >80% of their value (many were down ~95%) triggering an ‘acceleration event’ with most halting trading and returning what little cash is left to investors at some point next week.

So it wasn't the best start to Jerome Powell’s first week as Fed Chair. But at least the US government agreed upon a budget bill last Thursday that will keep the federal wheels turning and increase spending over the next two years by $300bn. Technically the government did shutdown briefly for a second time this year as Senator Rand Paul delayed the vote, voicing concern about the US ‘borrowing a million dollars a minute’. The US public debt pile is now forecast to grow from $20tn now to $33tn over the next decade with Trump’s recent unbalanced changes to taxation and spending accounting for $3tn.

Elsewhere, oil majors all beat earnings expectations with Statoil doubling its profits. Brent prices however trended lower throughout the week which began around $70 per barrel and falling to touch $62 on Friday. SpaceX launched its test Falcon Heavy rocket (largest space rocket in 45 years) successfully sending Elon Musk’s Tesla Roadster into space: into an orbit that intersects both Earth’s and Mars’ orbit. So Tesla now literally has the only production car that is ‘out of this world’; although we’ve heard the insurance is also ‘astronomical’.

The week ahead is fairly light in data releases with: UK CPI/PPI, Japan PPI and US oil inventories on Tuesday; Germany, Eurozone and Japan Q4 GDP and US CPI and retail sales on Wednesday and jobless claims, industrial production and PPI on Thursday; and of course Chinese New Year this Friday.