Daily Market Color February 5, 2018Historic Market Meltdown With little in the way of external triggers, the equity markets in the US experienced an explosion of volatility as major indices dropped severely across the board. The S&P 500 saw its largest daily drop in the past six years, down 4.1%, while the DJIA finished 1,175 points lower on the day after falling as many as 1,500 points into correction territory intraday. The CBOE Volatility Index jumped to its highest mark in the past two and a half years (and 2nd highest print over the last 6 years), as the Dow was gapping hundreds of points down in the matter of minutes. Trading volumes were more than double the 30-day average as investors tried to sell to retain some of their paper gains in stocks over the last several weeks. Crude oil and energy stocks fell together, with a barrel of WTI crude falling more than 3% to $63.45 – its lowest level in two weeks. A flight to safety/bond selloff reversal kicked in this afternoon as US Treasury yields gapped lower alongside the rout in stocks. Yields/swap rates declined 9-16bps across the curve, bringing the yield on the 10-year note to just below 2.71%, down 14 bps – its single largest daily drop in yield since 06/2016. The risk off mania that gripped financial markets also got reflected in changing expectations for the Fed’s rate hiking schedule, as the market’s implied number of rate increases for 2018 shifted down from 3 to 2 today. Welcome to your first day in charge of US monetary policy Mr. Powell… Strength in the Service Sector The flight to safety in financial markets was rampant despite positive economic data released by the Institute for Supply Management (ISM). Today the ISM’s index of nonmanufacturing activity displayed service sector growth in the US at a 10-year high during January. The index recorded a 59.9 level, exceeding median forecasts of a 56.7 and 3.9 points higher than December’s upwardly revised reading. Significant upticks were observed in the new orders (+8 points) and employment (+5 points) components, as strength in new orders touched a one-year high while employment figures increased to the highest level in ten years. Also noted in the report, growth was observed in 15 of 18 major industries.
