Daily Market Color October 26, 2017Risk Assets Regain Favor After Strong Earnings, Tax Reform Progress Stocks, Yields Rise With Solid Earnings, Tax Progress Equity markets rebounded nicely from yesterday’s decline as a fresh batch of corporate earnings boosted optimism over the strength of the US economy. Twitter Inc. and Ford Motor Co. headlined today’s releases of Q3 corporate results, with both companies convincingly outpacing estimates and observing their share prices jump 18% and 1.5%, respectively. Also adding to the pro-growth outlook, House Republicans narrowly approved the final vote on the 2018 fiscal budget and effectively unlocked the process to fast-track tax reform. Now begins the difficult part of actually writing, amending and approving a tax bill. US Treasurys sold off for a third straight session, as yields/swap rates increased 1-4 bps across the curve, bringing the 10-year note yield near 2.46%. In commodities, crude oil rose more than 0.9% after Saudi Crown Prince Mohammed bin Salman provided his support to extend OPEC cuts, and WTI crude futures are currently trading at $52.65/barrel. And Then There Were Two… President Trump’s nomination for the next Fed Chair has reportedly been narrowed down to two – Jerome Powell and John Taylor. According to an unknown source for Politico who regularly speaks to the president, both Janet Yellen and Kevin Warsh are no longer on Trump’s shortlist for the position, leaving the Fed Governor and Stanford economist as the last men standing in the race. Powell’s views are considered to be most closely aligned with incumbent Fed Chair Janet Yellen, while the “Taylor Rule” foreshadows a more hawkish tone amongst the FOMC. The nominee decision is expected to be finalized before Trump’s trip to Asia on November 3rd. Reduced Purchases, Extended Term for ECB QE Earlier today, policy makers at the European Central Bank announced the decision to scale down its monthly bond purchases from €60 billion ($70 billion) to €30 billion ($35 billion), while extending the term of the program through September 2018. The Governing Council acknowledged the need for less central bank support in the eurozone, but made sure to leave open the possibility for a further extension of asset purchases rather than setting a fixed date, given that “domestic price pressures are still muted overall”. Comments from ECB President Mario Draghi struck a dovish tone as he stated that “the decision today is for an open-ended program, it’s not going to stop suddenly. It’s never been our view that it should stop suddenly.” Market reaction to the announcement included a 0.6% surge in eurozone stocks, 1.3% decline in the euro and 2 bps decline in 10-year German bund yields to 0.44%. More Good News (Less Regulation) for Banks On the regulatory front, the CFTC issued an Order today to officially extend the date of the current de minimis threshold to December 2019. Without this extension, the threshold would have dropped to $3 billion, forcing some market participants to register as swap dealers. The CFTC is using the extra time to conduct further research to determine whether the threshold should be changed to mitigate market risks while balancing the needs of swap participants. Brian Quintenz, the newest Republican Commissioner has already advocated eliminating cleared swaps from the threshold calculation while industry groups have rallied against a decrease in the threshold. The CFTC seeks to make the threshold meaningful for all parties based on thoughtful research.
