Stocks Recover After Wild Ride

 

Volatility Remains Elevated

US stocks whipsawed between gains and losses during today’s trading session as volatility continued to be the central theme of financial markets.  After opening the session more than 500 points in the red, the DJIA closed 567 points higher on the day (+2.3%), driven by the tech and consumer sectors.  The S&P 500 similarly rallied in the later part of the session and finished with its largest daily gains in more than a year.  The CBOE Volatility Index rose to over 50 – its highest mark since 2015 – before settling down later in the day as the equity losses dissipated.  In bond markets, Treasurys experienced a steep selloff amid the rise in stocks, as yields/swap rates gapped 6-12bps higher across the curve, reversing much of yesterday’s rally.  The yield on the 10-year note closed near 2.80%, less than 10bps away from its highest level in more than four years.

 

 

Officials Look to Ease Investor Anxiety

Today Treasury Secretary Steven Mnuchin and Federal Reserve Bank of St. Louis President James Bullard each took their turns at trying to dispel concerns over the recent volatility in US financial markets.  Speaking to lawmakers on the House Financial Services Committee, Mnuchin reinforced that the “fundamentals are quite strong,” and stated “I don’t think these types of moves, given how much the market has rallied, do have financial stability concerns.”  He acknowledged the presence and impact of algorithmic trading, but held back from offering any recommendations on changing the market framework.  James Bullard voiced similar composure as he labeled the recent stock declines “the most predicted selloff of all time,” given how quickly equity markets have accelerated in 2018.

 

 

Trade Deficit Grows

Key economic data on the day included a report from the Commerce Department which presented a widening of the US trade deficit during December.  The overall trade gap expanded to its widest level in the past nine years, up 5.3% to $53.1 billion ($52.1 billion expected) for the month, as imports rose 2.5% to record highs while exports climbed 1.8%.  The largest increases in imports were observed in capital goods and consumer goods as a result of increased spending during the holiday season.  Throughout the course of 2017, the United States saw a significant widening in trade deficits with some of its largest trading partners – China (+8.1%), Mexico (+12.2%) and Canada (+63%).

 

 

International Equities Tumble

Stocks around the world followed the same path as yesterday’s historical rout in the US, with steep selloffs observed in Europe and Asia.  London’s FTSE 100 (-2.65%) finished at its lowest close since 2016, the Stoxx Europe 600 declined 2.3% and major indices in Japan and Hong Kong tumbled as much as 5%.