March 16, 2018
S&P Stuck in Worst Streak This Year Faces Quadruple Witching
Equity bulls frustrated with this year’s longest stretch of declines can blame it on a regular market event happening today. That’s when the quarterly expiration of futures and options on indexes and individual stocks, known as “quadruple witching,” takes place. Typically it coincides with the rebalancing of the S&P 500 Index, spurring volatility and active trading. Heading into today’s session, which follows a 1 percent drop in Chinese stocks, the S&P 500 has fallen four straight days and its push beyond 2,800 fell short for a second time in the past month. To Russ Visch, a technical analyst at BMO Nesbitt Burns Inc. in Toronto, the weakness is nothing to worry about as volatility tends to go up when fund managers try to adjust positions using new derivatives. “We’re not too bent out of shape regarding the low volume sell-off,” Visch wrote in a note. “Given the massive volatility spike in early February and the associated scramble to manage/insure against it, this latest price action shouldn’t be too surprising as derivative positions are wound down or pushed out,” he added. “You have to allow for a lot of ‘wiggle room’ as the process unfolds.” But volume will pick up, at least for a day, if history is any guide. Last time “quadruple witching” and an S&P 500 rebalancing took place, on Dec. 15, the market had the busiest day of the year with 10.7 billion shares changing hands. This time, the rebalancing could force $23.1 billion of trades, up from around $18.6 billion a year ago, S&P Dow Jones estimated on March 12. In addition, FTSE Russell is also implementing index rebalances today. Together, global stocks may be set up for “a big trade,” Investment Technology Group wrote in a note earlier this week. According to the firm’s estimate, the shuffling in Russell gauges could lead to $5.5 billion in trading. Watch out for Chinese stocks such as Alibaba Group Holding Ltd. and Baidu Inc., as trading in these shares is likely to be especially active once FTSE allows an additional 25% weighting of eligible stocks to be included in its global indexes, ITG said.
Euro-Area Inflation Downgrade Backs ECB’s Ultra-Slow Exit Plan
Investors primed for the European Central Bank’s next policy shift were given clear signals on Friday that any change is far from imminent. An unexpected downward revision to euro-area inflation and a softening in labor costs came just hours after ECB chief economist Peter Praet opposed any early tweaking of the institution’s language on stimulus. He said policy makers have been surprised by an influx of new workers that could be suppressing wage and price pressures. Investors are on guard for any decision by the ECB to end its bond-buying program and start the clock ticking on an interest-rate increase that could come around the middle of 2019. That would be the first tightening measure in President Mario Draghi’s eight-year presidency, which ends in October 2019 and has so far been dominated by crisis measures aimed at averting deflation and the breakup of the bloc. “The message is that it’s going to be a very slow exit process,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “Bringing net asset purchases to an end will be quite protracted and also rate hikes will be quite a long way off. It’s all going to be very slow because the recovery in inflation will be very slow.” While the euro area is now undergoing its most-robust economic expansion in its near two-decade history, wages and prices are failing to follow suit. Friday’s inflation reading showed the rate at 1.1 percent in February, down from an earlier estimate of 1.2 percent. That’s the lowest since late 2016, and well below the ECB’s goal of just under 2 percent. The core rate, excluding volatile components such as food and energy, held at 1 percent.
Japan’s Central Bank Is Driving Economic Policy as the Government Sinks in Scandal
Japan’s dependence on the central bank to drive economic policy was on show again on Friday as parliament locked in Governor Haruhiko Kuroda to another five-year term as a land scandal undermined the nation’s political leaders. While analysts are divided on whether the Prime Minister Shinzo Abe and Finance Minister Taro Aso will hang onto their jobs this year, there’s no doubt their focus will be diverted away from the government’s already flagging economic agenda. “You’re going to have Kuroda in place whatever happens,” said Jun Okumura, a visiting scholar at the Meiji Institute of Global Affairs. “That you don’t have to worry about.” As for the prime minister: “Legislative agenda is probably the last thing that’s on his mind right now.” Both houses of parliament swiftly confirmed Kuroda’s appointment, and that of his new deputies Masayoshi Amamiya and Masazumi Wakatabe, while lawmakers continued their focus on the controversial land deal linked to Abe and the finance ministry’s tampering with associated documents. And with that, the guardians of monetary policy will settle back into running the stimulus program that’s pushed back deflation and weakened the yen — two of the most the tangible benefits of “Abenomics” for Japanese businesses and the wider economy. “Continuity at the BOJ is one of few good pieces of news out of Japan right now,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute.