Markets absorbed what seems like four years’ worth of drama with a collective shrug this week between the highly anticipated Comey congressional testimony and the UK snap election turnabout. Comey offered no material new information and only solidified that the ‘Trump Show’ drama will continue indefinitely. The U.K. parliamentary elections most certainly caught Prime Minister Theresa May by surprise. The Conservative party lost majority control which will change the complexion of Brexit negotiations. Markets don’t seem overly concerned with a coalition approach at this time. Equity markets, particularly growth and technology stocks, sagged on the week while interest rates and the U.S. dollar seemed to remember the Fed meets next week and is all but certainly moving to hike rates by 0.25% ‐ the yield curve shifted higher and the dollar strengthened.

Weekly Anecdotes:

  • Friday’s selloff in the NASDAQ was concentrated in the same names that have driven the market (and indices) higher on the year. APPL, GOOGL, MSFT, AMZN, FB, the five largest stocks in the S&P 500, lost $97.4b in market cap while the other 495 stocks gained $74.4b. • Despite Comey and U.K. elections, volatility remained low, in the 10‐12 range. The VIX has been below 16 for 145 straight closes through Thursday, the third‐longest such streak on record.
  • The 10yr bounced off its lowest level of the year last week but ultimately moved higher in a parallel shift across the yield curve by 6 or 7 basis points.
  • The U.S. dollar behaved in similar fashion. After surging to a 14 year high in the Trump reflation trade after the election, the dollar fell back to pre‐election levels. The trade weighted DXY basket (U.S. dollar) has fallen approximately 5% in 2017.
  • The U.S. energy complex continues to reinforce the declining influence of OPEC as the swing producer in global oil markets. U.S. production has risen from 6.5mm bpd in 2012 to 9.3mm bpd where recently, it seems to be flattening out. Last week, inventories increased by 1.64mm barrels, the most for this week of the year than any of the past five years. Oil prices fell sharply back to the $45 range on the inventory news and is off over 11% from March highs.
  • Foreign purchase of U.S. Treasuries may be playing into the declining yields. In 2016, China sold a net $188b worth of U.S. Treasuries. Thus far in 2017, China seems to have shifted from net seller to net buyer, purchasing a net $29b through the first quarter. Both the ECB and BoJ are also supporting the U.S. Treasury market through their respective QE programs.
  • The Fed meets this week and is expected to raise rates from a 0.75%‐1.00% range to 1.00%‐1.25%, the third hike in the last six months and 5th of the current hiking cycle.
  • The market is pricing in only two hikes over the next 12 months, less than what the Fed has communicated. The thinking here is that undertaking the balance sheet unwind may provide incremental or complimentary ‘tightening’ not fully discounted yet.

Economic Updates:

  • Both Japan and Eurozone release revised Q1 GDP figures. Eurozone was the fastest growing G3 economy in Q1, growing over 2% for the second quarter in a row and at its fastest pace since Q1 2015.
  • The overall U.S. economic scorecard was fairly benign last week. Labor market data was mostly positive, consumer credit grew very slowly, and industrial good/capital spending came in as expected.