Safe Havens Sought, Volatility Up Sharply, As Political Concerns Swirl

Volatility is back after a long vacation, and Washington politics may be partly to blame. Earnings took center stage the last few weeks, but now the market seems to be entering a news-driven period. That means things could change more quickly, with bigger intraday moves.

The VIX — one of the most well known indicators of market fear — leaped to nearly 12 early Wednesday, up significantly from recent lows below 10, as concerns filtered through about controversy in Washington, D.C. The talk today centers on a New York Times’ article that reported President Trump asked former FBI head James Comey to halt the investigation of former National Security Adviser Michael Flynn.

The dollar is reeling, and stock futures slid early Wednesday, though the S&P 500 (SPX) did claw back some of its biggest overnight losses. Overseas markets declined and safe havens like gold and Treasury bonds rose sharply amid the political uncertainty.

The dollar slipped to six-month lows amid concern that the U.S. political controversy could potentially delay or limit chances for tax reform and other initiatives that many feel would bolster the economy. The bond rally is another source of pressure on the currency.

Dollar weakness isn’t necessarily bad news for the stock market, as it can make U.S. products cheaper for overseas customers. That might be one reason the info tech sector rallied on Tuesday, as many of the big tech companies make lots of money internationally. The strong tech sector helped Nasdaq (COMP) set a new record high yesterday. A weak currency does raise questions, though, about investors’ faith in the U.S. economy.

There was some decent “hard” data this week, including better than expected April industrial production numbers released early Tuesday. Housing data out Tuesday (see below) wasn’t as robust, but it’s possible that warm winter weather might have pulled some demand earlier into the year, Briefing.com said.

On the earnings front, Target Corporation TGT shares rallied in pre-market trading after the company reported better quarterly results than Wall Street analysts had expected. Wal-Mart Stores Inc WMT is tomorrow. Target same store sales dropped less than expected, and sales and earnings both exceeded expectations. After many retail stocks slumped last week, it’s positive to see least one major store had good earnings.

Oil, which rallied vigorously Monday and gave the market a big lift, let off some steam Tuesday and fell back below $49 a barrel, where it continued to trade early Wednesday. While news about Saudi Arabia and Russia agreeing to extend production cuts appears bullish, nothing becomes official until OPEC meets on May 25, so perhaps investors are waiting to see what happens then. The energy sector slipped in Tuesday’s trading.

Keep an eye on 10-year Treasury yields, because they’re playing defense after climbing to 2.4% earlier this month. The yield fell below key 2.3% support early Wednesday. Chances of a Fed rate hike by June slipped to 69%, according to Fed funds futures, down from above 80% at times last week.

Chink in Housing’s Armor?

Yesterday’s building permits and housing starts data revealed what looks like a pause in the housing market’s boom. Housing starts in April fell about 2.6% from March, while permits for new homes fell 2.5%, including a 4.5% drop in permits for single-family units. While it’s easy to say this is just one report, it does mark the third-consecutive month of falling housing starts, and permits have flattened over the last few months. One thing to keep in mind is that single-family starts did rise in April, with a big drop in multi-unit starts pulling down the overall number. But the report doesn’t give much hope for lower new home prices anytime soon, considering that supplies remain on the low side.

Growth Meter Ticks Up

While the housing news was a bit disappointing, there were fair tidings on gross domestic product (GDP) Tuesday, as the Atlanta Fed’s GDP Now indicator for Q2 ticked up to 4.1%, from last week’s 3.6%. Strength in real estate and transportation led in part to the increased projection, the Atlanta Fed said. Meanwhile, next week brings the government’s second estimate for Q1 GDP growth. It could be interesting to see if that next estimate pops up from the tepid 0.7% the government penciled growth at in its first projection for the quarter. Strength in Q1 earnings has led to some talk that perhaps growth was a little better than that 0.7% figure might have indicated.

Caution Despite Record High Stocks

Though the stock market continues to set new record highs, there’s still evidence of the cautious tone that crept in late last week. You can see this in the strength of gold, and in Treasuries. Meanwhile, the dollar lost ground against the yen, and the yen is often thought of as a safety play. The euro also gained against the dollar, but that could be more of a reflection on percolating strength in the European economy, where stock indices are hitting records and exports are growing. Politics in Europe have also settled down a bit after worries earlier this year about the French election.