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Equity markets enjoy a pre-St. Patrick’s Day toast, courtesy of the Fed

Brian Nick, Chief Investment Strategist, TIAA Investments


March 17, 2017

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Quote of the week

“Everything will be all right in the end. If it’s not all right, it’s not the end.”— Irish proverb

The Lead Story: The Fed braves the storm and hikes rates

As expected, on March 15 the Federal Reserve raised short-term interest rates by 25 basis points (0.25%)—its third hike since December 2015—to a new target range of 0.75% to 1.00%. Markets viewed a March move as unlikely until late February, when senior Fed policymakers began beating the drum for hiking rates sooner rather than later. The stronger U.S. and global economic backdrop, free of major geopolitical turmoil or adverse financial market conditions, gave the Fed an opening to raise rates earlier than perhaps even it intended. More perspective on the Fed’s decision is available for institutional investors and retail investors/participants.

Brian Nick, Chief Investment Strategist, TIAA Investments

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Article Highlights

The S&P 500’s 0.8% rise on March 15 more than offset earlier losses, allowing the index to gain about 0.2% for the week. Europe’s STOXX 600 Index did even better (+2.1% in U.S. dollar terms), supported by the Fed’s confident tone and Dutch voters’ rebuff of a far-right candidate in their general election. Stocks in emerging markets (EM) also performed exceptionally well, with the MSCI Emerging Markets Index jumping more than 4% for the week through March 16. Improved growth prospects throughout most of the developing world has translated to higher EM asset prices, especially in U.S. dollar terms.

U.S. Treasuries rallied as well, with the yield on the bellwether 10-year note declining to 2.50% on March 17 from 2.62% early in the week. (Bond yields and prices move in opposite directions.) The downward move indicates that markets may have been expecting a more hawkish policy outlook from the Fed based on the timing of this hike. Returns for non-Treasury “spread sectors” were also positive for the week through March 16.

Looking ahead, fixed-income markets will keep a close eye on the timing and amounts of any fiscal stimulus out of Washington, with yields likely to climb if the Trump administration’s budget ultimately makes good on campaign rhetoric about increased infrastructure and other government spending. Overall, we continue to believe that U.S. corporate bond fundamentals remain sound, although lower-quality credits may be subject to increasing levels of volatility.

In other news: Will the Dutch election results spill over into France?

On March 15, Dutch Prime Minister Marke Rutte scored a decisive win over far-right candidate Geert Wilders in the Netherlands’ parliamentary elections, viewed as a litmus test for the strength of European populism after last year’s Brexit vote. Analysts had thought a strong showing by Wilders would bolster the chances of Marine Le Pen, the leader of the far-right National Front in France, as she gears up for the first round of elections on April 23. However, his loss appears to have done little to harm her prospects: betting markets assign a roughly 28% probability of Le Pen becoming France’s next president versus 30% before the Dutch vote. Meanwhile, investors seem braced for the worst, as French credit spreads are at 2008 levels and the French equity market has lagged the rest of Europe this year. 

Another key contest took place in India. Prime Minister Narendra Modi led his Bharatiya Janata Party to a landslide victory in state elections held over the previous weekend. The win, halfway through Modi’s term, could renew his mandate for cutting red tape, rooting out corruption, improving infrastructure, and opening India to foreign investment. Markets welcomed the outcome during the week, with the rupee hitting its strongest level versus the U.S. dollar in more than a year, and India’s benchmark Nifty 50 Index enjoying a “Modi bump” and a new record high.  

Here at home, a number of U.S. economic data releases were strongly positive. Among them:

Current updates to the week’s market results are available here

Below the fold: Oil prices edge up in another volatile week

After dipping to their lowest level since a late-November low on March 14, the West Texas Intermediate crude oil benchmark rallied to close the week up 0.5%, at $48.7 per barrel. Oil got a midweek boost after U.S. government data showed that domestic crude inventories had declined for the first time in 10 weeks. Also supporting the uptick: Saudi Arabia’s energy minister affirmed the country’s commitment to stabilizing the global oil market.

Even though oil prices have fallen about 10% this year, the decline has not been driven by fears of a global slowdown, as was the case in August 2015 and January 2016. In fact, economies of commodity-intensive countries—mainly in the EM sphere—are improving. More broadly, the Citi Global Surprise Index continues to rise. This index gauges the extent to which worldwide economic data releases diverge from consensus forecasts; rising index levels indicate more upside surprises. The bottom line is that while it will take time for the vast supply of oil to work its way through the system,  demand should remain supportive of the oil price. Indeed, the International Energy Agency forecasts demand to grow by a healthy 1.4 million barrels/day in 2017.

Back page: “March Madness” puts full-court pressure on productivity

It’s been well documented that employees’ productivity suffers during the NCAA Division I Basketball Tournament, which tips off each spring. Thoughts of Power Point presentations give way to power forwards, and product cross-selling to the cross-over dribble.

A recent study from the University of Washington takes this position even further, revealing that investors react more slowly to earnings announcements and trading volume drops noticeably during the first round of March Madness. So the shouts heard on trading floors during the tournament may be the result of a questionable technical foul call rather than a stock breaking through a technical level.

Ironically, the University of Washington missed the tournament this year despite the presence of point guard Markelle Fultz, the current consensus first pick in this summer’s NBA Draft. Former Huskies on trading floors everywhere may have a leg up on their colleagues for the next two weeks.