An Anxious Tone In Risk Markets

The anxious tone that emerged in risk markets in early February remained for much of March. Domestic equity markets declined approximately 3% in the prior month, and the VIX Index (S&P 500 implied volatility) traded above its post-crisis average for 70% of the trading days in March. The rise in intermediate and long-end rates also took pause, with the 10-year Treasury yield ending the month 12 basis points (bps) lower. Rising inflation expectations and long-end rates were significant catalysts for the February sell-off in equities but concerns of a pending trade war captured the attention of market participants in recent weeks.

On March 1, President Trump announced his administration would impose tariffs on steel and aluminum imports, which would make good on campaign promises he had previously made. Perhaps more importantly, the White House made clear that there would be no exemptions allowed for U.S. allies. Not surprisingly, equity markets responded negatively to such threats, even if the direct economic impact of steel/aluminum tariffs were relatively limited.

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March At-A-Glance

• An anxious tone persisted in risk markets throughout March, keeping equity market implied volatility elevated above the post-crisis average.
• Concerns related to inflation pressures and tighter monetary policy shifted to threats of a potential trade war.
• As expected, the FOMC raised the fed funds rate by 25 bps at its March 21 meeting, but its projections for further rate hikes in 2018 were less hawkish than some anticipated.

The greater risk of such measures is the unknown retaliatory measures from other nations, which could spiral into outright trade wars (inflationary and negative for global growth). In fact, European Union officials quickly threatened retaliatory measures against U.S. exports, including Harley-Davidson, Levi Strauss and bourbon. It’s not likely a coincidence that those companies happen to be domiciled in the congressional districts of House Majority Leader Paul Ryan, Senate Majority Leader Mitch McConnell, and House Minority Leader Nancy Pelosi.

This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.