MorningWord 3/1/16 – March Madness

by Dan March 1, 2016 • Commentary• Morning Word

NOTE: Last night on our sister site, Ticker District contributor Peter Boockvar, Chief Market Analyst for The Lindsey Group, and the Co-CIO of Bookmark Advisors fielded questions from the other contributors, ranging from what kind of volatility we can expect during the plethora of upcoming March Central Bank meetings, China’s slowdown and its effects on currencies, commodities and global equity markets and more. If you haven’t seen a Ticker District webinar this is a great one to start with: watch here.



Equity markets globally are having a little relief rally this morning, the first day of March after what was a fairly volatile February.  Despite the S&P 500 (SPX) closing down fractionally for the month, and down 5.5% on the year, at its lows on February 11th the SPX was down more than 11% on the year at its lows.  Since the break below 1950 on January 7th, the index has spend most of the year between a fairly well defined range of 1950 to 1805:

From Bloomberg
From Bloomberg

There has been a lot of emphasis placed on 1950 in the SPX. Some feel that a series of constructive closes above that level would set the stage for a move back to the 2016 highs near 2050, while others feel that a failure here would mean a re-test of the Jan/Feb double bottom.

I would add that the upcoming slate of Central Bank meetings, the ECB on March 10th, the BOJ on March 15th and the FOMC on March 16th could provide the impetus for a material break one way or the other. The options market is pricing about a 3% move in either direction between now and march 18th expiration, that’s likely double the expected move during a period of lower over all volatility and without expected events.

Investor fear has clearly eased a bit, but the pricing of short dated index etf options suggests that investors are getting hedged up just in case.

On Friday we will get the February jobs report, which will show the unemployment rate below 5% at 4.9% and average hourly earnings up .2% sequentially and up 2.5% year over year for the second straight month. Recent wage inflation, coupled with higher than expected consumer prices pointing inflation to the Fed’s target of 2%, with unemployment below 5% (also the Fed’s previously stated target) could force their hand on further rate hikes, which Fed Fund futures place at only an 8% chance at their March meeting and 17% at their April meeting.  The table from Bloomberg below shows the probability of a hike at the upcoming 2016 meetings and a probability of the rate range over that time period:


The worst possible scenario for U.S. equity markets out of the March meeting would be a surprise increase, which would likely cause the dollar to break out of its recent range and stocks to re-test the prior lows.  I suspect a far more likely outcome would be a wait and see mode, with a slightly hawkish tone hinting to a sort of ready to go in April stance as long as things chill out globally.  On the flip side, the Fed has also induced selling pressure in risk assets by taking too much of a dovish tone which has threatened their credibility in the face of major economic targets tied to their dual mandate for full employment and price stability being met.  It’s my view that the implied volatility between now and March 18th seems fair given the uncertainty surrounding U.S. Fed policy and the potential for the ECB and the BOJ to disappoint on policy that of late has been less than effective in their attempt to stimulate growth.