Weekly Market Outlook

Treasuries rose for a fourth day and gold reached a three-month high as demand for haven assets persisted with investors assessing political risks in Europe and the U.S. American equities slumped.

The S&P 500 Index extended a stretch of listlessness as disappointing bank results in Europe added to pressure on financial shares. Yields on 10-year Treasury notes fell to 2.37 percent, while bond auctions in Europe lifted debt there. Gold topped $1,240 an ounce, and crude fell on signs of oversupply. Bloomberg’s dollar index fell for the first time in three days.

Trades sparked by Donald Trump’s election continue to falter as long-awaited details on pro-growth policies remain undelivered. That’s driven demand for safety even as corporate results in Europe and America add to evidence that economic growth is accelerating.

“There is less macro and more micro driving the market because we are in the earnings season,” Lucy MacDonald, chief investment officer for global equities at Allianz Global Investors, said on Bloomberg Television. “But we haven’t had an election for a while and we know we have plenty coming up. The negative outcomes aren’t really priced in.”

What’s coming up in the markets:

  • MPs will resume debating the remaining amendments of the bill to trigger Brexit today. Theresa May’s plan is on track after she won a parliamentary ballot by promising lawmakers a vote on the final deal with the EU. Seven Tory members of the House of Commons still voted against her.
  • The U.S. Treasury Department is this week selling a total of $62 billion of three-, 10- and 30-year securities in its quarterly refunding.
  • A strike looms at BHP’s Escondida mine. Workers at the world’s largest copper operation vowed to down tools indefinitely after wage negotiations with the company failed. The walkout will halt all production at the site.
Stocks
  • The S&P 500 Index fell 0.2 percent to 2,287.81 at 9:31 a.m. in New York.
  • The Stoxx Europe 600 Index dropped less than 0.1 percent. GlaxoSmithKline fell after saying profit growth may be erased this year if rival drugmakers are allowed to start sell versions of its top-selling asthma medicine.
Currencies
  • The Bloomberg Dollar Spot Index was little changed, after paring a 2017 loss to 2.4 percent.
  • The euro slipped 0.1 percent to $1.0668 and the British pound was little changed at $1.2504.
Commodities
  • Oil slid 1 percent to $51.63 a barrel in New York, heading for a third-straight drop amid speculation that rising supply from U.S. shale producers is offsetting cuts by OPEC.
  • Copper three-month forwards jumped 1.5 percent in London after workers at the biggest mine in Chile vowed to strike. Goldman Sachs Group Inc. forecast what would be the first deficit of the metal since 2011.
Bonds
  • Yields on 10-year Treasuries dropped three basis points to 2.36 percent, the lowest in three weeks.
  • Portugal’s 10-year debt yield fell 10 basis points while French benchmark yields dropped four basis points and Italy’s fell five.
  • Indian bonds tumbled after the central bank unexpectedly left rates unchanged, defying market expectations for a cut to counter slowing inflation.
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Weekly Market Outlook
Wall Street’s ‘fear gauge’ hovers near historically low levels as the stock market reaches records
Is greed trumping fear in the stock market?

Fear. It is one of the prevailing themes Wall Street is focusing on as they survey a U.S. stock market that has staged a steady, albeit measured, assault on all-time highs over the past few months and as President Donald Trump settles deep into his chair in the Oval Office.

Nicholas Colas, chief market strategist at Convergex, told MarketWatch that hand-wringing about risk in the stock market amid growing political concerns is among the topics most frequently cropping up in discussions with clients, even as the Dow Jones Industrial Average DJIA, +0.19% S&P 500 index SPX, +0.02% and the Nasdaq Composite Index COMP, +0.19% hit records. “The effect President Trump is having on capital markets is the first thing clients want to talk about. For many, it is the only thing,” Colas told MarketWatch.

So, why is the CBOE Volatility Index VIX, -0.80% or VIX, otherwise known as Wall Street’s fear gauge, hovering around historic lows, highlighted by a fleeting lurch down to a 10-year nadir of 9.97 on Feb. 1.

What is volatility anyway?

First, it is important to define our terms. On Wall Street, “fear” can be a subjective term because the idea of an asset suddenly jolting up or down could result in painful losses for investors betting on price moves. But typically when the market refers to “volatility” they are describing an assets’ likelihood of swinging higher or lower. (We’ll touch on two other terms that tend to be used in the market interchangeably later: risk and uncertainty).

More specifically, the VIX measures the implied volatility of S&P 500 index options over a 30-day period in the future. In other words, the VIX isn’t about current levels of fear but about the market’s wager on how far the S&P 500 could move from current levels over the next month, so various options can be priced appropriately.

The historic, long-term average of the VIX is around 20, with its current level near 11 representing an uncharacteristically subdued reading (see chart below). Low levels in the fear gauge usually coincide with rising equities, which is currently the case.

The ViX has been trending lower.

Since share prices often fall faster than they rise, a low VIX implies that more investors are expecting prices to extend gains, which means that an unexpected shift in sentiment spurred by a market surprise could catch investors off guard and upend stock-market indexes. Currently, investor sentiment remains near a three-year high.

Yet, a laundry list of potential land mines abound. Trump’s election victory and his first few weeks in office have certainly stoked a degree of uncertainty—and so-called animal spirits)—about his policy positions. Combine that with worries about European financial markets and concerns about growing populism in the region and there appears to be no dearth of powder kegs for the market. Indeed, measures of economic uncertainty are near an all-time high.

Standard deviation

But the market certainly isn’t exhibiting definitive signs of fretfulness. And that can be judged by a number of stock-related metrics. Let’s take the S&P 500’s standard deviation over the past few weeks. Standard deviation is a way to look at the average price performance of an asset and determine if it has deviated from a particular range, to gauge historical, or actual, volatility.

As the chart below shows, the stock market has made some major swings since August, but has traded in a relative narrow band in recent months (see area highlighted by the read circle below):

S&P 500 hasn’t been very deviant of late.

Volumes

Another measure of volatility, stock-market volumes, also reflect a period of quiescence. As MarketWatch’s Wallace Witkowski has explained in a previous piece exploring measures of risk, high volume and high volatility tend to be interrelated. But as recent action suggests, volumes have been tepid, at best:

Volumes suggest a quite market.

If Wall Street’s fear gauge, volumes and standard trading ranges point to placid markets why are investors so apparently fixated on fear?

Interpretations of risk and uncertainty

Colas offers a fairly simple explanation for this.

“The equity market feels very strongly that they have [Trump] figured out and to some degree that is fair because he was very clear on the campaign trail as to what he wanted to do and he is executing on that plan,” he said. Trump has signed about 20 executive orders which have been in line with his hard-charging campaign pledges on everything from loosening regulations on Wall Street to restricting immigration from seven majority-Muslim countries.

That said, fears the VIX could suddenly spike on the back of an unexpected event don’t seem remote. Colas says he believes that the current level of the VIX is more anchored to “everything we knew before the election and about the fourth-quarter corporate results [which have been OK].” Which underscores the point that the VIX is rooted in historical volatility. Therefore, a truly new event could scare up implied volatility.

And then there’s the question of whether investors are thinking about risk the right way? Steve Barrow, head of strategy at Standard Bank, describes it this way in a Tuesday research note:

Risk and uncertainty; two sides of the same coin? It might seem reasonable to think so, but if we look at the current situation it seems to us that there is a large amount of uncertainty—but little risk. What leads us to this view? Anecdotally, it seems to us that events such as Brexit and Trump’s victory last year in conjunction with upcoming events such as elections in a number of eurozone countries, has led to a good deal of uncertainty. We don’t know how electors will vote in Europe given the opinion poll mistakes of last year. We also don’t know for sure how the policy makers that won—Trump and the Brexiteers—will use their victories. But does that mean that there is lots of risks? It would seem so, but while measures of uncertainty are high, measures of risk seem quite low.

Barrow recalls what happened last year when the U.K. voted in June to leave the European Union and Trump squeaked out his presidential victory in November:

When the ‘remain’ side lost uncertainty (over the outcome) became a certainty and risk measures soared. It was the same with Trump’s win in November. Looking ahead to possible black swan events this year, such as a [Marine] Le Pen victory in the French presidential election, there is a degree of uncertainty but, as yet, little sign of risk.

Alternative measures of risk

There are certainly assets that reflect a level of unease in the market, outside of the VIX and stocks.

Gold futures GCJ7, -0.08% viewed as a haven in a time of uncertainty have been climbing recently. Gold prices touched their highest level in about three months on Monday. Gold for April delivery is up about a 1% this week, and 7% over so far this year, compared with a 2.4% rise for the S&P 500 in 2017 and a 1.5% rise for the Dow, according to FactSet data as of Feb. 6’s close.

To be fair, gold may also be climbing as expectations for inflation grow. Gold is often used as a hedge against inflation.

Meanwhile, currencies also have been prone to bounciness. Look no further than the gauge of the U.S. dollar, the ICE U.S. Dollar Index DXY, +0.19% as an indication of volatility. The dollar index, which measures the dollar against a basket of six currencies, has seen some sizable swings in light of Trump’s policy pronouncements and recent comments that the greenback was “too strong.” (see chart below):

The dollar and currencies have been volatile.

Other currencies like the Mexican peso USDMXN, +0.2182% have seen up-and-down trade on Trump comments, given his threats to build a wall along the U.S.-Mexico border and orders to rework longstanding trade pacts.

Watch the VIX

But for investors watching the VIX, market technician John Kosar at Asbury Research tells MarketWatch that he’s looking for a sustained level of the gauge at around 12.20 as a sign that fear is genuinely creeping higher. That is far from the traditional view of 20, which has usually implied fear is gripping the market, but at this juncture that’s enough to catch Kosar’s attention.

“There are potholes all over the road,” Kosar said, referring to the market risks. But he said the market needs to go from “complacent to sustained fear.”

“You need to watch your p’s and q’s. The market is a little too fearless right now. When market metrics indicate that investors collectively are not worried that is precisely when smart investors should be cautious,” he said.

Investor takeaway: If you’re in the market for the long-term, discussions about risk and volatility may not be meaningful (assuming you aren’t at or near retirement age), unless there is an expectation of catastrophic losses. So, while it is important to be aware of shifts in market sentiment or risks, even when markets nosedive, it’s important to remember they have a tendency to recover.

Colas said 1968 offers a good proxy for the current situation. Despite wide-ranging political tumult at the height of the Vietnam War, the S&P 500 generated a return of roughly 11%. Back then the biggest driver of the market were corporate earnings and interest rates. That is all the market really ever cares about, Colas said.

The same should hold true now.
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Weekly Market Outlook

If China has a multi-speed economy — with different regions performing at vastly different rates — it may also be crafting a multi-speed approach to monetary tightening.

The central bank on Tuesday continued the campaign of tightening the nation’s money markets that it kicked off late last year, this time by refraining from offering reverse-repurchase agreements for a third straight day, draining funds from the system. At the same time, evidence emerged that new bank lending in January neared — and might have beaten — a monthly record, according to people familiar with the matter.

By focusing the tightening on money-market rates rather than raising benchmark lending rates or issuing stringent orders to banks to rein in credit, the People’s Bank of China is walking a fine line. On the one hand, policy makers are seeking to contain leverage and reduce speculation in financial markets. On the other, the Communist leadership is wary about hobbling growth in an economy already expanding at the slowest pace in two decades.

For investors, there may be two immediate takeaways. First, a reduction in leverage is poised to escalate pain in the bond market, which is already on track for a fourth month of losses. Second, higher money-market rates may help ease downward pressure on the yuan, and on foreign-exchange reserves that data Tuesday showed slipped below $3 trillion for the first time since 2011.

“The PBOC is sending a clear signal that it wants to control leverage but not hurt growth — that’s why it raised the short-term loan costs but not the benchmark interest rates,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore.

Bank of America Corp.’s broad China bond index retreated 3.1 percent in three months to the end of January, the first three-month decline since 2013. In the government bond market, 10-year yields spiked to a 17-month high of 3.49 percent on Monday, according to ChinaBond data, continuing a climb up from a record low in August.

“There’s not much opportunity in the bond market now as the PBOC is determined to pull funds from the financial system,” said Meng Xiangjuan, a bond analyst at Shenwan Hongyuan Group Co. in Shanghai. “Rate hikes are clouding market sentiment.”

Evidence of stabilization in economic growth has given the PBOC the confidence to start tightening the screws when it comes to corporate leverage. With indicators from manufacturing to producer prices signaling a revival, the central bank has boosted the interest rates on its Medium-term Lending Facility, used by banks, and reverse-repurchase agreements.

“This is the first time that China kicks off a tightening cycle by hiking its newly developed money market policy rates, while leaving conventional benchmark rates of bank lending and deposit unchanged,” Harrison Hu, chief greater China economist at NatWest Markets, wrote in a note Monday. “The policy effects will indeed be uneven, i.e. more to curb financial risks than to dampen real economy.”

With the PBOC moving to raise short-term rates, there’s less of a contrast with the Federal Reserve, which is projected to continue its tightening campaign this year. Last year’s gap between the two contributed to the biggest annual drop in the yuan in more than two decades.

Chinese authorities are unlikely to use repurchase agreements to sap cash from the financial system this month because maturing reverse repos will naturally drain funds and a drop in yuan positions will keep liquidity tight, according to 10 of 14 traders surveyed by Bloomberg News.

China’s currency slipped against the dollar Tuesday after the data showed that the nation’s reserves — the world’s largest — dropped to $2.998 trillion, though the decline was still the smallest in six months.

“China has finally converged with the U.S. in monetary policy. This in turn could help ease depreciation pressure from the yuan against the dollar,” Hu wrote.

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Weekly Market Outlook

U.K. labor-market pressure may be mounting, food-price inflation is returning and one Bank of England policy maker is starting to voice concern.

A report on Wednesday showed starting salaries for permanent staff rose the fastest in nine months in January. While the central bank said last week that there’s more supply in the labor market than previously envisaged — and that wages will therefore stay relatively subdued — the survey from the Recruitment and Employment Confederation and IHS Markit indicates signs of building pay pressure.

That came as Kantar Worldpanel said Tuesday that U.K. grocery prices are now rising again after a period of deflation that ran from September 2014 to December 2016. The same day, Kristin Forbes said she’s becoming “uncomfortable” with the BOE’s policy stance given the strength of the economy and the rapid pickup in inflation, and this may push her to vote for an interest-rate increase soon.

The BOE forecasts that inflation — at 1.6 percent in December — will accelerate to above its 2 percent target this year, reflecting in part a weaker pound. Forbes, taking a hawkish stance, said that it could strengthen faster than projected, which will then make it “increasingly difficult” to justify tolerating a large overshoot.

Official U.K. statistics still show food prices are falling on an annual basis, though the rate of decline halved in December to the least in more than two years. That trend could be exacerbated by extreme weather in Spain that’s led to shortages of staples such as lettuce and zucchini in British supermarkets.

“Already for some seasonal food items, where contracts with suppliers tend to be renewed more frequently, prices have begun to pick up,” the BOE said this month. “As such, it is likely that retail food prices more generally will start to respond to pressure from higher sterling import prices over 2017.”

On the labor market, the REC report showed vacancies rising and the availability of staff decreasing, a trend that may worsen because of the decision to leave the European Union. Prime Minister Theresa May has indicated the U.K. will leave the bloc’s single market in order to gain control over migration.

“Employers are crying out for people,” said REC chief executive Kevin Green. “The government’s decision to prioritize immigration control over the economy in their EU negotiations means that finding candidates will become yet more difficult.”

In its latest forecasts, the BOE cut the estimate of the level that unemployment can fall to without fanning inflation to 4.5 percent from 5 percent. Forbes said while the rate probably is below 5 percent, it’s not as low as the MPC’s central estimate. That could mean stronger upward pressure on wages and inflation, though she noted the potential for Brexit to make firms more cautious about raising pay. The U.K.’s jobless rate is currently 4.8 percent.

“The MPC should be nimble and willing to quickly adjust the appropriate path for monetary policy in either direction as needed,” she said. “In my view, if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in bank rate.”

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Investments
RYAN ROBINSON
CONTRIBUTOR

Don’t let your day job or lack of capital stop you from finding and testing a business idea. Here’s how.

5 Ways to Validate a Business Idea, Right Now

Last year, I embarked upon a personal challenge to validate a business idea in 30 days.

To make it even more difficult, it was a random idea chosen by my readers. They asked me to do it without using my existing website, traffic and business connections and without spending more than 20 hours per week on the project. On top of that, I limited myself to spending no more than $500 validating this idea.

The experiment was a success.

In just two weeks, I built an email list of 565 subscribers without having an actual website. Then, I reached out to a handful of those subscribers and pre-sold 12 copies of a book that didn’t even exist yet, all in less than 30 days. I wrote about the experiment in real-time with in-depth weekly updates, successes, failures and lessons learned along the way, right here in my validation challenge.

Today, I want to share with you the five most effective ways to validate a business idea — quickly and without breaking the bank, based on what I learned through this experiment and from building several other businesses over the years.

1. Join an online community.

All great business ideas come from solving your biggest frustrations; the ones are also facing with similar obstacles. Want to uncover which problems you could get paid to help people solve? Join a topically relevant group on Facebook, LinkedIn or Slack, where members all have a shared interest.

Start asking genuine questions. Determine what their biggest challenges are in your topic area. Through these conversations, you’ll hear first-hand from your target customers exactly what they want. This gives you an incredible opportunity to create something more valuable, effective and unique to satisfy their needs in ways that others currently are not.

2. Guest posting.

The logic behind guest posting is simple. Get a preview of your upcoming solution, the idea you want to validate, published and highlighted on a more popular website that already has your existing audience built-in. Within your guest post on the same topic as the idea you want to validate, include links back to where readers can have the opportunity to learn more about what you’re building.

When I wanted to validate the idea for my first online course teaching people how to build a side business, I spent countless hours landing my first guest posts on blogs like Buffer, CreativeLive, The Daily Muse and other destinations, where I knew my audience was already reading.

Shortly after sending a cold email pitch to a writer at Buffer, my first guest post about finding meaningful work went live and in less than a week I’d amassed a couple hundred email subscribers that wanted updates on my course. The phone, email and Skype conversations I had with those early subscribers laid the foundation for the community I’ve grown and the products I’ve built.

3. Facebook ads.

If you’re willing to allocate a budget of $100 to $200 for driving paid traffic to your landing page through Facebook Ads, you can expect to get upwards of a couple hundred highly targeted visitors to come check out the idea you’re working on.

With a previous business, my partner and I were able to validate a brand new product line before investing in it. We spent $100 on Facebook Ads, collecting leads by offering a free downloadable guide. Then we transitioned into phone conversations with those potential customers, before landing our first $5,000 sale in less than two weeks. If you’re ready to try out your first Facebook Ads, get started and do it right.

4. Giveaways.

Choosing to run a contest or giveaway to help validate your idea can be massively successful in terms of growing your list of prospective customers, if you choose the right incentives to include in your giveaway. One of the most common mistake entrepreneurs make with hosting a giveaway, is awarding prizes that everybody would want to win.

If you run a giveaway, the prize needs to be very closely related to the solution you’re planning on building. That means no Amazon gift cards or iPhones. If you want to host a giveaway to validate your photography-related website idea, start by asking what photographers want most, which could be a free subscription to Adobe Lightroom, a new lens kit or a coaching session with a well-known photographer in their space.

Then, make sure you’re using the right giveaway platform to help incentivize entrants to share with their communities. If you can get each giveaway entrant to refer five of their friends, you can quickly go viral and build a large interest list. The Kingsumo Giveaways plugin for WordPress has this incentivized sharing feature built-in.

5. Amazon reviewers.

Want to validate your product idea? Start by combing through reviews of related products on Amazon to see what existing customers like, dislike and complain about most. Focus on identifying the two and three star reviews, where the customers are somewhere between ecstatic and wildly unhappy with their purchase.

Then, click through to the reviewers profile and click the button that says show more; the vast majority of Amazon reviewers that don’t edit their default profile settings, so you’ll likely see an option to send them an email. Reference their review, briefly mention you’re building something similar that’s designed to improve upon the product they reviewed, and ask whether they’d be up for answering a few questions.

At the end of the day, to succeed in business you need to be helping real people solve real problems. More importantly, as serial entrepreneur and TED speaker Derek Sivers shared with me in a recent interview, “Start now, you don’t need funding. For an idea to get big, it has to be useful—and being useful doesn’t need funding.”

The psychological trap of needing more time, money, experience or other resources before starting to build a business holds many aspiring entrepreneurs back from ever achieving their dreams. You have to work with what you’ve got. Start by simply validating your idea. The goal of validation is to give you relative certainty about the viability of your idea; it’s not a guarantee of success.

Validating your idea today will help prove that you’ll have a growing, paying audience of customers for the solution you plan on building, before you go out and create a finished product or service. Without validation, you run the risk of creating a solution to a problem that doesn’t really exist. Begin without grandiose expectations and just endeavor to be useful to people today. Help them overcome their challenges, document what works and see where it takes you.

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