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TRADING THE WEEK: Caution Ahead of Jobs, Fed

Traders Magazine Online News, April 3, 2017

John D'Antona Jr.

Enjoy the calm – which could be before the storm.

Traders are enjoying the peace and tranquility of the markets – both this week and last – as volatility and economic data have been modest. Activity around the Street was reported quiet as speculation ran as to what the upcoming March employment report would say about the US economy and what, if any, announcements would be coming from the Trump Administration.

But the relative peace in the markets might not last, according to Alastair George, chief strategist at Edison Investment Research. He said that even if some market calm has now returned, the recent increase in market volatility is disconcerting, having occurred with no obvious single trigger and following an extended period of very low volatility.

Alastair George

“The equity market declines to date are however very modest and we stick with the view that the risk/reward balance suggests investors should exercise caution in terms of equity allocations, even if the absence of panic suggests the market is relatively well-supported in the short term,” George said.

Also, George was quick to remind that there are more interest rate hikes on the way and that investors should bear this in mind when considering equities. In his thinking, Federal Reserve policymakers have not incorporated a significant US fiscal stimulus into their expectations, which makes two more rate increases the baseline, even if the Trump administration continues to struggle to implement its agenda during 2017.

“I’m thinking we’re moving towards a cautious rather than bearish stance on equities,” George said. ”While our reservations on the timing and scope of a US fiscal stimulus through reform of corporate taxation and infrastructure spending have only been reinforced, global markets appear well-supported in the near term, as the first US rate increase was easily absorbed by the market. We are therefore no longer bearish in the short term, even as we retain a cautious medium-term view.”

With quadruple witching now behind the market and quarter-end as well, trading on U.S. equity exchanges slid off from the prior week to 6.21 billion shares for the week ended March 31, moving higher from the 7.52 billion shares per day for the week ended March 24, according to Bats Global Markets data.

William Mingione, Head of Equites at Drexel Hamilton told Markets Media that despite limited upside in the context of Congressional resistance to many of the Trump policies such as the failed ObamaCare replacement b ill last Friday, the broader market remains resilient.

“The market is still buoyed by last week’s performance  by energy - with WTI getting above the $50 level, in which it found technical support at $48/barrel,” he said. “The broader markets remain in a tight trading range ($SPX 2,335/2375) and have no real reason to break out to the upside unless we start to see action in DC, not just talk.”

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