Market volatility rises after Flynn guilty plea—A sign of things to come?

On today’s edition of Market Week in Review, Consulting Director Todd LaFountaine and Mark Eibel, director, client investment strategies, discussed market reaction to U.S. tax reform efforts as well as former U.S. National Security Advisor Michael Flynn’s guilty plea.

Markets pleased by tax reform bill, unnerved by Flynn news

The U.S. Senate’s efforts to pass a tax reform measure played out front and center in the U.S. the week of Nov. 27, Eibel said, with markets generally reacting positively to the news. The bill is expected to have enough votes to clear the Senate on Dec. 1—and from there, will need to be reconciled with the version passed by the U.S. House of Representatives on Nov. 16. “Right now, the markets like the idea of tax reform,” said Eibel, adding that U.S. stocks surged on Nov. 30 as the odds of the bill’s passage increased.

On the flip side, financial markets were rattled on Dec. 1 after news broke of Michael Flynn’s guilty plea in the ongoing probe by special counsel Robert Mueller into alleged Russian interference in the U.S. 2016 presidential election. “If you look at Thursday (Nov. 30) and Friday (Dec. 1) together, in terms of market volatility, they might cancel each other out, “ Eibel said—“so the volatility is, for now, a short-term thing.” However, Eibel and the team of Russell Investments strategists believe that market chop is likely to become more common as the calendar flips to 2018. “2017 has seen remarkably low levels of volatility, and news like what we’ve seen this week demonstrates we might get back to historically normal levels soon,” he said.

Uneventful confirmation hearings for Jerome Powell—Why?

The U.S. Senate held confirmation hearings on Nov. 28 for Jerome Powell, President Trump’s pick to replace Janet Yellen as chair of the U.S. Federal Reserve (the Fed). “What stood out about this was that not much stood out,” Eibel quipped, explaining that the hearing went well and that overall market reaction was muted. Powell did speak favorably toward the idea of deregulation, and also indicated that the Fed will probably hike interest rates three or four times in 2018—neither of which came as a surprise, Eibel said.

“Normally, transitioning from one Fed chair to the next is a big deal—the kind of deal that can really move markets,” Eibel remarked, “but not this time around.” Why? Powell’s policies look to be very similar to Yellen’s, he said, which in Eibel’s mind could make for one of the smoothest handoffs in leadership the Fed has ever seen.

Brexit divorce payment bill rises

Turning to Europe, Eibel said that during recent Brexit negotiations, the so-called “divorce payment”—the amount of money the UK owes broader continental Europe to leave the European Union—increased to roughly 50 billion euros. Overall, though, the broader economic picture in Europe remains strong, he said, buoyed by solid manufacturing data from last month. Case in point: November’s IHS Markit Eurozone Purchasing Managers’ Index® number was the highest in 17 years, Eibel said.

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