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Stocks pause, dollar pops, and short volatility returns

A mix bag of corporate earnings and no market drivers from the State of the Union have the US indexes trading slightly lower, poised to snap a modest 5-day win streak.  The stock market reaction was very limited to the State of the Union, as expectations remain high that partisan roadblocks will prevent President Trump from advancing drug price reform or defense spending.  Nothing was revealed on the trade front and he maintained his stance on border security.  The February 15th deadline is slowly approaching, and the President will need to decide if he wants a legal battle and invoke emergency powers to get his wall.

Both General Motors and Snap Inc. posted strong numbers, while video game publishers, Take-Two Interactive Software and Electronic Arts Inc, disappointed with their results and continue to fail to find ways on how to take on Fortnite.

USD

The dollar’s recent rise has not been terribly exciting, but it has been consistent.  Today’s key move against the euro stemmed from worsening data from Germany. The decline in the euro since the end of last month has been steady but only a mere 150 pips.  Tight dollar trading remains the theme as accommodative stances from all the major central banks and lack of significant updates on trade talks are pointing to a key consolidation with the high-beta currencies.

VIX

The volatility index has nearly halved since the holidays as corporate earnings come in not as bad as expected, trade worries have deescalated, an easing of no-deal Brexit worries, and no one seems worried that we will have a legal nightmare when the President invokes emergency powers to get his wall.

It was just over a year ago that we saw that historic 20 point jump in the volatility index.  The Velocity Shares Daily Inverse VIX Short-Term note exploded on February 5th 2018, seeing its value go from nearly $2 billion to $63 million in one trading day.

The 2018 collapse in the VIX ended the low-volatility strategies, but we may be in an environment where we could some try to revisit those strategies once we get passed trade wars and Brexit.

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