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Notable trends and dislocations (US) The Fed turns more hawkish, though vol remains subdued Last week, unsurprisingly the Fed opted to hike benchmark rates another 25bps. However, the market was more focused on the FOMC’s unexpectedly hawkish message, which indicated that it is willing to normalize policy despite weaker-than-desired inflation. Qur economists now think the Fed will announce balance sheet normalization in September and will hike rates again in December. A more hawkish Fed could result in higher real rates and a stronger USD, which ultimately should benefit our Growth to Value rotation trade of long XLF calls versus short QQQ calls (see Chart 15). The S&P 500 was more-or-less flat week-over-week as it gained only 6bps. The tech selloff continued, however, and the Nasdaq-100 dropped 105bps. Similarly, the Russell 2000 also dropped 105bps. Despite concerns on the Fed, the VIX fell 0.32 vol points to 10.38, and SPX 1m ATM implied vol declined 0.3 vol points to 7.6%. Chart 13: The Nasdaq has set a new record for consecutive days without a 5% peak-to-trough drawdown On June 9, the Nasdaq dropped nearly 2% as investors unwound 2 crowded positions, resulting in a sudden selloff from a period of relative calm. However, despite the volatility among tech names 160 «2 136 140 120 100 Bo 80 60 40 BR during the first week of June, the Nasdaq (CCMP} has not seen a 5% drawdown from a prior peak (using closing data} in 150 days. This is the longest such streak in the Nasdaq’s history. Prior to today, the longest periods of similar calm occurred during July ’83 and July ’86, when the index did not record a 5% drawdown from a peak in 136 and 135 days respectively. 20 TSSSS 0 16-Jun-17 14-Jul-86 27-Feb-97 21-Jun-71 22-Nov-93 20-Aug-15 19-Nov-91 3-Nov-16 29-Sep-80 29-Mar-94 5-Feb-99 4-Oct-95 8-Dec-80 14-Apr-87 3-Mar-80 14-Mar-00 22-Jul-99 21-Sep-78 19-Apr-99 28-Jan-00 15-Oct-99 Source: BofA Merrill Lynch Global Research. Data from 1-Feb-71 to 16-Jun-17. Drawdowns measured from prior peaks and using close-to-close data. Chart 14: On 16-Jun, the SPX had its 11" consecutive session of moves not exceeding 0.5% in either direction on a close-to-close basis. This is the 4" time this year that such a streak has surpassed 10 days 90 10 Last week the S&P 500 recorded its 11" session without a move larger than 0.5% in either direction. As a result, 10d 40 8 realized vol stood at 3.31% as of 16-Jun. 30 6 This is already the fourth time this year that SPX has gone more than 10 consecutive days without a move greater than +/- 0.5%. 20 4 This has historically happened only in ’64, ’65 and ’52. The longest such stretch this year lasted 15 consecutive trading 10 2 sessions and ended on 16-May. For comparison, in ’64 SPX had 8 stretches without such a move with the longest stretch 0 0 spanning 43 days. ‘64 '65 52 17 ‘59 ‘62 '63 '67 '95 '51 ‘53 ‘66 '68 '72 '93 16 Max # of days without an up or down move > 0.5% (LHS) m# times SPX has gone for 10 days w/o a 0.5% move (RHS) Source: BofA Merrill Lynch Global Research, Bloomberg. Data from Jan-1928 to 16-Jun-2017. Bankof America Merrill Lynch Global Equity Volatility Insights | 20 June 2017 7 HOUSE_OVERSIGHT_014978