Why Market Volatility Fell despite Negative News
Markets seemed to shrug off bad news
For the week ended September 1, 2017, volatility in the global markets fell considerably. The markets reacted to another missile launch by North Korea on Tuesday, August 29, 2017, and tensions flared up when a North Korean missile flew over northern Japan and landed in the Pacific Ocean. On Sunday, September 3, 2017, North Korea conducted what it seemed to indicate was a nuclear hydrogen bomb test.
The other disappointment was the fall in non-farm payrolls in August when 156,000 jobs were added against a market expectation of 180,000 new jobs. The unemployment rate rose to 4.4% from 4.3%. The markets seemed unfazed by this negative news, seeming to expect no escalation in tensions and continuing to surge ahead, posting a second consecutive weekly gain.
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US market performance
The S&P 500 index (SPY) rose 1.3% last week, closing at 2,477. The Dow Jones Industrial Average index (DOD) rose.82%, and the Nasdaq (QQQ) closed 2.4% higher for the week. The US dollar (UUP) posted impressive gains despite the weak jobs report, and bond (BND) markets fell as bond yields appreciated after the non-farm payrolls report.
The VIX fell another 10% last week
The CBOE (Chicago Board Options Exchange) Volatility Index (or VIX) (VXX) fell another 10.0% for the week ended September 1, 2017, after a 20.0% fall in the previous week. The markets’ apparent lack of fear for negative news drove volatility lower last week. The VIX (UVXY) closed at 10.2 for the week ended September 1 compared to the previous week’s close of 11.3.
According to the latest Commitment of Trader’s Report released by the CFTC (Commodity Futures Trading Commission), large speculators have increased their overall net short positions to 117,371 contracts from 105,294 contracts through Tuesday, August 29. With new provocations from North Korea, we’ll have to wait and see if volatility could increase this week.
In the remaining parts of this series, we’ll analyze how different asset classes performed last week and look at their outlook.