Can Volatility Fall Further in the Last Week of 2017?


Dec. 26 2017, Updated 10:42 a.m. ET

Volatility rose marginally last week

In the week ended December 22, 2017, volatility in the global markets turned marginally higher but closed the week with a limited change from the previous week. The passing of the US tax reform bill on December 20, 2017, and averting a government shutdown helped sustain positive momentum for the financial markets. Trading activity usually declines in the last two weeks of the year, and any surprises increase volatility. Last week had no major surprises.

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US market performance

The US markets, supported by the passage of the tax reform bill last week, continued to surge ahead, recording the fifth straight week of gains. The S&P 500 (SPY) index closed 0% higher for the week ended December 22, and the Dow Jones Industrial Average (DOD) rose 0.42%. Investors in the technology-heavy NASDAQ (QQQ) index lent support to technology stocks, with the index rising 0.34%.

The US bond market (BND) reacted to news of the tax reform bill and the temporary spending bill that averted a government shutdown, driving short-term yields higher. The US dollar (UUP) gained marginally against its trading partners in response to tax reform and year-end inflows.

VIX speculators continue to bet against volatility

The volatility index (or VIX) (VXX) rose marginally last week despite the increase in risk appetite. With the major indexes unchanged, this small increase in volatility may not be a reason to worry. The S&P VIX 500 closed at 9.9, a 5.1% rise. According to the latest COT (Commitment of Traders) report released by the CFTC (Commodity Futures Trading Commission), large speculators increased their short positions on volatility futures from -112,109 contracts to -128,583 contracts in the previous week. Volatility is likely to remain muted this week for lack of any major events and since it’s the last week of the year when trading volumes are typically low.

In this series, we’ll be looking at the outlook for various asset classes for the last week of 2017.


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