Stock market volatility dropped as rate hike fears subside
Global stock indexes closed on a positive note in the week ending February 23 unfazed by the cautiously optimistic US FOMC meeting minutes. The key event of the previous week was the release of the FOMC meeting minutes. Initial knee-jerk reaction drove equity markets and bond yields higher, but the further realization that the Fed was indeed hawkish about the economy pushed markets lower. This fall, however, was reversed by the end of the week, with the US indexes surging in the last hour of trade on Friday. The only possible explanation is that markets don’t expect bond yields to shoot up, at least until the next FOMC meeting, which begins on March 20. Market participants expect the Fed will increase interest rates by 0.25%.
US market performance
Equity markets in the US extended their gains from the previous week. Broad market ETFs like the SPDR S&P 500 (SPY), the Deutsche Bank’s Dogs of the Dow ETN (DOD), and the PowerShares QQQ Trust Series (QQQ) have all closed in the green as markets rebounded on Friday. US bond (BND) yields rallied higher after the FOMC minutes with the ten-year yield testing 2.9% before retreating. The US dollar managed minor gains, especially due to the weakness of the euro after the ECB minutes.
VIX Index speculators continue to bet against volatility
The CBOE Volatility Index (or VIX), which is a measure of investor expectations for future volatility and tracked by ETFs such as the iPath S&P 500 VIX short-term futures (VXX), slipped another 15.3% with the S&P VIX 500 closing at 16.5 as compared to the previous week’s close of 19.5. As per the Commodity Futures Trading Commission’s latest commitment of trader’s report, large speculators, which include hedge funds, have reduced their long volatility contracts from 74,563 contracts to 59,550 contracts. Global financial markets will be focused on the new Federal Reserve chair’s testimony to congressional committees to see what his view is on the US economy. The report on personal income and inflation could also add to volatility in the week ahead. In the rest of this series, we’ll analyze the performance of various asset classes and discuss their outlook.