Stock markets should prepare for volatility
The week ended March 23, 2018, was an eventful one. The FOMC (Federal Open Market Committee) raised interest rates by 25 basis points, which turned out to be a non-event.
The proposal of $50.0 billion in tariffs on Chinese imports—and the potential for China’s $3.0 billion in retaliatory tariffs—pushed wary investors away from risk assets as they feared escalation into a trade war.
With this economic combat playing in the background, the US political landscape is becoming messier by the day as the staffing churn at the White House increases. The controversy surrounding President Trump’s alleged affairs has also taken center stage.
Unlike economic events, these political events are difficult to predict and could go either way in terms of tangible impact on the economy. When adding the unpredictable nature of President Trump’s decisions to the mix, markets should be prepared for higher volatility in the week ahead.
US market performance
Equity markets in the US struggled as all US indexes recorded losses in the week ended March 23, 2018. Among the broad market funds, the SPDR S&P 500 ETF (SPY), Deutsche Bank’s Dogs of the Dow ETN (DOD), and the PowerShares QQQ Trust Series ETF (QQQ) have registered losses greater than 4.0% during the week.
The US dollar lost its lead, declining for the first time in five weeks. The US bond (BND) markets were relieved after a less hawkish statement from the US FOMC at its March meeting.
VIX index speculators start betting for volatility
The CBOE volatility index, or VIX, is a measure of investor expectations for future volatility. VIX, which is tracked by ETFs such as the iPath S&P 500 VIX Short-Term Futures ETN (VXX), shot up last week. The S&P VIX 500 closed at $24.87 compared to the previous week’s close of $15.80.
According to the latest Commitment of Traders (or COT) report, large speculators such as hedge funds have increased their long volatility positions from 53,612 contracts to 72,100 contracts. Chances remain high for volatility to increase during this holiday-shortened week. The COT report is released by the Commodity Futures Trading Commission (or CFTC).
In this series, we’ll analyze the performance of various asset classes and discuss their outlook for the week ahead.