What Drove Stock Market Volatility Higher Last Week?
Stock markets fell on fears of rising yields
Equity indexes around the globe fell last week, halting their multi-week gaining streak. The key reason was the rout in the equity market, fueled by concerns about rising interest rates that could increase borrowing costs. That anxiety was triggered by comments from John Williams, president and chief executive officer of the Federal Reserve Bank of San Francisco, who envisioned three or four rate hikes this year. The anxiety escalated even further after the non-farm payrolls report indicated impressive job gains in January. The Fed left interest rates unchanged at last week’s meeting, but a hawkish statement that followed the meeting made the markets realize the approaching hazard of rising rates.
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US market performance
Last week, the US equity markets recorded weekly losses that haven’t been seen in months. The S&P 500 index (SPY) shed ~3.9% for the week ended February 2, with all sectors closing in the red. The Dow Jones Industrial Average (DOD) fell ~4.1%, and the technology-heavy Nasdaq (QQQ) closed ~3.5% lower after Apple reported weaker-than-expected guidance for the first quarter of 2018.
The US bond market (BND) rout continued as bond yields surged to levels that were the highest since 2014. The US dollar (UUP), however, managed to recoup from its multi-month lows with some help from bottom-fishing investors during the week.
VIX speculators continue to play against volatility
The volatility index (or VIX) (VXX), which is a measure of investor expectations for future volatility, surged 56.2% for the week ended February 2, with the S&P 500 VIX closing at 17.3, a level not seen since the US election week in November 2016. According to the latest COT (Commitment of Traders) report released by the CFTC (Commodity Futures Trading Commission), large speculators, which include hedge funds, decreased their overall net short positions from 90,170 contracts to 59,357 contracts last week.
This volatility index in the recent past has returned to lower levels in a very short span, but this time, the fear of rising rates seems to be a real threat. We’ll have to wait and watch before deciding if the days of low volatility have ended. In the remaining parts of this series, we’ll see how speculator positions changed for various asset classes last week and what the outlook is for these asset classes this week.