Why Volatility Trended Lower Last Week
Stock market volatility mellowed by flexible tariffs
It was supposed to be a week filled with drama: the dreaded tariffs were scheduled to be announced, and the February jobs report was on the radar. Both events turned out to be favorable for the financial markets. President Donald Trump seemed to have budged under domestic and international pressure, as he announced the tariffs along with concessions for Canada and Mexico and left the negotiations window open for other trading partners.
The February jobs report was stellar, but the key component, average hourly earnings, which was the trigger for the February market meltdown, was reported to have increased by 0.1%, lowering the annual growth rate to 2.6%. On the geopolitical front, news about a possible meeting between President Trump and North Korea’s Kim Jong Un before May has also added to the increase in risk appetite and the decrease in volatility.
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US market performance
Equity markets in the United States sprung back from the previous week’s low after the tariff plan was announced. Broader market ETFs such as the SPDR S&P 500 ETF (SPY), the Deutsche bank’s Dogs of the Dow ETN (DOD), and the PowerShares QQQ Trust, Series 1 ETF (QQQ) all registered gains for the week ended March 9, 2018. The US dollar rallied against the Japanese yen as risk aversion declined while the US bond (BND) market continued to struggle amid increased odds of a rate hike.
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 is tracked by ETFs such as the iPath S&P 500 VIX Short-Term Futures ETF (VXX), fell last week. The S&P VIX 500 closed at 19.59 compared to the previous week’s close of 14.64.
As per the latest Commitments of Traders (or COT) report released by the Commodity Futures Trading Commission (or CFTC), large speculators, including hedge funds, have increased their long volatility positions from 34,000 contracts to 77,000 contracts. These data were recorded before the news about tariff exclusions and the jobs report, and it’s likely that volatility positions could change in this week’s COT report. The bottom line is that if inflation doesn’t spook investors, the markets are likely to remain optimistic, and volatility could trend lower.
In the rest of this series, we’ll analyze the performances of various asset classes and discuss their outlooks.