VIX at an all-time low
By Yann Quelenn
The news did not make massive headlines: the VIX, the US volatility index, which is also known as the fear index, just collapsed to an all-time low below 10. We recall that the 20-year average for the index is above 20. A few weeks ago, Fed Chairman Janet Yellen warned markets about asset valuation that she considers too high. The Fed definitely believes that stock markets are in a bubble, and this is ironic as the Fed largely participated in underpinning asset prices with free money.
While the volatility is at an all-time low, stocks prices are at an all-time high. This sets up the potential relation between low volatility and high stock prices that could drive investors towards a sell-off. Other markets are now in a pausing mode certainly fearing that consequence. However, stock markets are not losing steam and may head higher.
All eyes are on the Fed now whose balance sheet reduction should be discussed in November. Currency-wise the dollar is now trading at 14-month low on recent disappointment of Trump’s expected fiscal policies and the Fed failing to fully deliver what was expected.
Dollar under pressure as US yields slide amid dovish FOMC statement
By Arnaud Masset
As broadly expected, FOMC members decided to leave monetary policy unchanged, maintaining the target range for the Federal funds rate at 1% to 1.25% and not providing a clear timing about its balance sheet reduction plan. Little changes were made to the statement compared to the June version. The Fed acknowledged that inflation measures have declined and are now running below the 2% target. Most importantly, changes were made to the expected start of the balance sheet normalization program. In its June statement, the Fed expected the program to be launched this year and it expects to be implemented “relatively soon.” Does the market have to worry about such a change?
From our standpoint, we think this is definitely a dovish adjustment to the statement as it removes clarity regarding the timing, giving more room to start the balance sheet runoff. In reaction to this dovish modification, the USD was heavily sold off yesterday amid the release. The dollar index fell another 1.10% to 93.15, the lowest level since mid-June last year. Higher yielding currencies were the big winners with the New Zealand and Australian dollar rising 1.60% and 1.15% respectively.
A fresh batch of US data is due for release later today. Initial jobless claims should come in at 1960k versus 1977k a week ago. More importantly, after shrinking two months in a row, durable goods orders should have risen 3.7% m/m in June. Excluding transportation, the indicators should rise by 0.4%m/m compared to 0.3% in July.
After months of lackluster data, investors have a real need to see some solid and uninterrupted flow of encouraging data from the US. Its only under these conditions that we’ll see a bounce back of the USD and the pursuit of recovery in US yields.