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Is the VIX Broken?

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What’s in Today’s Report:

  • Is the VIX Broken?

Futures are modestly higher following in-line inflation readings from China and more gridlock in Washington as markets look ahead to today’s inflation readings.

Chinese CPI met expectations rising 1.6% and that benign reading will keep stimulus coming in that economy.

Politically, Arizona Senator Sinema left the Democrat party and registered as an independent, although the move is unlikely to change her voting patterns.

Today focus will be on inflation data, specifically PPI (E: 0.2% m/m, 7.2% y/y) and the University of Michigan Five Year Inflation Expectations (E: 3.0%).  If those reports come in under expectations and further hint at dis-inflation, it will extend the early rally.

Sevens Report Co-Editor Tyler Richey Quoted in S&P Global on December 7th, 2022

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Stock market’s ‘fear gauge’ plunges as investors shift hedging strategies

Still, the VIX has not behaved in its typical fashion for much of this year, said Tyler Richey, a co-editor at Sevens Report Research. Click here to read the full article.

Market Multiple Levels: S&P 500 Chart

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What’s in Today’s Report:

  • Market Multiple Levels – S&P 500 Chart
  • VIX Breaks Longstanding Downtrend in Cautious Signal

Futures are modestly lower as persistent concerns about hawkish Fed policy and fading global growth overshadow positive Covid policy news out of China and encouraging EU economic data.

Economically, German Industrial Production was better than feared at -0.1% vs. (E) -0.6% while  Q3 Eurozone GDP topped estimates at 2.3% vs. (E) 2.1% Y/Y suggesting the EU economy may be stabilizing.

China’s NHC issued new guidelines on Covid restrictions overnight that eased certain testing and quarantine requirements and will hold a press conference tomorrow which points to the potential for more progress in moving away from Covid-Zero.

Looking into today session, there is one economic report before the bell: Productivity & Costs (E: 0.4%, 3.3%) and then Consumer Credit (E: 27.3B) will be released in the afternoon. The latter report is not one we typically follow closely but there has been increasing concern about the health of household balance sheets, so a sharp move higher in outstanding credit could raise concerns about defaults in the coming quarters.

Finally, there are no Fed speakers today but stocks have been taking queues from rate markets and the dollar so if either meaningfully move higher, that will add pressure to the broader equity market today.

When to Brace for More Volatility

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What’s in Today’s Report:

  • Revisiting the VIX – When to Brace for More Volatility
  • Familiar Holiday Volatility Courtesy of OPEC & Russia

U.S. equity futures are slightly higher and the dollar is pulling back modestly after a mostly quiet night of news as traders eye a stabilizing oil market.

After a volatile session yesterday, WTI crude oil is trading comfortably above $80/barrel this morning, fueling a rally in energy companies which is buoying index futures in pre-market trading.

Today, there is only one lesser-followed economic report due out: Richmond Fed Manufacturing Index (E: -1.0) and two Fed officials are scheduled to speak: Mester (11:00 a.m. ET) and George (2:15 p.m. ET).

Additionally, there is a 7-Yr Treasury Note auction at 1:00 p.m. ET that could move markets but the tape has been very quiet this week as attendance is light and volumes are down given the Thanksgiving holiday schedule. So more choppy and rangebound trading between 3,900 and 4,000 in the S&P is likely.

VIX History and the Current Bear Market

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What’s in Today’s Report:

  • A Look at VIX History and the Current Bear Market
  • Chart: 30-Yr Treasury Bonds Fall to New Lows

Stock futures are testing the 2022 lows this morning as global bond yields push multi-year highs amid renewed turmoil in the U.K.’s government bond market.

The BOE expanded its emergency bond-buying program overnight after Gilt yields spiked higher, with officials warning that market dysfunction is threatening the U.K.’s financial stability.

Economically, the NFIB Small Business Optimism Index came in at  92.1 vs. (E) 91.5 for September.

There are no additional economic reports today but there are two Fed officials scheduled to speak: Harker (11:30 a.m. ET) and Mester (12:00 p.m. ET).

Looking back to the bond markets, there is a 3-Yr Treasury Note auction at 1:00 p.m. ET and if the results are weak, sending yields higher, that would further pressure stocks today.

Bottom line is, turmoil in the U.K. Gilts market is once again sending global yields higher and weighing on risk assets and if we don’t see bond markets stabilize this morning, then expect stocks and other risk assets to remain under pressure today.

The Current Reality Facing Stocks (Not Good)

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What’s in Today’s Report:

  • The Current Reality Facing Stocks (Not Good)
  • Technical Update:  Watch the VIX
  • Weekly Economic Cheat Sheet:  CPI Thursday is the Key Number
  • Weekly Market Preview:  Can Earnings Hold Up?

Futures are slightly lower as markets digest the implications of Friday’s strong jobs report following a mostly quiet weekend.

Friday’s jobs report won’t make the Fed any more hawkish, but it’ll keep stocks facing a dual headwind of aggressive Fed and earnings pressure, and that’s weighing on futures.

There were no notable economic reports overnight.

Today is Columbus Day so there are no economic reports while the banks and bond market will be closed, likely leading to slow trading in stocks.  There is one Fed speaker, Evans (9:00 a.m. ET), but he shouldn’t move markets (at this point it’s well-known what the Fed plans to do).

Dow Theory Update (Bearish)

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What’s in Today’s Report:

  • Dow Theory Update (Bearish)
  • VIX Analysis Update

Futures are moderately higher following positive China COVID news.

Chinese authorities said they hoped to end all lockdowns in Shanghai by May 20th as cases continue to fall.  If the Chinese economy can fully reopen in the coming weeks that will remove a big headwind from stocks.

Economically, EU Industrial Production wasn’t as bad as feared, as IP fell –1.8% vs. (E) -2.0%.

Today the focus will be on the inflation expectations contained in the Consumer Sentiment (E: 63.7) report and if five-year inflation expectations can decline from 3%, that will be another anecdotal signal that inflation pressures have likely peaked (and it should add incrementally to this morning’s rally).     We also get two Fed speakers, Kashkari (11:00 a.m. ET) and Mester (12:00 p.m. ET), but we don’t expect them to move markets (look for them to reiterate the current Fed mantra of two more 50 bps hikes).

Why Are the VIX and S&P 500 Possibly Diverging?

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What’s in Today’s Report:

  • Why Are the VIX and S&P 500 Possibly Diverging?
  • Is Selling Becoming Mechanical?
  • CPI Takeaways (It Won’t Make the Fed More Hawkish)

Futures are moderately lower mostly on momentum from Wednesday’s afternoon selloff.

Economically, UK economic data disappointed (GDP and Industrial Production both missed estimates) while BOE officials warned of more rate hikes reminding markets there’s a real stagflation threat in the UK.

Geo-politically, Finland formally applied to join NATO (and Sweden is expected to follow), keeping NATO/Russia tensions high for the foreseeable future (meaning quarters and years).

Today, we get Jobless Claims (E: 190K) and PPI (0.5% m/m, 10.7% y/y) and one Fed speaker, Daly (4:00 p.m. ET), but barring a big spike in claims, a big move in PPI or incrementally hawkish commentary from Daly (all of which are unlikely) these events won’t move markets.  So, short-term technical will continue to be the main driver of stocks, and markets need to show some stabilization, otherwise, the declines themselves will invite more selling.

Are Rate Hikes a Reason to Reduce Stock Exposure?

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What’s in Today’s Report:

  • Are Rate Hikes a Reason to Reduce Stock Exposure?
  • Chart: Level to Watch in the VIX

U.S. stock futures are tracking global equity markets higher amid easing Omicron fears and good economic data.

GlaxoSmithKline reported overnight that their antibody treatment is effective against the heavily mutated Omicron variant which is helping further ease fears about the new strain.

Economically, Chinese Imports rose 31.7% vs. (E) 21.5% y/y and Exports rose 22.0% vs. (E) 20.3% y/y in November pointing to a still-healthy economic recovery and that is supporting risk on money flows this morning.

Today, there are two lesser followed economic reports due out: International Trade in Goods and Services (E: -$66.8B), Productivity and Costs (E: -4.9%, 8.3%) but neither is likely to materially move markets while there are no Fed officials speaking today.

There is a 3-year Treasury Note auction at 1:00 p.m. ET that could impact yields and the broader curve and if we see a sharp enough flattening move (weak demand for shorter maturities amid rate hike fears) stocks could come under pressure, but to be clear, the tone is very risk on this morning as dip-buyers step into the market, chasing this bounce higher.

Why Did Stocks Drop Again?

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What’s in Today’s Report:

  • Why Did Stocks Drop Again?
  • The VIX Has Approached a Tipping Point

U.S. equity futures are trading higher this morning as upbeat economic data is helping offset renewed fears about COVID-19 lockdowns and the global economic recovery.

PMI Composite Flash data was better than expected overnight, especially in the EU (52.5 vs. E: 49.1) where economic lockdown concerns have weighed heavily on stocks this week.

Looking into today’s session, there are two economic releases that will be in focus early: Durable Goods Orders (E: 0.9%) and the PMI Composite Flash (E: 59.0), and it is important that we see more positive trends in the data or concerns about a slowing recovery could become a stronger headwind on risk assets in the near term.

From there, focus will shift to this week’s busy Fed circuit with several more central bank officials speaking today: Barkin (8:50 a.m. ET), Powell (10:00 a.m. ET), Williams (1:35 p.m. ET), and Daly (3:00 p.m. ET). Powell and Yellen’s continued testimony before Congress today will be the most important for stocks as investors look for further reiteration of easy policy measures for the foreseeable future.

Finally, there is a 5-Yr Treasury Note Auction at 1:00 p.m. ET and as we saw last month, a surprise outcome can shake bond markets which ultimately tends to reverberate through to equities.

Bottom line, as long as there are no surprises in the auction or in the morning economic data, and policy makers stick to their accommodative message, volatility should begin to ease, but all of the possible catalysts listed above have the potential to weigh on stocks and other risk assets today.