The VIX futures contracts, i.e. the fear index rose yesterday to its highest level since November 2011. The VIX index itself is created on the basis of 30-day options on the S&P 500 index, showing the expected volatility one month ahead. In other words, high levels could mean expectations for high volatility in the coming month, and low values could mean the expectation of low volatility. Such fear as now has not been seen on Wall Street for almost a decade.
Yesterday, US indexes fell again. The S&P 500 decreased by 3.4 percent, the Nasdaq by 3.1 percent, and the Dow Jones Industrial Average by 3.6 percent. The USD/CHF exchange rate has fallen to its lowest level in almost two years, and the US dollar index has reached its lowest level in nine months. The Japanese yen has strengthened against the dollar to the level we last observed 26 weeks ago and the euro climbed to the highest level in 30 weeks. There were also historical events on the bond market. US 10-year yields fell to 0.819%. Never before have American bonds had such low yield. It may result primarily from market expectations towards further actions of the US Federal Reserve. Investors assume that at a regular meeting on March 18, the Fed may decide to lower interest rates again by 25 or 50 basis points.
Therefore, in a very short time, coronavirus-related volatility may remain in many asset classes. According to S&P, GDP growth in the eurozone in 2020 will fall by 0.5 percentage points to 0.5 percent. Pessimistic forecasts are also presented for the US economy as well as for the whole world. According to the latest Reuters survey, China's GDP growth will fall to 3.5 percent in the first quarter of 2020. The result for the fourth quarter of 2019 is 6 percent.
Thus, investors may pay special attention to macroeconomic data. One such publication will be today's report from the US labor market for February. The consensus assumes an increase in employment in non-farm payrolls by 175,000. However, the ADP report published on Wednesday did not indicate any collapse in the labor market. Hence, the sentiment before NFP may still be good. Meanwhile, the deterioration in the US labor market could put even more pressure on the Fed. The data will be published today on March 6 at 14:30.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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