The Cboe Volatility Index fell to its lowest level of the year on Friday even as Fed funds futures showed a higher chance of a September rate hike after Kevin Warsh's Jackson Hole speech. The S&P 500 slipped three-tenths of a percent, but derivatives data suggests the calm may not last into next year.
VIX drops to a year-to-date low
The Cboe Volatility Index fell to as low as 14.1 in the aftermath of Federal Reserve chair Kevin Warsh's first address at the Jackson Hole symposium, its lowest reading all year. The VIX tracks the price of 30-day options on the S&P 500 Index.
Stocks slipped midday as shares of Nvidia unwound some of their big earnings gains, but the S&P 500 was down only three-tenths of a percent, about half the roughly 60 basis-point range options pricing had implied for the session.
Bitcoin and gold each dropped at least 2.5%, evidence that investors across asset classes are preparing for higher interest rates. Ben Emons, managing director at Highline Asset Management, said a Fed that stays vigilant on inflation without hiking aggressively is seen as positive for the economy, bolstering the bull case for stocks.
Rate-hike odds jump after Warsh speech
Odds of an interest-rate hike at the Fed's September meeting jumped to nearly 60% after Warsh's speech, compared with just 35% on Thursday, according to Fed funds futures tracked by CME Group. Still, James Perry, founder and chief investment officer of Perry International Capital Partners, said "The Fed is still technically in ease mode," adding that falling oil prices would pull inflation expectations lower still.
Longer-dated volatility tells a different story
Mandy Xu, Cboe's derivatives market intelligence head, said a broader look at S&P 500 volatility that includes options expiring beyond the VIX's range suggests the impact of higher rates may not show up for several months. The spread between six-month and one-month S&P 500 options is currently in the 96th percentile of the past year, she noted, as uncertainty over inflation and the rate path steepens the term structure further out.
Late-February VIX futures are priced around 21, compared with just under 16.9 for the active contract, according to ThinkOrSwim data — a notably steeper curve than a month ago, when front-month contracts traded near 20.
Source: CNBC
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