In market conditions like what we’re currently experiencing, it is important to remember that implied volatility is going to move markets a lot harder and faster than normalised trade. The Chicago Board Options Exchange (CBOE) VIX is at 30.32, even after last night’s rally, showing that wild swings are still very likely and that volatility works both ways.
So what was the trigger?
Since the release of the Fed minutes at 4am AEST on 20 August, the S&P has been in free fall, moving from 2103 to the low of 1833 in five trading days – that’s a 12.8% move.
In hindsight, the key issue around the minutes is the difference between these two statements:
- ‘Most members judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point”.
- ‘Almost all’ members need more ‘evidence’ before feeling ‘reasonably confident’ that inflation would return to the Committee’s longer-run objective.
This has clearly caused fear around the trajectory of the US economy. On one hand, employment is strong enough to lift rates, yet inflation is stagnate at 0.1%. However, at the time Fed members were saying publicly conditions were ‘gaining momentum’ for the ‘normalisation of policy’. Emerging market growth risk is a factor, but US markets are more likely to move on US data.
However, hike hysteria was put back in its box after New York Fed President Bill Dudley’s comments, ‘At this moment, the decision to begin the normalization process at the September Federal Open Market Committee (FOMC) meeting seems less compelling to me than it was a few weeks ago…let’s see how the data unfolds before we make any statements about exactly when that might occur.”