Eyeing volatility around FOMC

Could we be seeing the calm in the markets before a potential storm?

VIX trading stock shares
Source: Bloomberg

There has been some confidence returning to markets amid pockets of encouraging corporate earnings and bargain hunting on oversold stocks.

Perhaps most notably, the fear gauge or volatility index (VIX) has pulled back over 38% from two-year highs of 26.25 points, which was reached in mid-October.

This week, we are awaiting one of the most eagerly watched market events with the possible end of QE3.

Although, this has been widely talked about in prior months, it is hard to rule out that the event could prompt a bout of market volatility as traders interpret the news in their own ways.

The US Federal Reserve on Thursday morning (0200hr SGT) is scheduled to give its guidance on its bond-buying programme, where it is widely expected to cut the final $15 billion per month in QE3.

Fed Chair Janet Yellen will also be giving a monetary policy statement, which will be closely watched for any cues on interest rate hikes. The market will be watching out for any changes to the key phrase ‘considerable time’ for hints of a more hawkish tone.

How will market react?

There are still some question marks on how much emerging markets will be hit by the end of QE3 and US interest rate hikes. Some investors will be expecting to see a flight of capital away from equities and currencies in the region, as they look for better yields.

Against this backdrop, a slew of market risks are still bubbling in the background. While the news on Ebola has faded out of the headlines somewhat, they could easily take centre stage again. We could also see another round of weak economic data from Germany, US or China that could spook investors.

Geopolitical risks still remain especially in the Middle East, where ISIS-related tensions could escalate. The Hong Kong pro-democracy protests are also ongoing and the situation remains unresolved.

With all these overhanging uncertainties, investors could take any excuse to cash out and stay on the sidelines. This presents some good opportunities for an upside on the VIX, which are trading at levels around their two-month average range, between 12 and 16 points. It’s not hard to imagine a spark from any of these events to see the VIX bouncing back to similar heights seen in mid-October.

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