Chart of the Month | Conflicting Signals in Stock and Bond Markets

June 7, 2019 |
1 minute read
|

The Bond markets’ expectations of U.S. Federal Reserve (Fed) rate cuts changed drastically last Friday on the news of President Trump’s intention to impose tariffs on Mexico, in an attempt to influence immigration issues between the two countries. The implied Fed funds futures rates, as measured by the MOVE Index, rose to a 72.7 reading (blue line) not only due to hedging flows but also on stronger beliefs the Fed must cut rates. While the yield curve remains inverted, the economic outlook for the U.S. has worsened and credit spreads widened, two factors that were mostly absent when the curve first inverted at the end of March. Equity investors, on the other hand, have remained mostly optimistic, judging by the subdued levels of the VIX Index which measures implied volatility of S&P 500 options (orange line). One explanation of the recent diversion could come from the inherently risk adverse mindset of fixed income investors versus the generally more optimistic and forward-looking approach of equity investors. Only time will tell whose outlook will be correct.

Chart-of-the-Month-Implied-Volatility-in-Equity-and-Treasury-Options

Ivo C. Nenin

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Ivo C. Nenin

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