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

June 7, 2019  | by Ivo C. Nenin

Market Commentary

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

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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.