Markets directionless after the fear gauge hits a 24-year low

May 9, 2017 08:37 AM

The CBOE Volatility Index fell yesterday to the lowest level since 1993 to trade in single digits. The implied volatility index, which is based on option contracts on the S&P 500 index for one month is aimed to look forward and perform as a leading indicator as it's driven by the pricing of calls and puts contracts.

While this could be interpreted to mean that good times lie ahead, it also indicates that the party may be over soon. Volatility does not stay at low levels for prolonged periods of time, and we’re likely to see the index reverting to its 200-days moving average around 15. Just don’t let the extremely quiet market conditions trap you into taking huge risks.

The markets’ reaction to the French election results were muted. The euro sold off after an initial rally above 1.10, and the same applied to European equities which closed slightly lower. Asian investors were also seen stepping back after sending equities to a two-year high, waiting for a fresh catalyst to decide their next move.

The Aussie was the only currency on the move early Tuesday. The Aussie/U.S. dollar (AUD/USD) currency pair fell 0.5% after Australian retail sales unexpectedly fell 0.1% in March and February figures were revised lower to -0.2%. This marks the third drop in four months, and it would become a worrying sign if the downtrend trend sustains.

Saudi’s Oil Minister Khalid Al-Falih’s comment on Monday that oil producers would “do whatever it takes” to rebalance the market did little to support prices. He also indicated that production cuts might be extended beyond 2017, but this is likely to be faced with skepticism from investors, especially considering that the longer the period of cuts to output, the less likely compliance might hold. However, if OPEC and non-OPEC members agree on an extension of nine months or longer, this would at least put a floor on prices.

About the Author

Hussein Sayed is chief market strategist at FXTM.