Article / 02 January 2017 at 16:18 GMT

Volatility Update: VIX could gain as 2017 begins — #SaxoStrats

Product Manager Futures and Options / Saxo Bank
Denmark
  • US equity indices were under pressure in the last trading week of 2016
  • Lumber futures ended the week strongly on recovery in US housing market
  • Rates rose, particularly on short-term paper
  • Gold, which lost ground late last year, seems to have found a base near $1,128/oz
  • With stocks sold, volatility is on the rise, and VIX could be in for further gains
  • Q4 earnings and the onset of Trump's presidency also factors to watch

Volatility
 When stocks are sold off, volatility tends to increase. Image: iStock


By Georgio Stoev

European markets are back in action today, while US markets remain closed in observance of New Year's. Selling of stocks towards year-end brought a rise in volatility, and the volatility index could be set to rise further after ending 2016 on an uptick (as discussed below).

For the last week of trading of 2016, markets remained quiet amid low volume and thin liquidity. Equity indices, particularly the technology-heavy Nasdaq, were under pressure. Shares of IT groups such as Google and Facebook lost more than 2%. In addition, there was a bit of "Trump unwind" apparent, with conglomerates down 1.8% and industrials off 0.8% for the week. Financials also came under a bit of pressure, slipping 0.4%.
 
December 27 Source: QuikStrike

Among commodities, lumber futures (LBF7) finished the week strongly, up 3.7%, sparked by the steady recovery in the US housing markets. Rates also rose, particularly on short-term paper, with the eurodollar March contract (GEH7) rallying 2.3%. Perhaps the market is starting to finally realise that hiking rates too quickly may backfire on the economy.

Eurodollar
Source: SaxoBank

Gold ( GCG7), which lost ground late last year, appears to have found a base near $1,128/oz and made a little comeback last week. In our previous Volatility Update, we suggested a $1,140/1,170 call spread on gold involving Feb expiration. We still think gold could make further gains in the short run. The increasing trend in the accumulation of puts could be signaling a reversal in the precious metal. The open interest of GCG7 turned positive on December 15. A positive ratio, or the number of put options outnumbering the number of call options, from a contrarian point of view could be one bullish indication.

Gold Open Interest
Source: QuikStrike

On Thursday, among the most active traded contracts were the April (GCJ7)1300 and 1400, on the call side. The two strike prices saw an increase of 8,759 contracts. 

Volatility on the rise

With rates and gold on the upswing, equities could be on the downside. And whenever equities are sold, volatility typically rises. 

The Chicago Board Options Exchange Volatility Index (VIX) had three consecutive up days. Is there a trend here? We will find out on Tuesday when US markets reopen for trading. However, with the VIX closing on an uptick at $14.04, above it's psychological level of $12, it could be in for some further gains.

What could inject further gains into the VIX? For one thing the psychological level of 20,000 points for the Dow still remains intact. Traders did pack their bags and sort of left the conclusion of this run-up to glory for 2017.

Other factors that could play a role in the VIX rising are fourth-quarter earnings and the US inauguration. In terms of earnings expectations overall, earnings growth is suppose to be 3.2%, according to FactSet. Likewise, according to research analysis, eight out of 11 sectors have lowered their growth outlook. (See here for the full report

Aside from earnings, it is soon time to see Donald Trump take office and get more constructive then just tweeting his opinions and commanding headlines. It's time for the president-elect to get down to business and turn talk into action.

Have a successful year and week ahead!

Trump Tower in Chicago
 Time for the real estate tycoon and reality-TV host to get down to business 
as 45th president of the United States. Photo: iStock


— Edited by John Acher

Georgio Stoev is futures and options product manager at Saxo Bank

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