The VIX (SP500 volatility index) returned to above 15 for the first time since early November. A volatility of 15 is not, in absolute terms, a very high level of nervousness, but when the VIX had fallen below 12 in December, its lowest level since January 2020, ie. the pre-Covid period, this small recovery and this two-month “high” may reflect a need for hedging on the part of certain investors.
For what ? Because for several days, statements from central banks have come one after the other on both sides of the Atlantic to push market expectations back a bit on the date of the first rate cut and on the pace of this next cycle. . The sharp easing of bond yields that took place from the end of October appears to have upset some members of the ECB and the Fed, who fear that this easing of interest rates and more generally of financial conditions will slow down the return of inflation against the 2.% target.
Christine Lagarde herself believes that excessive market optimism can hinder the fight to bring inflation back to the target. His counterpart from the ECB, Klaas Knot, definitely a hawk, did not beat around the bush: For him, the more the (bond) market relaxes, the less likely rate cuts will be.
Some members of the Fed are also vocal on the issue of the pace of rate cuts. Two days ago, Christopher Waller assessed that with economic activity and a labor market in good shape, and inflation gradually falling to 2%, there was no need to act as quickly or cut rates as quickly as in the past.
All these little phrases hit the mark and the bond market reacted both in Europe and in the US: yesterday the US 10-year yield returned to 4.13%, the highest level in mid-December, thus erasing all the easing generated by Jerome Powell’s interest rate. quite flexible speech at the last Fed meeting…in addition to the interest rate level, it is also an important symbol. A way for the market to judge that the Fed president might have been more accommodating than necessary during this meeting…
The probability of a rate cut (via Fed Funds Futures) for the March meeting has dropped significantly: They went from more than 90% at the end of December to “only” 57% yesterday afternoon.
In this context, the SP500 is still robust, trending just a few dozen points below its all-time high. However, the double upward acceleration in December and January, each time a failure of the 4800 point zone could leave the door open to a “double top”, a technical number that reflects some form of running out of steam and a need to correct up on, the purpose of this configuration is the bearish projection of the height of this double top.
Which, as a theoretical target, would give a return to around 4540 points, the zone where the slope of the peaks in January 2022 and July 2023 also passes, that is, a decrease of a little more than 4% compared to current levels.