The VIX Volatility Index, also known as the market’s preferred ‘fear gauge’, roared back to life this past week. On Wall Street, futures tracking the Dow Jones, S&P 500 and Nasdaq 100 sank 0.92%, 1.78% and 3.05% respectively. Will volatility remain elevated in the coming week, or is this near-term noise?
There were two notable drivers of volatility to keep an eye on. The first is an increasingly hawkish Federal Reserve after US inflation surprised to the upside, again, for January. Expectations for a 50-basis point rate hike, and to a certain extent an emergency rise before then, have been increasing. That has helped push the US Dollar and Treasury yields to the upside.
Meanwhile, US intelligence reported that Russia could invade Ukraine this coming week. WTI crude oil prices surged, closing at another 2022 high as US$ 100 per barrel neared. The Euro also dived, thanks to a combination of Russia-Ukraine tensions and ECB President Christine Lagarde downplaying hawkish monetary policy bets in the wake of February’s interest rate decision.
Unsurprisingly, gold prices surged to wrap up last week as geopolitical risks between Russia and the west climbed. Still, down the road, the anti-fiat yellow metal still must contend with a rising US Dollar and government bond yields. The anti-risk Japanese Yen gained as the sentiment-linked Australian and New Zealand Dollars faltered.
Ahead, outside of Russia-Ukraine tensions, FOMC meeting minutes are on tap as well as US retail sales. Hawkish commentary risks spooling market volatility and benefiting the US Dollar. Earnings season is still in play, with companies like Walmart and Airbnb reporting. What else is in store for markets in the week ahead?
US DOLLAR WEEKLY PERFORMANCE AGAINST CURRENCIES AND GOLD
Higher-than-expected US inflation data strengthened the case for Fed tightening and paved the way for a stronger US Dollar. Fed officials are preparing markets for a potential 50bps rate hike at the March meeting.
The recent cryptocurrency rally came to an abrupt halt Thursday as US Treasury yields jumped on heightened inflation worries. These losses are being pared going into the Superbowl weekend.
The Pound had a relatively quiet week as the London session came to a close, however, a number of crucial data releases next week, including UK CPI, could change that.
The Euro is increasingly vulnerable despite a hawkish pivot from the ECB earlier this month. Russia-Ukraine tensions risk destabilizing the single currency as Lagarde plays down hawkish bets.
Gold prices rose to the highest level since November last week after a red-hot CPI report pushed up breakeven rates. Bulls followed through on the move as geopolitical tensions in Ukraine rose.
Oil prices could rise in the short term on fears that Russia could invade Ukraine soon, creating a situation that could disrupt energy supplies to Europe.
Stocks have undergone a rally, but still maintaining the stance that it is a corrective bounce that will lead to a new leg lower.
USD/CAD has been a choppy range environment, but could soon change; levels and lines to watch in the days ahead.