Last week’s turnaround snapped the broader stock market’s weekly losing streak and landed the S&P 500 (SPX) within striking distance of a fresh record high north of 2100. Bulls declared victory with the SPX holding that closely watched 2100 line, leaving 2118 as the next short-term resistance. The SPX’s 2.4%, early-March decline was largely erased amid renewed optimism for slow, methodical interest-rate hikes, European debt and economic improvement, and energy-price stability. In fact, by some readings, risk perceptions eased to levels not seen since late 2014.
One of the more closely tracked measures, the CBOE Volatility Index (VIX), posted a marked drop last week, down roughly 3% to mark a near-perfect correlation with the SPX’s 2.7% weekly gain. VIX, which is sometimes called the Street’s “fear gauge,” fell to 2015 lows of 12.54 intraday Friday and settled for the week just shy of 13 (figure 1).
Volatility Drop Skips Some Areas
VIX is now down 34% year to date. Implied volatility in the Dow Jones Industrial Average, as measured by the CBOE DJIA Volatility Index (VXD) and the CBOE NASDAQ-100 Volatility Index (VXN), are off sharply as well.
But, take note: other asset classes are not getting crushed to the same extent as equities. For instance, volatility in the CBOE Crude Oil ETF Volatility Index (OVX) and CBOE Gold ETF Volatility Index (GVZ) saw only modest declines last week. Implied volatility in the euro, as measured by the CBOE EuroCurrency Volatility Index (EVZ), eased 7%, but is still up 35% so far in 2015 (figure 2).
The drop in risk perceptions appears to be driven primarily by global macroeconomic headlines. On one hand, hopes for a Greek debt deal were palpable in the currency markets on Friday, when the euro/dollar finished the week near 1.085—a far cry from the multi-year lows of 1.046 dollar per euro just a week earlier. As the dollar weakened, recent losses across some commodities, including gold and crude oil, were recovered. That in turn helped bolster the performance of the energy and basic material sectors within the S&P.
At the same time, Treasury bonds were bid higher as last week’s Federal Reserve Open Market Committee (FOMC) statement soothed concerns that the central bank might be anxious to launch an aggressive rate-hike campaign; the yield on the benchmark 10-year note finished Friday at one-month lows of 1.94%, while the 30-year yield is near 2.5%.
In short, action in the currencies, energies, Treasury bonds, and metals could potentially remain choppy and—if history is a guide—potentially spill over into the equities market.
As for this week’s drivers, durable-goods data, which can be a valuable indicator to reinforce or debunk employment gains, plus home sales data, a notable area of inconsistency, could set the tone. These reports will be capped by the broadest measure of the economy, a GDP revision, due for release Friday (figure 3). Market focus will shift to a very busy week of economic news heading into Q2, including key monthly jobs data on April 3.
Finally, a handful of consumer names—Carnival Corporation (CCL), GameStop (GME), and Lululemon Athletica (LULU)—are due to report results later in the week. However, the earnings calendar is light over the next few weeks, which should fix attention firmly on macro events.