July fireworks continued into a second week and could persist as a plunge—followed by a mild bounce—in Chinese stock shares, plus more bailout drama from Greece, sparked head-jerking moves in U.S. stock averages.
It was another intense weekend of all-nighters for Greece’s officials and its would-be saviors. Greek Prime Minister Alexis Tsipras secured the backing of his own parliament for belt-cinching fiscal reforms late last week. And over the weekend, eurozone leaders accepted the pitch. They ultimately made Greece surrender much of its sovereignty to outside supervision. In return they simply agreed to talks on an 86 billion euros bailout (Greece’s third rescue) to keep the near-bankrupt country in the single currency, Reuters reported.
Even with Greece headlines still flowing, investor focus now includes the busy Q2 earnings calendar and the leading financial and technology names reporting this week. The Federal Reserve figures in this week’s lineup, too, with a Capitol Hill appearance by Chair Janet Yellen.
Volatility Flares in the Past Month
The S&P 500 (SPX) was twisted in both directions, yet ended last week virtually unchanged. Price moves did widen. SPX’s average daily move from May through June was 10.5 points, but increased to 14.7 points through the first seven trading days in July.
Indeed, barometers of market volatility are moving. For instance, the CBOE Volatility Index (VIX)—the broader market’s “fear gauge” that captures implied volatility priced into short-term SPX options—hit a multi-month high just above 20 on Thursday. It dropped to 16.83 by the closing bell Friday. Still, VIX is up 27% from the 13.22 level hit only a month ago (figure 1).
VIX Isn’t Alone
Expected volatility for the emerging markets as measured by the CBOE Emerging Markets ETF Volatility Index (VXEEM) is up 34% since June 10. Volatility in China equity markets, measured by the CBOE China ETF Volatility Index (VXFXI), logged sizable moves. And volatility jumps extended to small-cap stocks, oil, and more (see the table below).
Notably, volatility in the euro, as measured by the CBOE EuroCurrency Volatility Index (EVZ), took a rare move lower in the past month. That’s somewhat ironic given the intense media focus on events in Europe in recent weeks.
|One month||Year to Date|
|S&P 500 volatility||VIX||27%||-12%|
|NASDAQ 100 volatility||VXN||18%||-9%|
|Russell small-cap volatility||RVX||19%||-15%|
|Emerging markets volatility||VXEEM||34%||9%|
Looking forward, there are a number of catalysts to potentially stir up volatility in the weeks ahead. Domestic news could take some focus away from the developing stories overseas as we enter the heart of the Q2 earnings reporting season. JPMorgan Chase (JPM) and Wells Fargo (WFC) report before the opening bell on Tuesday, with Bank of America (BAC) due out with its Q2 results early Wednesday. Intel (INTC) and Netflix (NFLX) reveal their quarterly performance in reports post-close Wednesday. The floodgates on profit reports swing wide open on Thursday.
On the economic front, a report on June retail sales kicks things off Tuesday morning. Housing, inflation, and manufacturing numbers are due in the days that follow. See figure 2 below for the full calendar.
Yellen Stirs the Bond Market
Also midweek, the Fed’s Janet Yellen will provide testimony on the economy to the House on Wednesday and the Senate on Thursday.
Yellen may have already set the tone in remarks delivered in Cleveland on Friday. The Fed head reiterated her view that an interest rate hike in 2015 remains appropriate given economic performance.
“I think that many of the fundamental factors underlying U.S. economic activity are solid and should lead to some pickup in the pace of economic growth in the coming years. In particular, I anticipate that employment will continue to expand and the unemployment rate will decline further,” Yellen said.
Yellen said she saw “hints” of wage gains and “encouraging” data that consumer spending is picking up.
In the wake of Yellen’s hawkish commentary, Treasury bonds finished at the week’s lows, and benchmark 10-year yields rose to the week’s highs at more than 2.4%. Further volatility in the bond market when Yellen speaks midweek could potentially spill over into the equities market.
Of course, headlines from overseas continue to impact trading. Against the turbulent Greek backdrop, the European Central Bank (ECB) holds a policy meeting on Thursday, and markets will be hungry for analysis of the potential reach of the Greece crisis. ECB headlines could drive increased volatility in the currency, commodities, fixed income, and equities markets—and within those markets, provide plenty of fodder for bulls and bears alike.