Fomc In The Spotlight

By Craig Bewick
MAR 16 2021

US Equities were mostly lower today but the divergence among major indexes continued.  In late afternoon trading the Nasdaq was slightly higher while the Russell 2000 was down by over 2% and the Dow was down by over 150 points.  We used the QuikStrike Cross Correlation tool to compare the last week of correlation of daily log returns in the four major indexes to the last twelve months.  As you can see, though one week is a small sample size on which to run a correlation, the numbers below illustrate how the price action of the major US indexes has diverged recently. (ES=S&P 500, NQ=Nasdaq-100, YM=Dow, RTY= Russell 2000)

Products              Correlation – 1 Week      Correlation 1 Year

ES-NQ                  .92                                       .87

ES-YM                  -.30                                      .96

ES-RTY                 .62                                       .86

NQ-YM                -.66                                      .74

NQ-RTY                .36                                       .66

YM-RTY                .34                                       .88


It was an otherwise fairly quiet day in CME Group financial and commodity products though WTI Crude Oil futures prices declined by about 1% and Natural Gas prices were up by almost 3%.  Other notable moves include Copper futures prices, which were down by about 2% and the little-talked about (here in the Key Takeaways section anyway) Palladium futures prices, which were up by about 4%. 

Yesterday we mentioned that the FOMC would be concluding its March meeting tomorrow with an announcement on whether it would move its Fed Funds target rate from 0-25 basis points.  While the consensus (according to CME Group Fed Funds futures) is that they will hold rates steady, we wanted to see if the options markets were pricing in a potential move in the futures based on the accompanying Fed statement.  To look at that  we looked at the QuikStrike Event Volatility Calculator, which uses the term structure of volatility to try to isolate the potential impact that an economic number release or event might have on the price of the underlying future.  We also looked at the QuikStrike graph of the term structure itself.  Both suggest that the options market is pricing in the potential for price movement based on the FOMC meeting/statement.  The event volatility calculator suggests the options market is pricing in a 130 point move in the price of the Nasdaq-100 futures and a 17 point move in the price of the S&P 500 futures.  You can see the elevated volatility in the options expiring Wednesday (E-mini S&P 500) and Friday (E-mini Nasdaq-100) in the QuikStrike graphs below. 



Craig Bewick has spent 25 years in futures and options markets, starting at CBOT and CME working in risk management, regulatory, technology, product management and client development. 

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