Key Takeaways with Craig
US Equities began the day mixed again with the Dow trading higher and the Nasdaq lower, as we observed yesterday. However, after the meetings from the last FOMC meeting were released in early afternoon, the equity indexes all dropped, with the Nasdaq and Russell 2000 leading losses, down by over 2.5% in late afternoon action. The Fed minutes seemed to suggest that the Fed might be more aggressive in shrinking its balance sheet and possibly more aggressive in raising short-term interest rates.. or at least that’s how the market appeared to have interpreted the report. Not surprisingly, implied volatility (“vol”) in CME Group’s equity index options popped today, perhaps most notably in the E-mini Nasdaq-100, where 30-day vol has risen from 17.3% to 22.2% since Monday’s close; a relative increase of about 28%.
Also, unsurprisingly, CME Group interest rates markets reacted to the news as well. Using the Micro Treasury Yield futures contracts as a proxy for Treasury yield changes, yields rose from 2 years through 30 years. However, as opposed to the last couple of days, today, the short term rates rose by relatively more than the long term; the 2-Year yield was up by about 7 basis points while the 30-Year rose by just 2. Fed Funds futures prices also declined, a move that was reflected in CME Group’s FedWatch tool which seeks to assign probabilities for Fed Funds target changes at each FOMC meeting. Yesterday, this tool was assigning a 57.5% probability of a 25 basis point rate hike at the March meeting; shortly after the minutes were released the tool was reflecting a 71% chance but that fallen to 64.1% at the time of this writing.
Looking ahead, we will be watching for the release of the December Employment report that is scheduled for Friday morning. As you can see in the QuikStrike graph below which depicts the implied volatility curve in the E-mini Nasdaq-100 options, the options market is pricing in a substantial premium in the options that expire Friday versus the more deferred expirations.
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