This week offers quite a bit in the way of potential resolution. The Syrian issue may see some answers as Congress continues the debate but it is looking more and more as if a non-violent solution may be at hand. That could be a huge trigger of relief and removing fear, especially the excessively high price of crude. Next, there is a big two-day Fed meeting where it appears everyone is ready for the Committee to announce a pullback from bond purchases. The cutback amount ranges from small to large by the consensus but it’s the action and not the amount that may shift sentiment. Currently the market ‘expects’ and doesn’t yet ‘know’, creating the uncertainty and fear that causes an elevated VIX.
Speaking of the VIX, it has been behaving well over the past several days. The futures curve (see below) is still upward sloping and portraying a bullish market trend. Basically, as the numbers rise with time this creates a curve that represents contango, or pricier futures the further out you go. The recent close below 14 for VIX cash has removed much of the fear built from the Syrian uncertainty. However, there was never a rise up to cause a trend shift, just a small correction and then back to the current pattern. Further, you can see the head/shoulders top (see chart) that was evident (we spoke about this in the webinar here on 9/5). However, this week we’ll see the Sept future expire at the open on Wednesday, this is currently not pricing in any big movement prior but we can see October is holding some good premium.
This Fed meeting is being watched as a potential gamechanger for policy and markets. That could be right but for very good reasons. The Fed has been hinting along about cutting back on bond purchases and now the market expects it, so anything otherwise would be considered highly disappointing. The debate of course is whether the market is pricing this in, the answer to that lies above in the VIX (not too worried about it). They will give us a revised forecast (based on their own survey), talk about the economy, jobs and how things are going to look going into 2014. Later this month we may find out who the new Fed Chairman/woman may be, but that is a discussion for another day.
There is little evidence that QE has helped the economy from a fundamental standpoint, but it was NEVER about that, rather it was more to turn psychology around from misery and depression in 2008/09 to shoring up confidence and wealth. Whatever you may think of such actions, the real estate market, stock market, industrials and other countries benefited from the policy. Monetary policy is always tricky as it’s about applying just enough grease to get the motor running smoothly. We’ll find out if they made the right decision.