VIX spike biggest since Boston Marathon bombing

Yesterday’s 32.2% spike in the VIX – resulting from the shooting of a Malaysian plane by Ukrainian separatists – was the biggest single day jump in the volatility index since 15 April 2013, the day of the Boston Marathon bombing. This also coincided with the biggest daily decline in gold in over 33 years of -$134.54 or -9%.

Much of the ‘big’ volatility sessions resulting from events in the Ukraine have elapsed during Q1, but could the implications of the wrongful death of more than 250 civilian passengers caught up in a long-running geopolitical violence be a catalyst for a further stepping up in volatility?

As the VIX chart below shows, the index has yet to regain its 200-week moving average, which requires an additional 35% spike for it to be reached. This is consistent with the fact that S&P500 has declined less than 1.0% from its record highs attained earlier this month.

Yields extend divergence from stocks

The downward trajectory in bond yields continues to defy the majority of bond analysts’ forecasts in Jan-Fed, expecting a +3% handle on US 10-year yields.

Contrary to the taper-tantrum of last summer, Q3 could well see prolonged weakness in yields as traders fret over the lack of ‘liquidity’ ahead of the end of the conclusion of monthly asset purchases. Such absence could well be amplified by any ‘miss’ in non-farm payrolls, in which time a retest of the 2.30% support becomes a possibility.

If yields did extend weakness below 2.40%, then the implications for stocks require more complex analysis.

One would expect equities to fall in tandem with yields, but the deepening divergence between the two since April has led to the SPX/10-year yield ratio to hit its highest level since May 2013.

Yields remain low due to Yellen’s assurances of talking down labour markets and inflation, as well as the growth implications of filling the QE void.

These yield-negative dynamics have been a major reason to the yen’s prolonged resilience, even against the resurging US dollar.

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