Jackson Hole: The Fed is trade war dependent
Our first impression is that Powell was slightly more dovish, which indicates the door is open to a new rate cut of 25 bps in September.
Fixed Income Specialist, Saxo Bank Group
We entered a new volatility regime on February 2, and we don’t yet know how long it is going to last. If we look at historical data for the volatility index, we can see a pattern that once the volatility index picks up, it takes years to normalise. Although the VIX didn’t peak as much as it did during the financial crisis in 2008 and the debt crisis is 2011, we can agree that we haven’t seen volatility this high in seven years, making us consider and consider again whether things are going to change this time around.
In the last few weeks as volatility picked up, the equity market tumbled. However, credit spreads remained quite resilient, widening up just a little due to the upward movement of interest rates. Yet credit spreads are still at their lowest in 10 years and while the recent repricing might seem quite modest the market sees this as an opportunity to buy the dip rather than selling expensive assets that they might be holding to. The only problem is that nobody knows for sure whether this is the dip. If the volatility index stays at high levels for a prolonged times it will most probably push credit spreads event higher. If that’s the case, the repricing of credit spreads will not be immediate.
As you can see from the chart below, in order for the volatility index to retreat to very low levels that we have recently reached (below 15) it takes between two to four years. During this time credit spreads will be exposed to upward pressure causing a repricing of fixed income securities.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)