Wall Street’s fear level rises to the highest level in two months as stock prices drop

Written by Saqib Iqbal Ahmed

NEW YORK (Reuters) – U.S. stocks fell on Wednesday, sending Wall Street’s fear level to a two-month high as investors tempered expectations for interest rate cuts after better-than-expected economic data and pushback from central bankers. It became.

The CBOE Volatility Index, an options-based measure of investors’ expectations for short-term stock market movements, hit 15.37 on Wednesday morning, its highest level since Nov. 10. The benchmark S&P 500 index had recently fallen about 0.7%.

The VIX index is well below its long-term average of 19.6, and the S&P 500 index is about 1.5% away from hitting a new closing high. Nevertheless, the VIX index’s rise from a four-year low of 11.81 in mid-December marks a rocky start for stocks in 2024, following explosive gains in the final months of last year. is highlighted. The S&P 500 index is down about 0.7% since the beginning of the month after gaining 4.4% in December.

“This rally since November was based on some degree of confidence that the Fed would cut rates at least three to four times and that they would start cutting rates in March,” said J.J., CEO of IG North America. J. Kinahan said. President of online broker Tastytrade. “As we’ve seen over the past few business days, that trend is starting to become noticeable.”

U.S. retail sales beat expectations in December, casting further doubt on financial market expectations for interest rate cuts in the months ahead.

Meanwhile, some Fed officials oppose the idea of ​​an imminent rate cut. Federal Reserve President Christopher Waller said Tuesday that the central bank should not rush to cut interest rates until it is clear that inflation will remain low.

A rise in the VIX could be a big boon for traders who have taken advantage of the recent lull in volatility to accumulate VIX call options.

For example, approximately 250,000 February VIX call contracts, which benefit if the volatility index exceeds 17 by mid-February, have soared from a purchase price of $16.8 million on Friday to approximately $27 million by Wednesday morning. As shown by data from Trade Alert.

With the VIX remaining low by historical standards, increased volatility will likely lead to more options hedging activity, especially if the recent sell-off in stocks continues, Kinahan said.

(Reporting by Saqib Iqbal Ahmed; Editing by Ayla Iosebashvili and Nick Zieminski)