Aurelia Butler

NEW YORK (Reuters) – Wall Street’s most closely watched gauge of market anxiety shows expectations of choppy trading ahead despite a recent snapback in U.S. stocks, though institutional investors’ low exposure to equities may help curb gyrations. The Cboe Volatility Index, an options-based indicator that reflects demand for protection against drops in the stock market, recently stood at 23, following a sharp rally in stocks that has taken the S&P 500 index up 12% from its mid-June low on expectations that the Federal Reserve may be less hawkish than anticipated in its fight against inflation.VIX readings above 20 are generally associated with an elevated sense of investor anxiety about the near-term outlook for stocks, while readings north of 30 or 35 point to acute fear.The VIX is well above its long-term median of 17.7, signaling continued unease about the longer-term outlook for stocks. Still, it is down from its year high of almost 40 and has oscillated between 20 and 30 for six weeks, its longest time within that 10-point range in a year-and-a-half. Meanwhile, the VVIX index – a gauge of expected swings in the fear index, slumped to a three-year low earlier this week, signaling investors do not expect sharp swings in either direction from the VIX.”There is just less of a concern of an outlier kind of move in the market,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.The lowered expectations for extreme volatility come as investors assess whether stocks can sustain a rally in which the S&P 500 in July notched its best one-month percentage gain since November 2020. The July rally followed stocks’ worst first half of the year since 1970. San Francisco Fed President Mary Daly on Tuesday pushed back on expectations of a so-called dovish pivot from the Fed, saying that the central bank’s fight against inflation was “nowhere near” done, and data on U.S. employment on Friday and consumer prices next week could bolster the case for Fed hawkishness.Meanwhile, several Wall Street banks have cast a skeptical eye on the recent rebound in stocks and warned of more downside ahead.”We view this as a bear market rally,” wrote Savita Subramanian, equity and quant strategist at BofA Global Research in a report, noting that such rebounds have occurred an average of 1.5 times per bear market since 1929. The bank has a year-end target of 3,600 on the S&P 500, about 14% below current levels.LOW EXPOSUREOne factor that could help dampen market volatility in coming months is limited exposure to stocks among institutional investors, who earlier this year raced to cut their stock allocations as the Fed ramped up expectations that it will fight inflation with market-bruising interest rate hikes.Despite the recent bounce, big investors’ exposure to stocks remains low. Equity positioning for both discretionary and systematic investors remains in the 12th percentile of its range since January 2010, according to a July 29 note by Deutsche Bank (ETR:DBKGn) analysts.”Institutional positioning in equities is at the low end of its historical range,” said Anand Omprakash, head of derivatives and quantitative strategy at Elevation Securities. “You have a situation where the catalyst for an explosive equity crash is not as prevalent as it might have been in the past.”Lighter positioning means investors are not exhibiting the same rush to load up on options insurance against a downside move in stocks, a factor that can moderate the VIX’s rise even if stocks come in for another bout of weakness.The 10-day average daily trading volume in VIX options has slipped to about 360,000 contracts, the lowest since early January, according to a Reuters analysis.Lighter allocations to equities may also take the edge off potential selloffs, said Max Grinacoff, U.S. equity derivatives strategist at BNP Paribas (OTC:BNPQY). His firm has a year-end target of 4,400 on the S&P 500 – some 7% above current levels.”Because of how clean positioning has become through the year … you are not having the impact from everyone running for the exit at once,” he said. More

TORONTO (Reuters) – The Canadian dollar strengthened against the greenback on Wednesday as worries about a possible recession eased following encouraging economic data from the United States, Canada’s largest trading partner, offsetting a slide in oil prices.Wall Street rallied as data showed that the U.S. services sector rebounded unexpectedly in July and orders for U.S.-manufactured goods increased solidly in June.”The economic data broadly came in higher than expected as the service part of the economy seems to be stabilizing and price pressures are improving,” Edward Moya, a senior market analyst at OANDA in New York, said in a note.Canada sends about 75% of its exports to the United States, including oil.U.S. crude oil futures settled nearly 4% lower at $90.66 a barrel after U.S. data showed crude and gasoline stockpiles unexpectedly surged last week and as OPEC+ said it would raise its oil output target by 100,000 barrels per day.The Canadian dollar gained 0.3% to 1.2838 per greenback, or 77.89 U.S. cents, after trading in a range of 1.2833 to 1.2891.Canadian trade data for June is due on Thursday and the July employment report is set for Friday, which could offer clues on the strength of the domestic economy.Money markets expect the Bank of Canada to hike its benchmark interest rate by a further 50 basis points next month to a level of 3%. That is the top of the so-called neutral range at which monetary policy neither stimulates nor weighs on the economy.Canadian government bond yields were higher across much of a deeply inverted curve. The 2-year rose 10.8 basis points to 3.218%, while the 10-year was up 1 basis point at 2.719%. More

(Reuters) -Federal Reserve officials voiced their determination again on Wednesday to rein in high inflation, although one noted a half-percentage-point hike in the U.S. central bank’s key interest rate next month might be enough to march toward that goal.”I start from the idea that 50 (basis points) would be a reasonable thing to do in September because I believe I’m seeing evidence in my contact conversations, and in the observations of the world I see, that there are some bright spots for me,” San Francisco Fed President Mary Daly said in an interview with Reuters.However, “if we just see inflation roaring ahead undauntedly, the labor market showing no signs of slowing, then we’ll be in a different position where a 75-basis-point increase might be more appropriate. But I go in with the 50 in mind as I look at the data coming in,” Daly added.Whether the Fed will go ahead with a third straight 75-basis-point rate hike at its Sept. 20-21 policy meeting – a pace unmatched in more than a generation – or dial back a bit is of central interest to investors, businesses and consumers who are increasingly fearful that the central bank’s inflation fight may trigger a recession.After Daly’s remarks, investors in futures contracts tied to the Fed’s benchmark overnight interest rate pared back the probability that the central bank would raise the policy rate by 75 basis points next month.Fed Chair Jerome Powell said last week the central bank may consider another “unusually large” rate hike at the September meeting, with officials guided in their decision making by more than a dozen critical data points covering inflation, employment, consumer spending and economic growth between now and then.Several policymakers, including Daly, have shown stiffening resolve this week to continue the aggressive monetary tightening, with nearly all of them uniformly flagging that the central bank remains determined to press ahead with rate hikes until it sees strong and long-lasting evidence that inflation is on track back down to the Fed’s 2% goal.Inflation has for months confounded expectations that it would ease and is now, by the Fed’s preferred measure, running at more than three times the target.’A VERY UNLIKELY SCENARIO’In a separate appearance, Minneapolis Fed President Neel Kashkari echoed comments by Daly this week that it is extremely unlikely that the central bank will pivot to cutting interest rates in 2023.”Some financial markets are indicating they expect us to cut interest rates next year,” Kashkari said at an event held as part of a financial regulation conference in New York. “I don’t want to say it’s impossible, but it seems like that’s a very unlikely scenario right now given what I know about the underlying inflation dynamics. The more likely scenario is we would continue raising (interest rates) and then we would sit there until we have a lot of confidence that inflation is well on its way back down to 2%,” Kashkari added.St. Louis Fed President James Bullard also said the central bank will be steadfast in raising rates to bring inflation back down.”We are going to be tough and get that to happen,” Bullard said in an interview with CNBC. “I think we can take robust action and get back to 2%.”That will probably involve having to keep rates “higher for longer” in order to gather enough evidence that inflation is coming down in a sustainable way, Bullard said, noting that policymakers will have to see evidence that headline and core measures of inflation are “coming down convincingly” before any let-up.Bullard has previously said he wants the Fed’s policy rate to rise to between 3.75% and 4.00% this year to help quash inflation.Speaking in Virginia, Richmond Fed President Thomas Barkin said the central bank has made clear it will “do what it takes” as he warned that inflation will recede but “not immediately, not suddenly and not predictably.”For her part, Daly told Reuters that raising the policy rate to 3.4% by the end of this year “is a reasonable place to think about us getting to” and rebuffed the assertion that the Fed’s rate hikes from here – which would take it beyond policymakers’ collective judgment of the long-run “neutral rate” of interest – ought to be considered “restrictive.””Not in my judgment,” Daly said, arguing that the interest rate level at which the Fed is actively impeding growth and activity is closer to 3%.”When you think of 2.5%, that’s the longer-run neutral rate of interest, but right now, inflation is high,” Daly added. “And there’s a lot of demand chasing limited supply, and so of course the neutral rate is elevated. So my own estimate of where that would be right now is around or a little bit over 3%, maybe 3.1%.””So in my judgment, we’re not even up to neutral right now,” Daly said. More

In addition, the CBO calculated that increasing the Internal Revenue Service budget would generate $204 billion in new revenue from cracking down on tax avoidance, something that wasn’t included in the official deficit score. When that is factored in, the CBO analysis is in line with the $300 billion in deficit reduction claim initially made for the bill by Senate Majority Leader Chuck Schumer and West Virginia Senator Joe Manchin. The CBO estimate will be used both to sell the bill to the public and by the top Senate rules official to determine whether provisions comply with the chamber’s budget rules. Elements that don’t affect the budget could be stricken from the bill.The deficit decrease is driven in part by a repeal of a Trump administration restriction on prescription drug rebates, generating $122 billion and by allowing Medicare to negotiate the cost of high-priced drugs, which generates $102 billion.A 15% corporate minimum tax on large corporations generates $313 billion, as expected, while a narrowing of the carried interest loophole nets $13 billion in the score, slightly less than Democrats forecast.The bill’s spending includes $31 billion to provide Obamacare premium subsidies for three years along with a slew of tax breaks for clean energy. Budget watchdogs on Wednesday urged Congress to resist pressure by business groups to gut the corporate tax and carried interest changes.“The Inflation Reduction Act is the largest deficit-reduction bill in over a decade. But it’s only a first step toward fighting surging inflation and tackling our $24 trillion national debt. We can’t let special interests water it down,” said Maya MacGuineas of the Committee for a Responsible Federal Budget.©2022 Bloomberg L.P. More

“Some financial markets are indicating they expect us to cut interest rates next year,” Kashkari said at an event held as part of a financial regulation conference in New York. “I don’t want to say it’s impossible, but it seems like that’s a very unlikely scenario right now given what I know about the underlying inflation dynamics. The more likely scenario is we would continue raising (interest rates) and then we would sit there until we have a lot of confidence that inflation is well on its way back down to 2%.” More