US stocks experienced its worst performance in two years. The Dow plunged 4.6% — more than 1,000 points— the largest point decline ever during a trading day, while the S&P 500 dived more than 4%. The sharp tumble has erased all of the gains made in 2018. Looking at the CBOE Volatility Index, or VIX, it more than quadrupled from the record low set in late 2017 to reach 37, well above its long-term average of 19.5, the biggest one-day increase since the inception of the index.

What could be triggering the selloff is the January US jobs report which implies continuing economic growth is finally translating into higher wages — sparking worries that higher overall inflation could be around the corner that might encourage the Fed to raise rates faster, pulling cheap money out of the economy. We are maintaining our three rate hikes for 2018 with the first hike in March and followed by June and the last in 4Q2018.

Meanwhile, the VIX futures are still pricing in slightly more subdued volatility in the near term with February futures at 31.80, March futures is lower at 27 and the April futures is at 23, suggesting the current spike in volatility should abate over the next few months. Yet we should not be too complacent especially if the VIX continues to drift higher, futures price would slowly start to price in. Risk creeps up when the futures prices are higher than the spot price and/or when VIX continues to stay high, causing investors to panic.

On the local scene, the MYR softened against the USD by 0.37% to 3.900 on Monday. The KLCI fell 0.93% to 1,853.01 following a foreign net outflow of RM262mil. Meanwhile, MGS yields excluding the 30-year rose across the curve; the 5-year by 0.5bps to 3.605%, 7- by 3bps to 3.930% and 10- by 6bps to 3.960%.

• US stocks experienced its worst performance in two years. The Dow plunged 4.6% — more than 1,000 points— the largest point decline ever during a trading day, while the S&P 500 dived more than 4%. The sharp tumble has erased all of the gains made in 2018. However, the 4.6% fall by Dow is still not close to the biggest percentage fall on Black Monday in 1987 or during the 2008 financial crisis.

• Looking at the CBOE Volatility Index, or VIX which measures the implied volatility on the S&P 500, it more than quadrupled from the record low set in late 2017. The CBOE Volatility Index reached its highest level since August 2015 with Monday’s reading blowing past 35 to reach 37, well above its long-term average of 19.5. Monday’s surge was the biggest one-day increase since the inception of the index.

• The recent dive in US market and the surge in the VIX seems to have pushed markets closer to a correction — defined as a 10% drop from their most recent high point.

• What could be triggering the selloff is the January US jobs report with unemployment at 4.1%, net jobs adding 200K and wages growing 2.9%. The data implies continuing economic growth is finally translating into higher wages — sparking worries that higher overall inflation could be around the corner.

• Rising inflation might encourage the Fed to raise rates faster, pulling cheap money out of the economy. We are maintaining our three rate hikes for 2018 with the first hike in March and followed by June and the last in 4Q2018.

• Meanwhile, we noticed the VIX futures are still pricing in slightly more subdued volatility in the near term. VIX futures, which expires in February, is now priced at 31.80 while the March futures is lower at 27 and the April futures is at 23.

• Lower futures suggests the current spike in volatility should abate over the next few months. In the past, a rapid increase in bond yields is often short-lived, especially when once investors have had the chance to digest higher rates. The equity volatility will quickly normalize.

• Yet we should not be too complacent with the current easing trend of futures prices. If the VIX continues to drift higher, futures price would slowly start to price in. Our concern will be when the futures prices are higher than the spot price and/or when VIX continues to stay high, the risk of seeing investors panicking will creep in.

• On the local scene, the MYR softened against the USD by 0.37% to 3.900 on Monday. The KLCI fell 0.93% to 1,853.01 following a foreign net outflow of RM262mil. Meanwhile, MGS yields excluding the 30-year rose across the curve; the 5-year by 0.5bps to 3.605%, 7- by 3bps to 3.930% and 10- by 6bps to 3.960%.

Source: AmInvest Research - 6 Feb 2018