By Saqib Iqbal Ahmed
NEW YORK (Reuters) - A decline in U.S. stocks sent Wall Street's "fear gauge" to a two-month high on Wednesday, as investors tempered rate cut expectations after stronger-than-expected economic data and pushback from central bank officials.
The Cboe Volatility index - an options-based measure of investors' expectations for near-term stock market gyrations - hit 15.37 on Wednesday morning, the highest level since Nov. 10. The benchmark S&P 500 index was recently down around 0.7%.
The VIX is well below its long-term average of 19.6 while the S&P 500 is some 1.5% away from setting a new record closing high. Nonetheless, the rise in the VIX from mid-December’s four-year low of 11.81 highlights the bumpy start stocks have had in 2024 following their explosive rally in the final months of last year. The S&P 500 is down around 0.7% month-to-date, after surging 4.4% in December.
"This rally we've had since November, a lot of it has been around a bit of certainty that the Fed would have at least 3-4 rate cuts and that they would start in March," JJ Kinahan, CEO of IG North America and president of online broker Tastytrade. "As we have seen over the last couple of trading days, that's started to come off."
U.S. retail sales increased more than expected in December, casting further doubt on financial market expectations that cuts are months away.
Some Fed officials, meanwhile, have pushed back against the idea of imminent rate cuts. Fed Governor Christopher Waller on Tuesday said the central bank should not rush to cut rates until it is clear lower inflation will be sustained.
The rise in the VIX could translate to big gains for traders who used the recent lull in volatility to lap up VIX call options.
For instance, some 250,000 February VIX call contracts that would benefit from the volatility index rising above 17 by mid-February jumped in value to around $27 million on Wednesday morning, from a purchase price of $16.8 million on Friday, Trade Alert data showed.
With the VIX still low by historical standards, the rise in volatility is likely to draw more options hedging activity - especially if the recent weakness in stocks continues, Kinahan said.