Looking to the Futures

Over the course of the past 10 years, there have been six instances where we have observed the volatility index holding above a reading of 20 for a minimum of two consecutive weeks.  This morning marks day twenty where we have closed above that magic number. 

This can mostly be attributed to rising tensions resulting from the Iran war between the United States, Israel, and Iran.  As this conflict continues to drag, elevated volatility remains apparent.  U.S. President Donald Trump soft-launched a 15-point plan and sent the terms to Iran who unequivocally denied, hinting that things will continue. This proposal only mentioned terms between the U.S. and Iran.  There was no mention of Israel being a third party or privy to the terms which suggests that even if the U.S. and Iran are able to make peace that Israel will still continue its operations. 

Elevated energy prices, specifically Crude Oil (/CL) and Brent Crude Oil (/BZ) have presented risks of global supply shock with the Strait of Hormuz being closed for a longer than expected period.  Iran has recently started taking a pay-to-pass fee of around 2 million from oil tankers whose countries do not pose a threat to their regime. This fee which is assessed per tanker, amounts to about a $1 surcharge on a per barrel basis assuming the tankers are at full capacity.

Federal Reserve Chairman Jerome Powell went on to state during his last FOMC (Federal Open Market Committee) rate decision press conference that the U.S. economy has faced more supply shocks in the last five years than anytime prior.  He stated, “shocks are more persistent which creates challenges for central banks and economies.” By adopting a “wait and see” approach, Powell emphasized flexibility in his ability to take rates where they need to go based on the data. 

According to the CME FedWatch tool prior to this past FOMC meeting there was a minimal chance of rate hikes and most positioned for a cut or two of 25 basis points.  As of this morning, traders were positioning a roughly 50% chance of a rate hike. 

Historically, a cutting interest rate environment typically represents strength of the economy with lower average volatility whereas a hiking rate environment represents rising uncertainty and higher borrowing costs that can impact earnings multiples. 

Volatility in the commodities market doesn’t necessarily translate into volatility in the equities market but data suggests it can be a leading indicator.  This was apparent last month in the metals market when silver futures (/SI) had a 6-sigma event, or an extremely rare event beyond the sixth standard deviation in a normal distribution of price volatility. 

It is important to dive into historical volatility readings to assess the current environment.  The highest reading in the last 30 years was in 2008 during the financial crisis where we had a high of 89.53 and most recently during covid, we hit 85.47. 

According to the CFTC Commitment of Traders Report, dealers/intermediaries are net long 83,279 contracts and leveraged funds are overwhelmingly short 117,767 contracts. Change of those shorts week over week are 11,344 which represents de-risking as the volatility index rises. 

8:30 AM ET- Initial Jobless Claims

4:00 PM ET- Federal Reserve governor Lisa Cook speaks

6:30 PM ET- Federal Reserve governor Stephen Miran speaks

7:00 PM ET- Federal Reserve Vice Chair Philip Jefferson and Michael Barr speak

New futures products are available to trade with a futures-approved account on all thinkorswim platforms: 

• Ripple (/XRP)
• Micro Ripple (/MXP)
• 100 OZ Silver (/SIC)
• 1 OZ Gold (/1OZ)
• Solana (/SOL)
• Micro Solana (/MSL)

Visit the Schwab.com Futures Markets page to explore the wide variety of futures contracts available for trading through Charles Schwab Futures and Forex LLC.