Today’s play is to buy risk, sell volatility. January’s Open Market Committee meeting of the US Federal Reserve, minute of which will be released this week, should show confidence in US economic growth. The decline of the VIX volatility index and the recovery in equities has offset concerns of slightly higher interest rates.
Yet we will not be lulled into complacency. When the European Central Bank and the Bank of Japan start “normalization”, this will likely trigger a sustained, extended correction that bears expect. We see additional volatility through September. US fiscal spending will accelerate, thanks to the Bipartisan Budget Act of 2018 which will boost federal outlays by $67.9 billion in 2018 and $184.3 billion in 2019. This could push the Fed to tighten faster, increasing the risk of a hard landing in the USA.
By Peter Rosenstreich