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Stocks Soar But Volatility Remains Buoyed

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Stocks Soar But Volatility Remains Buoyed

US stocks started the week on a positive note, as Chinese and Japanese data helped buoyed equity bourses. Data in Europe was also solid, with flash PMI reports showing strong manufacturing results. All eyes will be on the Federal Reserve ahead of their two day meeting which culminates on Wednesday with a press conference by Fed Chairman Ben Bernanke.

Overnight HSBC reported that Chinese manufacturing growth slowed. Chinese HSBC flash manufacturing purchasing manager’s survey has dropped to 50.5 in December from 50.8 last month as output, backlogs, input prices and new orders have grown but employment and output prices have decreased.

In Japan, the Tankan report was reported at 6-year highs for large manufacturers. However, there was disappointment with large corporate capital expenditures slowing to 4.6% vs. 5.1% in the third quarter. Consensus was at 5.5%. The better than expected news boosted the yen but the Nikkei felt the pressure of better data reducing the chances of additional stimulus from the Japanese Central Bank.

The Federal Reserve interest rate policy Meeting scheduled for December 17 and 18 and it will be the most import Fed meeting of the year as investors wait to see if the Fed will taper its bond purchase program. The market seems to be putting a 50-50 chance on tapering which could generate significant volatility on Wednesday.

Stocks have been on the defensive over the past week and implied volatility has climbed to the highest point in the past 2-months. The VIX volatility index which measures the at the money implied volatility for the S&P 500 index has climbed above 15%. This means options traders believe that the large cap index will move by at least 15% over the next year. The low for the year is 11% which was hit in November.


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