Since the start of November, the US stock market volatility index ( VIX ) has fallen by 30%, which might be the second biggest fall in the month since March 2022. It fuels more optimism as the current level was last seen in January 2020. Why is it happening and what does it mean?
The why is more easy to point at, as of today Fed rate swap markets are factoring in five rate cuts in 2024 with a total of 2.5% rate reduction. This has led to an 11% drop in US 10-year bond yield along with its volatility index ( MOVE) falling by 14%. It leads to a phase of new optimism in equity markets for the next year.
The important question is does it mean the worst is behind us? That cannot be said for certain. As Global central bank members are communicating that more time is needed to be sure and there is the possibility of a hike again. That said, the last cycle was for the first time here rate cuts or pauses outnumbered the hikes since the inflation fight began.
As far as real-world risks are concerned the conflicts are still going on though they have taken a pause. Food production continues to worry nations as El Niño impacts become more severe from January.
A view from the neutral line shows that optimism might peak by this year's end and with that volatility might bottom out. If this happens then 2024 would start very differently than market participants estimate.