Looking to the Futures
Volatility Jumps Following Tariff Threat
Volatility futures (/VX) rallied on Friday, trading above 22 for the first time in two months. The front-month contract expiring next Wednesday settled at 22.05. The contract had spent the prior month between 17 and 19. That period of relative tranquility followed a steady decline from a spike in volatility this spring when futures topped out at 44.01 while the CBOE Volatility Index (VIX) reached 60.13 after the president announced the Liberation Day tariffs.
The driver for this rally was tariffs again, with the president posting on Truth Social that the US would impose an additional 100% tariff on imports from China starting November 1st or sooner. The announcement followed Thursday’s release from China’s Commerce Ministry that foreign companies would require a license to export products including rare earth metals from the country. That would give the Chinese government enormous leverage over supply chains across a wide range of products, from chips to cars to military radar systems. The Commerce Ministry also placed restrictions on exports of rare earth refining equipment. China supplies over 90% of the world’s processed rare earths.
The stock market reacted to the news by selling off significantly. The S&P 500 (SPX) dropped 2% on the news and finished the day down 2.9%. The NASDAQ 100 (NDX) gave up 2.6% following the president’s post and ended the day down 3.7%. The CBOE Volatility Index jumped 36% on the news while /VX futures rallied 25.66% to settle at 22.05. Prior to the news, the S&P 500 reached an intraday all-time high of 6764.58 on Thursday, while the NASDAQ 100 found an all-time high at 25,195.28 on Friday morning ahead of the tariff announcement. The selloff was broad, with 70% of the S&P 500 down on the day according to the Advance-Decline indicator ($ADSPD).
This week saw the beginning of earnings season, with Wall Street banks announcing earnings yesterday and today. Producer prices and retail sales are scheduled for tomorrow but will likely be delayed due to the government shutdown. Consumer inflation numbers are expected to be released next Friday following a delay due to the shutdown. In two weeks, the Federal Reserve will announce the next rate decision. The CME FedWatch Tool shows rates traders are relatively certain on a 25-basis point cut, followed by a further quarter-point cut in December.
Technicals
The most important move on the chart is the big rally in early April. That was followed by a quick retreat to the 200-day SMA over the next month. Since then, the trend has been muted with some relatively minor moves. The spike on Friday was the first time it crossed the 200-day SMA since June. That also pushed the RSI into overbought territory for the first time since the April run-up in the VIX. The MACD is at the highest level since June.
9-Day SMA 18.89
20-Day SMA 18.32
50-Day SMA 19.3
14-Day RSI 64.89%
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