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Morning Update


Volumes in Europe today have been particularly light due to the Assumption of Mary holiday. No major European economic news was released.

In the US the July CPI was reported to be unchanged M/M with the core CPI up 0.1% M/M. This was lower than expectations, with the consensus calling for a 0.2% increase. The report shows declining energy prices and a moderate increase in food prices, along with a 0.8% jump in retail sales. "The 15% decline in gasoline prices from early April through early July helped stabilize retail sales by boosting disposable income. However, gasoline prices have subsequently risen by 10% since early July” said Ryan Wang, an HSBC Securities Inc. economist (4-traders.com).

While the S&P 500 remains in a tight, choppy range around the psychologically important 1400 level, TLT, the iShares Barclays 20+ Year Treasury Bond, and the VIX, the CBOE S&P 500 Volatility Index, have been making notable moves.

TLT is well off its 2012 highs made in late July and looks poised to break down through a key support area around 124.00. Should TLT loose this level we see its next support level in the 118.00 area, a 4.8% drop from here. Long maturity bonds have sold off over the past few weeks as traders begin to price in rate hikes down the road and investors move their money into riskier investments like equities as a result of the current “risk-on” environment.

Yesterday the VIX confused many investors when it jumped 8.3% on a $0.02 increase in SPY. The jump was due to traders taking advantage of a sub-14 VIX to buy out of the money options on the market. The VIX futures have been showing a lot less volatility than the cash index, as well as extremely high levels of contango. With only 5 trading days before expiration the August VIX future is 1.83 points higher than the cash VIX, showing traders believe that the VIX could still move higher. The September VIX future is 2.5 points higher than the cash, again reflecting expectations of increased volatility. At the moment, it makes sense for the cash VIX to be around 14 given that there is no volatility realizing in the S&P 500.

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