Stocks were mixed to start the week on Monday, though this action kept the Nasdaq Composite on pace for a quarterly gain north of 10% while the S&P 500 is up more than 3% to start the year.
Meanwhile, the Treasury market has also seen a huge rally with the 10-year yield falling from a high north of 4% in early March to as low as 3.38% last week.
These moves come as the Federal Reserve raised its benchmark interest rate by 25 basis points last week and investors weigh the Fed’s latest actions and attempt to assess the odds of further bank failures and even recession.
For investors looking tracking financial stress to watch going forward, here are the key charts to watch.
1. Rising Market Volatility — YF Tickers: ^VIX, ^VVIX, ^MOVE
The VIX (^VIX), also known as the “fear index,” measures investors’ expectations of future (or “implied”) volatility over the next 30 days in the S&P 500. It is calculated based on transactions in options on the index itself.
In general, higher stock index volatility tends to accompany selloffs, indicating “fear” in the market. Conversely, lower volatility is usually associated with stock market rallies
Just as the VIX measures stock market volatility, the VVIX (^VVIX) measures the volatility of the VIX itself. Sometimes, it will perk up and serve as an advance warning of moves in the underlying VIX.
The ICE BofAML MOVE Index (^MOVE) index is the bond market’s answer to the VIX. It is calculated once each day after the close, and so unlike the VIX the MOVE Index does not give intraday readings of volatility.
Pro tip: An extreme upside VIX spike will usually accompany a huge down day in stocks — but that won’t necessarily mark the low in stocks. If the VIX remains elevated, stocks can continue to drop as the VIX goes sideways, or even down itself. As the pros say, “Don’t confuse pace with direction.”
Current status: The VIX shot above the 30 level last week as concerns over bank stress grew — only to crash Monday and Tuesday last week and remain lower into the news week, trading near 21.
The MOVE index peaked at nearly 200 on March 20 — higher than the pandemic highs — and after cooling mid-week, surged on Friday amid investor fears over Deutsche Bank (DB), finishing the week above 170.
2. Haven Flows — YF Tickers: JPY=X, EURJPY=X
Foreign exchange pairs measure the change in two currencies relative to one another. Typically, the ratio reflects differences in short-term interest rates between the two countries or areas.
Relatively higher-rate countries tend to attract investment capital, while lower-rate jurisdictions are sources of funds to be borrowed and invested elsewhere — generally referred to as the carry trade.
However, in times of stress, a premium is placed on developed market currencies — especially the U.S. dollar and the Japanese yen. Money flows from risky areas into these safe havens in what are called “haven flows.”
Over the last 30 years, the Bank of Japan has maintained the easiest monetary policy among developed nations. As a result, a favored macro trade is to borrow money in Japan, then invest it in the bonds of a higher-interest rate economy.
Traders have historically looked to the EURJPY pair — pitting the euro against the yen — as a barometer of global risk tolerance. If the euro rises against the yen, the theory says riskier investments are in favor as money flows into Europe from Japan. Conversely, the pair often heads south when global risk surfaces and funds need a relatively “safe” home.
Pitting the dollar against the yen is also useful to use as an early warning sign. With U.S. rates far above those in Japan, big flows into the yen — evidenced by a lower USDJPY — can be a red flag for overall risk tolerance when this pair drops quickly.
Pro tip: The order of the currencies in their abbreviated ticker is made by convention, which can be confusing. For instance, the euro versus the dollar is typically expressed as EURUSD. Notably, Yahoo Finance omits the “USD” in forex tickers if it occurs first and appends an “=X” to all pairs. For instance, the Yahoo Finance ticker for USDJPY is JPY=X, for EURJPY, the ticker is EURJPY=X.
Current status: Neither the euro nor the dollar is showing signs of sustained strong haven flows into the yen — though the yen has net strengthened since the SVB failure.
3. Deteriorating Credit Markets — YF Tickers: HYG, JNK
Investors closely watch corporate credit markets for signs of weakness, as they are often first to show cracks in risk appetite. Corporate bonds are measured in how wide or tight their rates of interest are from the corresponding tenors of government debt. But stock investors don’t need a fancy terminal to measure stress in corporate bonds.
ETFs that track corporate credit — like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg High Yield Bond ETF (JNK) — can do the job.
The ETFs track prices on a selection of corporate bonds, which move inversely to yield. In times of stress, when yields surge higher, the ETFs will nosedive, as they did during the pandemic and other periods of stress.
Back in the early days of the pandemic, the Fed took the then-unprecedented step to support corporate credit markets by buying these two ETFs directly.
If these ETFs do plummet again, watch out for quick, outsized reversals to the upside, which can indicate the Fed has taken action to support markets.
Current status: HYG and JNK aren’t currently reflecting or forecasting extreme market stress.
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