General Trends
Volatility returned to global markets in February on stronger-than-expected U.S. inflation data - Intraday fluctuations in VIX futures reached unprecedented levels, where the 1-month weighted VIX futures appreciated +96% in one day on February 5th. Equities came off when being short equity volatility has been the de-facto consensus trade over the last eighteen months. The VIX continued after hours and the next day to mark a full 465% rally from lows of the year to highs of the year. However, the intraday moves in February were also significant on the downside, as another record was set on February 6th. The same 1-month VIX futures fell 33% intraday, before closing down 27% for the day. In aggregate the intraday swings on February 5-6th accounted for a total uptick in implied volatility of 33% – a very large move, but more muted than the intraday spike on February 5th. Plenty of short covering and margin calls ensued until the market calmed later in the month. Nevertheless, this volatility spike did not spread to other asset classes and seemed mostly confined to the Equity market, although there were elements of risk off witnessed. Outside of this event, markets became increasingly worried about inflation in the face of good macro data. Janet Yellen handed over the reins of the Federal Reserve System (the “FED”) to Jerome Powell and Japan confirmed Haruhiko Kuroda to stay in his position at the Bank of Japan for another five years.
Equities
February saw Equity markets reverse course and give back all outsized gains made in January with a little interest. Despite continually improving macro data and inflation seen ticking up, Equities were struggling to reclaim previous momentum to post new highs. Globally Equities lost -4.27% over the month with Energy and Consumer Staples the worst hit while Technology stocks managed to keep a flat performance.
Starting with US equities, global equity markets plunged the most since May 2017. After the selloff in US stocks on 2-Feb, the volatility in equity markets spiked over following days, then plummeted throughout the remainder of the month, with large fluctuation along the way. With the hawkish undertones at the Fed, US rates went up. Conversely, 10 year yield dropped in Europe and Japan. Equities led risk assets lower as the Shanghai Composite (-6.4%), Hang Seng (-6.0%), and DAX (-5.7%) underperformed.
Bonds
While there was a lot of discussion surrounding the Bond market, there was not much directional bias throughout February. Major concerns surrounding inflation, as Jerome Powell took over the FED, had not translated into consistent movement. U.S. Treasuries traded sideways through most of February and watched the Equity volatility explosion from the side-lines. In Europe, yields generally moved lower as we awaited the results of the Italian elections and confirmation on Angela Merkel. Volatility returned to the market and core yields rallied with the FED expected to raise rates at least three times in 2018.
While U.S. Treasuries (-1.0%) were notable underperformers, German Bunds (+0.2%), Italian BTPs (+0.3%), Gilts (+0.3%), and Spanish Bonos (-0.1%) were little changed. Increased volatility contributed to spread widening, hitting European (-0.7%) and U.S. (-0.9%) high yield credit.
Energy
Energy markets also receded in February after a strong rally. The glimpse of a USD rally and a long position in Oil combined to trigger some profit taking. Inventories were still reducing at a similar pace in the U.S. however, and aggressive Asian buying continued. OPEC leaders committed to keeping production restraints in place through 2018. Refined products also struggled through February, however most attributed the sell-off in Energy to profit taking rather than any major structural change.
Agriculture
February was a month where consensus positions were squeezed again, which was very apparent in the Agriculture market. Large price squeezes were witnessed as cold weather triggered profit taking. Wheat and Corn also continued to languish at depressed prices.
Base Metals
Base Metals held their performance through February. Better macro data and utterings around fiscal stimulus plans allowed for Metal traders to maintain high prices. After a strong rally through 2017 Metals continue to trade sideways around their highs. Precious Metals had a quiet month mainly just tracking the gyrations of the USD. On other note, Trump finished off the month sparking discussion surrounding trade wars as he proposed slapping tariffs on imports of Steel and Aluminium. Silver (-5.3%) and Gold (-2.0%) saw no safe haven bid despite higher volatility.
Commodities
U.S. dollar index strength (+1.7%) contributed to CRB Commodity Index weakness (-1.7%) led by Brent (-5.6%) and WTI (-4.8%).
FX
US dollar has shown resiliency against most crosses in tandem with the increase in US interest rates. Its weakness was stemmed in February as it found some area for consolidation after its rough ride lower since early 2017. Most pairs oscillated around strength and weakness but no major direction throughout February. However, JPY was bought more than USD, with Japanese investors being net sellers of US Treasuries. The yen also strengthened against most currencies as it constitutes a safe haven in risk off scenarios. FX volatility rose slightly but overall was a quiet month relative to Equity volatility. No major announcements from key central banks other than succession plans which may have helped dampen volatility.